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INVESTMENT IN REAL ESTATE SECTOR AND TAX

IMPLICATIONS – JUDICIAL ANALYSIS

Table of Contents
INTRODUCTION ..................................................................................................................... 1
BALANCING RERA & IBC..................................................................................................... 2
REAL ESTATE DEVELOPMENT –IMPLICATION OF INCOME TAX ACT..................... 3
TAX ISSUES IMPACTING THE REAL ESTATE SECTOR ................................................. 8
TAXATION OF BUSINESS TRUST ..................................................................................... 10
TAXATION OF REITS AND INVITS IN INDIA ................................................................. 12
CIRCLE RATES TO BE ADOPTED FOR TRANSACTIONS RELATING TO LAND OR
BUILDING .............................................................................................................................. 14
CONCLUSION ........................................................................................................................ 17
BIBLIOGRAPHY .................................................................................................................... 20

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INTRODUCTION
If one were to take a deeper dive and look at the last four budgets, the real estate industry has
emerged stronger and mature over the last four years and it is important that the government
is given credit where it is due. The biggest game changer was in 2016 with the introduction of
Real Estate Regulatory Authority (RERA) (though not a budget initiative), which transferred
the bargaining power from the hands of the developer or builder to the hands of the home
buyer. While the regulation has not yet translated into increase in sales, it has tremendously
improved international investor and domestic buyer confidence in being able to claim their
rights as investors/buyers in what was seen before as an inefficient and opaque marketplace.
RERA has moved through the legislative contours to finally becoming a regulation. The
sector had become huge in terms of large number of transactions and its contribution to the
overall GDP of the country. Lately, due to non standardised and unregulated practices, the
fragmented sector has been in the limelight for all the wrong reasons, further impacting its
image. There was a dire need of a supervisory body to oversee the operations of the sector.
This Act has the impact of changing the entire landscape of the real estate sector and
redefining the process of how real estate sales happen in the country. This has not only
impacted the developers’ community, but all the stakeholders in the sector. Every stakeholder
- right from the government, banker and consumers is unlearning the old ways of operating
and getting aligned to the new systems/processes which are RERA field.1
The advent of RERA has created a furore among developers and there was a lot of criticism
and resentment in the fraternity for this legislation. However, by and large, developers have
accepted the change. It will be good to highlight the work done by organisations like
CREDAI, NAREDCO, FICCI, among others, who are constantly working with the
community and creating awareness about the long-term benefits of this act.2

1
https://www.grantthornton.in/globalassets/1.memberirms/india/assets/pdfs/realestate_annual_handbook_2018.p
df last visited on 10 November 2019.
2
ttps://www.icsi.edu/media/webmodules/REAL_ESTATE_REGULATION_AND_DEVELOPMENT_ACT.pdf
last visited on 10 November 2018.

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BALANCING RERA & IBC
In the last couple of years, we have seen introduction of two path-breaking legislations which
have had a substantial impact on the real estate industry. On the one hand, Real Estate
(Regulation and Development) Act, 2016 (RERA) for the first time set up a regulator for the
country’s sprawling and overcrowded real estate market and on the other, the Insolvency and
Bankruptcy Code, 2016 (IBC) ushered in a mechanism for reorganisation and insolvency
resolution of stressed companies. The introduction of these legislations did not particularly
help the real estate sector as these were implemented around the time when most players
were facing severe liquidity crunch and mounting delivery pressures, and consumer forums
were already bursting with complaints against many developers. Since the two new
legislations were special enactments, providing stricter timelines for resolution, with harsher
penalties, it did not take much time for aggrieved home buyers to shift their focus to the new
remedies.3
RERA permits filing of a complaint against a developer for delays, false
representations, unfair practices, irregularities and non-compliances. If the breaches are
significant enough to revoke the registration, the RERA authority can transfer the project to a
competent authority or a new promoter. Similarly, IBC with its latest amendment, permits
buyers to file applications before the NCLT against the defaulting developers seeking
initiation of the insolvency process as a financial creditor. In case the insolvency process is
admitted, the existing promoters are potentially staring at re-organisation of the entity with
take-over by a new promoter.
At a deeper level, this common theme runs through the two legislations. Both are
special and override any other law in force. But, situations of their inherent inter-play,
applicability or relevance especially in cases wherein the rights of the home buyers are
concerned, is still untested. From the proceedings so far, it appears that the IBC is being
given a larger preference. The Supreme Court of India, in the Jaypee matter, stayed all the
suits and proceedings, including the proceedings initiated before RERA. This approach has
the potential of undermining RERA, which otherwise is an equivalent legislation. If
insolvency proceedings are admitted against a company which also has may home buyer
complaints pending before RERA, it is likely that the bidders may seek to limit their
liabilities only for the claims filed with the resolution professional and seek extinguishment
of liabilities which may arise out of pending complaints and cases. Inconsistency in the

3
https://www.thehindubusinessline.com/specials/india-file/a-tale-of-three-developers-will-the-law-catch-
up/article29045750.ece# last visited on 10 November 2019.

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manner of resolution of a real estate company under RERA and IBC is also a big challenge.
RERA can e efficient for resolving project/asset level concerns of home buyers, which is not
possible under IBC, since it deals only at the company level and thus company sale is the
only option. This is also a key reason for some big real estate companies not finding the right
bidders or the value as there may be different sets of bidders interested in individual
projects/assets and not keen on the entire basket of projects. The time has come for changes
in IBC to increase the involvement of RERA in the insolvency process. A recent amendment
in IBC made it mandatory to obtain the approval of Competition Commission of India prior
to approval of the plan, in cases of combination. Similarly, RERA authority should also be
given an opportunity to participate in the insolvency process. This will not only create a
balance between both the legislations but ensure effective redressal of the home buyers’
grievances.4

REAL ESTATE DEVELOPMENT –IMPLICATION OF INCOME TAX ACT


Finance Act 2017 has amended various provisions relating to immovable property, in order to
appreciate the true prospective of taxation concerning real estate sector it is necessary to
examine the various sections:
1. Section 2(42A)
For investments in real estate w.e.f. 1-4-2017 the holding period for Capital Gains arising
from immovable property is reduced from 36 months to 24 months – proviso to section
2(42A). The base year u/s. 55 for indexation benefit prescribed is 1-4-2001 from 1-4-1981,
thereby reducing Capital Gains tax liability both by reduction of holding period and also
shifting base year from 1981 to 2001. Section 48 Explanation (iii) provides that base year for
computing index cost for acquisition shall be the first year in which the asset is held or 1-4-
2001 whichever is later.
2. Section 23(5)
In CIT v. Ansal Housing5 and in CIT v. Sane and Doshi Enterprises6 courts have held that
sections 22 and 23 is applicable to assesses who are engaged in business of construction of
house property and are therefore liable to pay tax on the annual letting value of the unsold
flats as “Income from House Property”. Section 23(5) now seeks to tax notional income in
respect of house property held as stock-in-trade. Thus the developers who has unsold

4
https://barandbench.com/where-do-developers-fo-from-here-under-the-ibc-pioneer-judgment/ last visited on
10 November 2019.
5
CIT v. Ansal Housing, (2016) 389 ITR 373 (Delhi)(HC)
6
CIT v. Sane and Doshi Enterprises, (2015) 377 ITR 165 (Bom.)(HC)

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completed /built flats as inventory / stock-in-trade would be covered, thereby charging to tax
notional rental income without actually earning the same.
Standard deduction would be allowed u/s. 24(a) while computing notional income of unsold
flats held as stock-in-trade thereby the rate of effective taxation would be 24% of notional
annual value of unsold flats held as stock-in-trade. U/s. 23(5) incidence of tax would arise
after period of one year from the end of financial year in which certificate of completion of
construction is obtained from the competent authority.
3. Section 45(5A)
Joint Development Agreement where possession or part possession of immoveable property
is given by the land owner to the developer that would trigger the transfer u/s. 2(47)(v) as on
the date of handing over the possession, irrespective of the fact whether the title has been
transferred or not. The position was that Capital Gains liability would arise or accrue
irrespective of whether land owner had received consideration or not.
In case of specified agreement capital gains would arise in the year in which the project is
completed wholly or partly and certificate of completion is obtained. Stamp duty value of
land or building or both for the land owner would be as on the date of issuance of completion
certificate increased by any consideration received which shall be deemed to be full value of
consideration.7
The full value of consideration would be regarded as cost of acquisition in the hands of land
owner in the developed property and would be allowed as a deduction on subsequent transfer
of the developed property by the land owner in the proportion of the area sold Capital gains
on sale of such premises will be chargeable to LTCG or STCG depending upon the holding
period from the date of issuance of completion certificate. S.45(5A) applies only to a
specified agreement entered by individuals and HUF and does not apply to companies, LLP
and any other non-corporate entities.
ISSUE 1 : Whether 45(5A) would affect joint development agreement where land owner
retains constructed premises for his own personal use. The position could be that land owners
would now be liable to tax on market value of premises retained by them at the value

7
Firoze B. Andhyarujina, Real Estate Development – Guide to Implications of Income-tax Act, Real Estate
Regulatory Authority (RERA) And Goods And Services Tax (GST) Act, Pub. 23 rd December, 2017,
http://itatonline.org/articles_new/real-estate-development-guide-to-implications-of-income-tax-act-real-estate-
regulatory-authority-rera-and-goods-and-services-tax-gst-act/, last accessed on 4th December, 2019

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ascribed at the time of issuance of completion certificate and would be allowed deduction on
subsequent transfer.
ISSUE 2: Where joint development agreement is based on revenue sharing model whether
the benefit of 45(5A) would apply.
ISSUE 3: Section 2(47)(5) has not been amended so as to defer tax liability of land-owner at
the time of completion of the project.
It provides that capital gains on transfer of land or building or both under “ Specified
agreement” by individual or HUF is chargeable to tax in the year in which completion
certificate is issued for the whole or part of the project. Stamp duty valuation of assessee’s
share in land or building or both will be on the date of issue of completion certificate as
increased by consideration received which shall be deemed to be the full value of
consideration.
4. Section 50CA
Capital Gains on transfer of any capital asset being unquoted share is to be computed with
reference to fair market value of such share. U/s. 50 CA FMV of unquoted shares of company
where the underlying asset is immovable property shall be now taken to be fair market value
and the valuation provided under rule 11UA of IT rules shall not apply. Note any transfer of
unquoted shares of a company owning immovable property prior to 1-4-2017 will be outside
the purview of section 50 CA and the transfer at book value will be valid.
5. Section 56(2)(x)
Where there is transfer of immovable property without consideration (stamp duty value of
which exceeds ` 50,000/-), stamp duty valuation will have to be considered; and in those
cases where the transfer value is less than the stamp duty valuation the difference between
stamp duty value and consideration paid would be liable to tax. Section 56(2)(x) applies only
to receipt of consideration of immovable property by any person for nil or inadequate
consideration and not held by him as stock-in -trade , however if there is transfer in ordinary
course of business as stock-in-trade then the provisions would not apply. Land or building or
both would include all types of rights attached to immovable property such as FSI, TDR,
shares with occupancy rights.8

8
Firoze B. Andhyarujina, Real Estate Development – Guide to Implications of Income-tax Act, Real Estate
Regulatory Authority (RERA) And Goods And Services Tax (GST) Act, Pub. 23 rd December, 2017,
http://itatonline.org/articles_new/real-estate-development-guide-to-implications-of-income-tax-act-real-estate-
regulatory-authority-rera-and-goods-and-services-tax-gst-act/, last accessed on 4th December, 2019

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ISSUE 1: Whether difference between stamp duty valuation is affected where the property
devolves under auction sale, distress sale or sale through court or debt recovery Tribunal or
where there is dispute and litigation.
ISSUE 2: Whether 56(2)(X) would apply to additional area allotted to members of a co-
operative society at concessional rate by developer under scheme of redevelopment.
6. Section 71(3A)
Limits inter-head set off of losses under the head Income from house property in any
particular assessment year to ` 2 lakhs, thus loss under the head “Income from house
properties” in excess of ` 2 lakhs shall not be allowed to set off against income chargeable
under any other head of income. Thus section 71(3A) provides that loss under income from
house property in excess of rupees 2 lakhs cannot be set off against income from any other
head.9
7. Section 80-IBA
Gives impetus to affordable housing projects by expanding size of units required to be
eligible for “Affordable Housing Unit” by
i. Increasing limit of 30 sq. metres in non-metropolitan cities to 60 sq. metres.
ii. Increasing size of unit in non-metropolitan and metropolitan region from built up area of
30 sq. metres and 60 sq. metres to “carpet area” to 30 and 60 sq. metres respectively.
The approval from the competent authority is defined to mean building plan and layout plan
approvals. The period of completion of project is increased from 3 years to 5 years.
8. Section 92BA
From F.Y. 2016-17 onwards no compliance with respect to Specified Domestic Transfer
Pricing Provisions shall be required to be made by the developer in respect of the following
expenditure paid/payable to related parties on
• Purchase of construction material.
• Remuneration to directors.
• Interest on loan to related parties.
• Reimbursement of services to related parties.
• Compensation to related party in an internal arrangement.
• Brokerage to related party.

9
Amaresh Singh and Manjul Mantri, INDIA; REAL ESTATE 2019, Pub. 30 th November, 2018,
https://iclg.com/practice-areas/real-estate-laws-and-regulations/india, last accessed on 4th December, 2019

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9. Section 94B
Thin capitalisation norms for Associated Enterprise as contemplated in Base Erosion and
Profit Sharing (BEPS) is introduced to prevent excessive interest deductions by Indian
companies. Its effect is on foreign debt raised by real estate companies by issuance of NCDs
to Foreign Portfolio Investor (FPI).
Real Estate Sector is highly capital incentive and therefore infusion of funds in the form of
NCD/FCCD from overseas investors is a normal practice. Section 94B restricts interest
deductibility which would adversely impact raising low cost funds by developers. FPIs are
permitted to invest in listed or unlisted Non-Convertible Debentures “NCD” issued by Indian
company in D-mat form. An Indian company will not be eligible to claim deduction for
interest paid to associated enterprise that exceeds 30% of Earning Before Interest, Taxes,
Depreciation and Amortisation. “EBITDA of the borrowing company. Interest payments
below ` 1 cr. per annum are exempt.
Ambit of “Associated Enterprises” is wide to cover SPV of developer set up by an offshore
PE Fund largely formed by equity and large debt in the form of compulsory convertible
debentures. Offshore private equity investor or FPI will also qualify as associated enterprise.
Interest paid in excess of 30% is permitted to be carry forward for period of 8 years. Thin
capitalisation norms come into effect from FY 2017-18. The provision would apply where
debt is availed from foreign entities but will not apply to borrowings made from nationalised
banks and FI in India.
10. Section 194-IB
Individuals and HUF (other than those liable for tax audit u/s. 44AB) responsible for paying
to a resident rental income exceeding ` 50,000/- per month or part of month during the
previous year shall deduct an amount equal to 5% as TDS. Explanation to section 194-IB
states “Rent” means any payment, by whatever name called, under any lease, sublease,
tenancy or any other agreement or arrangement for use of any land or building or both.
Sections 194-I and 194-IB will not be applicable where rent is directly paid by developer for
procuring temporary alternate accommodation in a redevelopment project since rent is not
paid by developer to member or tenant for use of any land or building. However when the
society member or tenant pays rent directly to the owner for use of temporary alternate
accommodation he shall be liable to deduct TDS u/s. 194-IB where monthly rental exceeds
Rs 50,000/- , Requirement to obtain TAN is dispensed with.
11. Section 194LD
7
NCD issued by Indian Real Estate Company to FPI and complying with requisite condition
are characterised as Rupee Denominated Corporate Bond. Interest on NCD payable to FPI
were earlier taxed at the rate of 20% is reduced to 5%. Further there is reduction in
withholding tax to 5% on interest payable to non-resident on NCDs. There is also exemption
of Capital Gains on transfer of Rupee Denominated Corporate Bonds “Masala Bonds” u/s.
194LC.

TAX ISSUES IMPACTING THE REAL ESTATE SECTOR


Outlined below are some of the key direct tax issues impacting the real estate sector. Clarity
on the same will help in removing some of the hardships being faced by the sector from an
income tax perspective and at the same time provide a fillip to new investment products such
as REITs in India.
 REMOVAL OF NOTIONAL INCOME TAXATION UNDER SECTION 23(5)
OF THE ACT
The provisions of Section 23(5) of the Act provide that in case of a taxpayer having any
building or land appurtenant thereto as its stock-in-trade, which is not rented up to one year
from the end of year in which the certificate of completion (CoC) is obtained, annual value of
such property is taxable on a notional basis in the hands of the taxpayer
The above provisions have resulted in undue taxation in the hands of real estate builders/
developers, who are required to offer income to tax on a notional basis. This leads to an
onerous charge on the real estate sector, which is already cash strapped. It may be noted that
the case of Ansal Housing Finance and Leasing Co. Ltd., wherein the Delhi High Court had
upheld the notional taxation of property in case of real estate developer is currently pending
for adjudication before the Hon’ble Supreme Court of India and hence, sub-judice
There should be no levy of such notional income taxation in the hands of taxpayers on
account of the following reasons:
No taxation on notional basis: Income cannot be taxed on a notional basis. Notional basis of
taxation has been provided only with a view to determine/ compute income on a presumptive
basis. Section 23(5) cannot be construed to be charging section for the head income from

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house property (IHP) and hence, there cannot be any notional income taxation pursuant to
such provisions10
Income from business assets should not be taxable under the head IHP- In case of builders/
developers, property is constructed/ developed for the purpose of sale, income from which is
chargeable under the head “Profit from Business or Profession” and not “Income from House
Property”. The builder does not have any intention to let out the property and its purpose of
holding the property is to sell the same, hence, income from the property held by a builder as
stock-in-trade should not be taxable under the head “Income from House Property”
Property not meant for let-out: The relevant provisions of the Act envisage that the property
should be in a position to be let out and therefore, it has been provided that annual value is to
be taken equivalent to the sum for which the property might reasonably be expected to be let
out. As mentioned above the builder, i.e., real estate taxpayer does not have intention to let
out the property
Income from vacant property not taxable: Also, in a case where property is let out or meant to
be let out but same remains vacant, the rental value on notional basis is not to be considered
as income for the period during which the property has remained vacant. In view thereof, if
the property can be let out by the builder but remains vacant, no income should be chargeable
to tax for the reason that property has remained vacant. The property should be deemed to
have been occupied for the purpose of business of the builder/ developer
 RESTRICTION OF SET-OFF OF LOSS UNDER HOUSE PROPERTY TO
INR 2 LAKHS UNDER 71(3A)
Until FY 2016-17, loss under the head income from house property was allowed to be set-off
against income arising under any other heads of income during the same year. Section 71(3A)
of the Act has been introduced effective from FY 2017-18 (Assessment Year 2018-19) to
restrict the set-off of loss arising under the head income from house property against the
income under any other head of income during the same year up to INR 2 lakhs. The
quantum of loss not set-off (i.e., amounts exceeding INR 2 lakhs) is allowed to be carried
forward for set off against house property income for next eight assessment years.
The intention behind this amendment appeared to be curbing interest deduction in respect of
second house property owned by an individual or a HUF. However, the amendment is
applicable to all house properties including commercial property. This is detrimental to the

10
Sanjay Dutt and Gaurav Karnik, INDIAN REAL ESTATE: DEMYSTIFYING THE NEW TAX AND
REGULATORY ENVIRONMENT, https://www.ey.com/Publication/vwLUAssets/ey-demystifying-the-new-
tax-and-regulatory-environment/$File/ey-demystifying-the-new-tax-and-regulatory-environment.pdf, last
accessed 5th December, 2019

9
real estate industry engaged in construction and leasing of residential as well as commercial
properties wherein in the initial years heavy house property loss is generated due to interest
deduction.
Hence, this restriction of allow ability of set-off of house property loss only up to INR 2 lakhs
against other heads of income should either be completely removed or be restricted in respect
of second house property

TAXATION OF BUSINESS TRUST


Many real estate companies have introduced Initial Public Offerings (IPOs) to raise equity
investment from retail investors in recent years. The real estate development activity has
spread from cities to Tier II and Tier III towns also. However, Indian real estate sector has
been viewed largely as an unorganised sector and corporatization of the sector was important
to attract better foreign capital investments. With this background, REIT structure has been
viewed as a preferred investment vehicle by many real estate experts to develop and unlock
the value in Indian real estate business. After receiving several representations by real estate
industry in the past, the government of India introduced a new form of business vehicle in
Finance Act 2014, viz. business trusts operating as either Real Estate Investment Trusts
(REITs) or Infrastructure Investment Trusts (InvITs).11
Securities and Exchange Board of India ('SEBI') has responded to the industry
representations in past but the attempts were neither adequate nor timely. In a step to
showcase Indian real estate business as an effective investment vehicle, SEBI issued draft
(Real Estate Investment Trusts) Regulations, 2008 ('REITs Regulations, 2008') open for
public comments in 2008. The draft Regulations provided that REIT scheme could be
launched only through a registered trust under Indian Trust Act, 1882.12
As per the Regulations, the Trust should be deployed to provide for undertaking real
estate investments in India in accordance with REIT Regulations. The initial REIT
Regulations 2008 remained in draft format since then. However, SEBI amended SEBI
(Mutual Funds) Regulations, 1996 (MF Regulations) on April 16, 2008 introducing a new
chapter 49A providing for setting up of Real Estate Mutual Funds (REMFs). The draft REIT

11
T.V. Ganeshan, CHECK ON REAL ESTATE TO TRACE REAL INVESTMENT, Pub. 9 th September, 2013,
[2013] 37 taxmann.com 281.
12
Parul Mittal, TAXATION OF BUSINESS TRUST, DO THE CHALLENGES STILL EXIST, Pub. June 21,
2019, [2016] 70 taxmann.com 370.

10
Regulations 2008 provided for investment in real estate industry with no investment in
securities. On the other hand, REMFs were hybrid form of structure wherein a pool of
investments was allowed to be deployed in making investments in securities as well as real
estate assets. SEBI released another set of draft REIT Regulations on October 10, 2013 open
for public comments till October 31, 2013. However, due to lack of tax and regulatory
reforms to incentivize the proposed scheme, REIT was not viewed as an alternative
investment avenue. Relevant tax amendments were also important to optimize the effective
application of REITs in Indian scenario. Consequently, the Finance Act 2014 introduced a
special taxation regime in relation to business trusts and the tax incentives, effective from
October 1, 2014. Section 2(13) was introduced to define business trust as comprising of
REITs and Infrastructure Investment Trust registered under SEBI regulations. Subsequently,
on the basis of comments received on SEBI's draft REIT regulations and the Budget
announcement for 2014, on September 26, 2014, SEBI finally notified SEBI (Real Estate
Investment Trusts) Regulations, 2014 (SEBI REIT Regulations) laying down framework for
setting up, registration and regulation of REITs in India. In order to further incentivize the
scheme of business trusts, Chapter XII-FA was inserted in the Income-tax Act, 1961 ('The
Act') to provide for taxability of business trusts registered under SEBI prescribed
regulations.13

Definition of Business Trust


REIT is a form of business trust through which investors along with sponsors invest in a pool
of real estate properties that generate regular rental income. In a typical REIT structure, the
owners of completed real estate assets viz. sponsors raise capital from both domestic and
foreign investors through issuing units to them. The real estate assets are owned and managed
by an intermediary company called Special Purpose Vehicle (SPV). The trust holds debt and
equity interests of an operating business through forming an intermediary. The benefits of
REIT structure over current real estate market comprising of real estate developers are as
follows:
1. In case of real estate sector, the investment stays locked for years in those real estate
assets and an investor has to wait till suitable price appreciation happens when the

13
T.V. Ganeshan, CHECK ON REAL ESTATE TO TRACE REAL INVESTMENT, Pub. 9 th September, 2013,
[2013] 37 taxmann.com 281.

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value can be unlocked through sale of such real estate property. A REIT structure
reduces the burden of cash trap in completed assets owned by real estate developers.
2. REIT is an alternate investment avenue wherein the shortcomings of investing in
physical real estate assets can be mitigated. The liquidity can be maintained since
REIT structures can be listed on stock exchange also. Both the entry as well as exit
can be planned;
3. REIT ensures improved fund availability to real estate developers by sourcing long-
term finance from domestic as well as foreign investors;
4. REIT provides the investors a new investment vehicle with regular rental income;
5. REIT is a pass through structure that allows many tax exemptions in hands of REIT
and investors; and
6. REITs are managed by independent trustees, managers and other professionals.
Further, REIT structures are also stringently regulated by SEBI, thereby maintaining
transparency and professionalism in working.14

TAXATION OF REITS AND INVITS IN INDIA

Special tax regime introduced in Finance Act, 2015


Section 115UA was introduced under Chapter XII-FA of the Act for the purpose of
determining the taxability of income of unit holder and business trust. As per provisions of
section 115UA, the distributed income in the hands of unit holders should be deemed to be of
the same nature and in the same proportion in the hands of unit holder as the income in the
hands of business trust.
As per clause (2) of section 115UA, the total income of Business Trust other than capital gain
will be taxed in the hands of business trust at the maximum marginal rate. The capital gains
should be taxable in accordance of provisions of sections 111A and 112.

Interest income
1. Interest income received by Business Trust from SPV

14
Parul Mittal, TAXATION OF BUSINESS TRUST, DO THE CHALLENGES STILL EXIST, Pub. June 21,
2019, [2016] 70 taxmann.com 370.

12
Interest income in hands of Business Trust – As per section 10(23FC), any interest income
received or receivable by a Business Trust from a Special Purpose Vehicle shall be exempt in
the hands of the Business Trust. Accordingly, provisions of section 194A(3)(xi) was inserted
in Finance Act, 2014 thereby exempting applicability of withholding tax provisions on
interest income received by REIT from SPV. On combined reading of section 115UA and
section 10(23FC), it is marked that only interest income received from SPV is exempt in the
hands of Business Trust. However, interest received from non-SPV sources shall be taxable
at maximum marginal rate.
2. Interest income received by unitholders as distribution
As per provisions of clause (3) of section 115UA of the Act, any distributed interest income
of the same proportion as interest received from SPV received by a unit holder from a
business trust shall be deemed to be income of the unit holder and shall be subject to tax.
Hence, it can be said that section 115UA is the charging section for business trusts that
provides for pass-through status to business trusts wherein the interest income is exempt in
the hands of business trust and in return is taxable in the hands of unit holder at the time of
distribution.15
Capital gains
Capital gains tax in hands of Business Trust
Capital gains realized by a business Trust on sale of its capital assets viz. shares of SPV, sale
of properties held by SPV etc. shall be subject to normal capital gains tax rates. However, by
virtue of applicability of section 10(23FD), capital gain component of distributed income will
be exempt in hands of unit holders. Accordingly, Business Trusts are statutorily mandated as
a tax pass-through structure wherein capital gains are levied on business trust and is
subsequently exempt in the hands of unitholders at the time of distribution.
Capital gains implications on sale of units by unitholder–
In accordance with provisions of section 10(38), no long- term capital gains tax is applicable
on any transfer of units of a business trust by a unit holder if securities transaction tax ('STT')
is paid on the transfer of such units.As per provisions of section 111A(1) of the Act, a
concessional rate of short-term capital gains at 15 per cent shall be levied on unitholders on
sale of units provided STT is paid on the transfer of such units.

15
Id.

13
Capital gains implications on share swap Implications –
In accordance with section 47(xvii), any transfer of a capital asset being share of a SPV to a
business trust in exchange of units allotted by such business trust to the transferor is exempt
from the ambit of capital gains tax in India. Accordingly no capital gains tax arises in the
hands of sponsor at the time of swapping of SPV shares with units in business trust.

Rental income
Rental income earned by REIT –
The rental income earned by REIT through renting, leasing or letting out of any real estate
asset owned directly by such business trust is exempt in the hands of REIT in accordance
with section 10(23FCA).
Rental income earned by unitholders
As per provisions of clause (3) of section 115UA of the Act, any distributed rental income of
the same proportion as rent received from SPV received by a unit holder from REIT shall be
deemed to be income of the unit holder and shall be subject to tax. Hence, it can be said that
section 115UA is the charging section for business trusts that provides for pass-through status
to business trusts wherein the rental income is exempt in the hands of business trust and in
return is taxable in the hands of unit holder at the time of distribution.16

CIRCLE RATES TO BE ADOPTED FOR TRANSACTIONS RELATING TO LAND


OR BUILDING
The Finance Act, 2013 has introduced a new section 43CA wherein stamp duty value to be
considered for the purpose of computation of income under the head "Profits and Gains of
Business or Profession" is covered in respect of all transactions relating to land or building or
both. Said amendment would affect the real estate builders. This is because the income would
be computed on the basis of notional income and not on the basis of real income appearing in
the books of the taxpayer. The aforesaid provision is applicable to all taxpayers and
assessees who earn income by transferring/selling real estate assets and, thus, are liable to
capital gains tax. This provision creates a very difficult situation for the seller of the property,
as he is required to pay tax on extra money which he never received. Alternatively, if seller

16
Dharmesh Shah and Ashwin Kashinath, TAXABILITY OF JOINT DEVELOPMENT AGREEMENTS- A
BOON OR A BANE, Pub. 13th July, 2017, [2017] 83 taxmann.com 381.

14
wants to claim exemption by investing in a residential house or capital bonds, depending
upon the facts of his case, then he is required to invest an extra amount which he never
received on sale. However, this provision is not applicable to persons deriving business
income by selling immovable property, i.e., these provisions do not apply to transfer of
immovable property, which is held by the transferor as his stock-in-trade. The Allahabad
High Court in the case of CIT v. Kan Construction & Colonizers (P.) Ltd. 17 treated the plot of
land as stock-in-trade and held that the gain on the sale of such plot was taxable as business
income and not as capital gain under the Income-tax Act, 1961, the reason being that the
stamp duty valuation provisions under section 50C of the Income-tax Act were not applicable
to sale of plot of land which was held as stock-in-trade. Further, as per the provision of
section 43CA where the consideration for the transfer of an asset [other than capital asset],
being land or building or both, is less than the stamp duty value, the value so adopted or
assessed or assessable shall be deemed to be the full value of the consideration for the
purposes of computing income under the head "Profits and gains of business or profession".
It is also provided that where the date of an agreement fixing the value of consideration for
the transfer of the asset and the date of registration of the transfer of the asset are not the
same, the stamp duty value may be taken as on the date of the agreement for transfer and not
as on the date of registration for such transfer. However, this exception shall apply only in
those cases where amount of consideration or a part consideration thereof for the transfer has
been received by any mode other than cash on or before the date of the agreement.
In view of the aforesaid amendment, the real estate players will face difficulty, as they will
not be able to sell away some of their plots and real estate assets which were held as stock-in-
trade well below the price of the existing circle rate.18
The above changes made by the Finance Act would have a far reaching impact on the real
estate players, e.g., certain real estate companies must be having traditional land parcels
acquired at significantly lower prices in value and will be held by the land owning company.
But the actual development activity will happen in the flagship company of the Group by
acquiring the land or its development rights from the land owning company. Since by the
aforesaid clause only the stamp duty value as on the date of agreement would be considered,
it will impact the real estate companies, as there will be a huge difference between the value

17
[2012] 20 taxmann.com 381/208 Taxman 478.
18
Dharmesh Shah and Ashwin Kashinath, TAXABILITY OF JOINT DEVELOPMENT AGREEMENTS- A
BOON OR A BANE, Pub. 13th July, 2017, [2017] 83 taxmann.com 381.

15
of the land acquired originally (at traditional value) and the value of the land at the time of
agreement for development by acquiring the land or its rights.19
Income-tax on immovable property received for inadequate consideration
One of the most perilous amendments made by the Finance Act, 2013 is the proposal to
amend section 56 of the Income-tax Act, 1961 relating to taxation of deemed income,
wherein it brings to tax all such immovable properties like land, building, flat, etc., which
have been purchased by Individuals & Hindu Undivided Families (HUFs) at a price lower
than the Circle Rate value. According to the Explanatory Memorandum to the Finance Bill,
2013 which states that the existing provisions of sub-clause (b) of clause (vii) of sub-section
(2) of section 56 of the Income-tax Act, inter alia, provide that where any immovable
property is received by an individual or HUF without consideration, the stamp duty value of
which exceeds Rs. 50,000 then the stamp duty value of such property would be charged to tax
in the hands of the individual or HUF as income from other sources. It is further stated that
the existing provision does not cover a situation where the immovable property has been
received by an individual or HUF for inadequate consideration. Hence, the existing
provisions were amended so as to provide that where any immovable property is received for
a consideration which is less than the stamp duty value of the property by an amount
exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such
consideration, shall be chargeable to tax in the hands of the individual or HUF as income
from other sources. However, this does not apply to property received from close relatives or
under certain other circumstances as provided for. The present amendment is made with a
view to include cases where property is received for inadequate consideration. This
amendment would be applicable from 1-4-2013 and would, therefore, be applicable to the
financial year 2013-14 relevant to the assessment year 2014-15. n most of the cases, there
may be a gap between the date of agreement for purchase of real estate asset and the date of
registration of the property. To address to the hardship in these cases, it is provided that
where the date of the agreement fixing the amount of consideration for the transfer of the
immovable property and the date of registration are not the same, the stamp duty value may
be taken as on the date of the agreement, instead of the date of registration. This exception
shall, however, apply only in a case where the amount of consideration or a part thereof has

19
Id.

16
been paid by any mode other than cash on or before the date of the agreement fixing the
amount of consideration for the transfer of such immovable property.20

CONCLUSION
Real- estate industry has witnessed a prolonged down-cycle owing to high inventory, lesser
demand and high tax implications. Demand in real estate has been declining since 2013 and
by 2016, it had hit an all-time low. Implementation of GST at the rate of 12% has also
adversely affected the real- estate market. This industry has increasingly been relying on the
NBFCs and housing finance companies to raise their debt financing. The liquidity crunch
faced by the NBFCs and HFC segment towards the end of 2018 has impacted the funding
availability and cost for many real estate developers. At this distressed situation, the interim
Budget 2019 might be a blessing for the real estate sector . The Finance Minister also
reiterated, in his budget speech, that a group of ministers has been nominated to look into the
possibility of giving relief from GST for the housing projects. In respect of direct- tax
proposals, the Finance Bill, 2019 has proposed various amendments in provisions relating to
Income from house property and capital gains which would give a boost to this sector. A
glimpse of these changes are enumerated below:21
1. Expanding scope of capital gain deduction
Any long-term capital gains, arising to an Individual or HUF, from the sale of residential
house property is exempted to the extent such capital gains are invested in another residential
house property. The taxpayer is allowed to invest only in one residential house in India to
claim section 54 relief. The Finance Bill, 2019 proposes to extend the exemption for
investment made, by way of purchase or construction, in two residential houses provided the
amount of capital gains does not exceed Rs. 2 crores. If the assessee exercises this option, he
shall not be subsequently entitled to exercise the option for the same or any other assessment
year i.e. the assessee can exercise this option only once in a lifetime.
2. No tax on second self-occupied house
If an individual owns more than one house property for his own residence then only one
house property, as per his choice, would be treated as self-occupied and its annual value is
deemed as nil. The other house property is deemed to be let-out as per Section 23 and
20
Parul Mittal, TAXATION OF BUSINESS TRUST, DO THE CHALLENGES STILL EXIST, Pub. June 21,
2019, [2016] 70 taxmann.com 370.

21
IS INTERIM BUDGET 2019 A BLESSING FOR REAL ESTATE INVESTMENT?, available at
https://117.232.123.74:2083/filecontent.aspx?Page=|NEWS&isxml=N&id=222330000000017832&search=inve
stment+in+real+estate+sector+and+tax+implication&tophead=true.

17
notional rent of such house is taxed under the head 'House Property'. The Finance Bill, 2019
has proposed to amend this provision by allowing an option to the assessee to claim nil
annual value in respect of any two houses declared as self-occupied. In other words, a
taxpayer can now claim that he has two self-occupied house properties. Considering the
socio-economic need of middle-class families to maintain houses at two locations on account
of their job, children's education, care of parents etc., this relief would address the genuine
concerns of house owners.
3. Interest on housing loan for two self-occupied house properties
Section 24 of the Income-tax Act, 1961 allows deduction of interest paid on housing loan
taken for self-occupied house property up to Rs. 2 lakh. However, this deduction is limited to
only one self-occupied property. The Finance Bill, 2019 has proposed to amend section 24 to
extend the benefit of deduction of interest paid in respect to second self-occupied property.
However, the maximum deduction a taxpayer can claim remain unchanged, i.e., Rs. 2 lakhs.
4. Relief in respect of affordable housing scheme
Section 80-IBA provides deduction to the assessees engaged in the business of developing
and building housing project. Deductions up to 100% of profits is available to assessee
provided that the housing project is approved by the competent authority after June 01, 2016
but on or before March 31, 2019. The Finance Bill, 2019 seeks to amend this section so as to
extend the benefit of deduction even if the project gets approved before March 31, 2020.
5. Rise in threshold limit for deduction of tax from rent
Every person (including an individual or HUF who are subject to tax audit) shall be required
to deduct tax under Section 194-I from payment of rent. The tax shall be deducted if the
amount of rent paid or payable during the financial year exceeds Rs. 1,80,000. This threshold
limit, for deduction of tax, is proposed to be increased from Rs. 1,80,000 to Rs. 2,40,000.

With the changing mode of conducting business, investments are made in businesses in a
jurisdiction through creating a maze of intermediary companies, commonly called as special
purpose vehicles to carry out business operations in a tax friendly manner, deploying
technical and legal support from industry experts to undertake complex planning of wealth
creation in a tax proficient manner. REIT is supposedly one of such structures that is largely
single jurisdiction based, though it provides multi-fold investment benefits to investors from
both source country and home country. After having a successful run in countries like USA,
Hong-Kong and Singapore, the take-off of REIT and InvIT structures in India is keenly
awaited. Though a lot many concerns are addressed in Finance Act, 2015, viz. doing away of
18
capital gains tax and Minimum Alternate Tax on share swap by sponsors, it is believed by
Indian real estate industry experts that certain technical tweaks are still required for smooth
functioning of REIT structure in India. For instance, most REIT's being listed, the period of
holding units of a business trust should be made 12 months in order to qualify as a long-term
capital gains, in line with shares of a listed company. Though, dividend is exempt in hands of
both business trust and unit holder, an exemption from dividend distribution tax on dividend
paid by SPV to REIT should be provided. In wake of the fact that the actual investment in
REITs has not occurred as expected since the Foreign Direct Investment policy under Foreign
Exchange Management Act, 1999 and the regulations framed thereunder did not permit
foreign investment in completed rent-yielding real estate projects. Recently, the Union
Cabinet, in a press release, has now announced its approval for REITs being considered as an
eligible financial instrument to attract long-term finance from foreign and domestic sources,
including NRIs making available fresh equity to the real estate sector. However, the press
release only makes reference to REITs with an absence of InvITs, resulting in uncertainties
regarding permission for foreign investment in InvITs.

19
BIBLIOGRAPHY
ARTICLES REFERRED

1. T.V. Ganeshan, CHECK ON REAL ESTATE TO TRACE REAL INVESTMENT,


Pub. 9th September, 2013, [2013] 37 taxmann.com 281.
2. Parul Mittal, TAXATION OF BUSINESS TRUST, DO THE CHALLENGES STILL
EXIST, Pub. June 21, 2019, [2016] 70 taxmann.com 370.
3. Dharmesh Shah and Ashwin Kashinath, TAXABILITY OF JOINT DEVELOPMENT
AGREEMENTS- A BOON OR A BANE, Pub. 13th July, 2017,
[2017] 83 taxmann.com 381.
4. Nishith Desai, REAL ESTATE INVESTMENT, available at
http://www.nishithdesai.com/information/areas-of-service/industry/real-estate-
investments.html, Last accessed on 3rd December, 2019
5. Reaping the Returns: Decoding Private Equity Real Estate Exits in
India, http://www.joneslanglasalle.co.in/ResearchLevel1/Reaping_the_Returns_Deco
ding_Private_Equity_Real_Estate_Exits_in_India.pdf
6. Firoze B. Andhyarujina, Real Estate Development – Guide to Implications of Income-
tax Act, Real Estate Regulatory Authority (RERA) And Goods And Services Tax
(GST) Act, Pub. 23rd December, 2017, http://itatonline.org/articles_new/real-estate-
development-guide-to-implications-of-income-tax-act-real-estate-regulatory-
authority-rera-and-goods-and-services-tax-gst-act/, last accessed on 4th December,
2019.
7. Amaresh Singh and Manjul Mantri, INDIA; REAL ESTATE 2019, Pub. 30th
November, 2018, https://iclg.com/practice-areas/real-estate-laws-and-
regulations/india, last accessed on 4th December, 2019
8. Sanjay Dutt and Gaurav Karnik, INDIAN REAL ESTATE: DEMYSTIFYING THE
NEW TAX AND
9. REGULATORYENVIRONMENT, https://www.ey.com/Publication/vwLUAssets/ey-
demystifying-the-new-tax-and-regulatory-environment/$File/ey-demystifying-the-
new-tax-and-regulatory-environment.pdf, last accessed 5th December, 2019
10. IS INTERIM BUDGET 2019 A BLESSING FOR REAL ESTATE INVESTMENT?,
https://117.232.123.74:2083/filecontent.aspx?Page=|NEWS&isxml=N&id.

20