Important Judgement on Capital Gains Exemption to Include Cost of Land

Real Estate and the provisions of Capital gain go hand in hand for buyers of real estate. Sharing a recent judgement passed by the Hon'ble Madras High Court on a capital gain exemption under section 54 of Income Tax Act.

C. Aryama Sundaram Vs. Commissioner of Income Tax, Chennai dated 06th August, 2018

The assessee sold a residential house property resulting into long term capital gain of Rs.10.47 crore. Thereafter, the assessee purchased new property with superstructure for a consideration of Rs.15.96 crores. After demolishing the existing superstructure, the assessee constructed a residential house and claimed the exemption under section 54 towards the cost of the construction and the cost of the land.

The Assessing Officer (AO) held that only that part of the construction expenditure which was incurred after the sale of the original asset was eligible for exemption under section 54. The AO, thus allowed an exemption of Rs.1.14 Crores under section 54. The Commissioner of Income Tax (Appeals) upheld the order of the AO. Income Tax Appeallate Tribunal (ITAT) remitted the matter to the file of AO to consider the deduction under section 54 for construction cost incurred by the assessee. 

Aggrieved, the assessee appealed before the Madras High Court. High Court analysed the provisions of Section 45 and Section 54 and noted the conditions precedent for claiming exemption under section 54. High Court observed that what has to be adjusted and/or set-off against the capital gain is, the cost of the residential house that is purchased or constructed and not just cost of construction of the new residential house. Thus, it is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house. 

High Court stated that Section 54(1) of the said Act does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house. Had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, Section 54(1) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer, which gave rise to the capital gain or may be in the alternative have expressly made the exemption in case of prior purchase, subject to purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gain.

High Court, thus held that the cost of new residential house would include the cost of construction as well as cost of land for the purpose of claiming exemption under section 54. High Court, thus ruled in favour of the assessee.

Source: ICAI Journal
click here for a detailed judgement

SIMPLIFYING THE CONDITIONS OF SEC 80 IBA vis a vis Affordable Housing

In the recent past, there has been a lot of discussion in the builder community on Affordable Housing vis a vis the Income Tax deduction as per the provisions of Sec 80-IBA of Income Tax Act.

Let me take this opportunity to decode the above statement by bringing to your notice that the above statement is a combination of two different provisions.

Firstly, the provision of Sec 80-IBA of Income Tax Act which speaks about the deductions in respect of profits and gains from housing projects.

Secondly, a notification no. 13/6/2009-INF issued by the Ministry of Finance dated 30th March, 2017 which incorporates a new sub sector "Affordable housing" under the category of "Social and Commercial Infrastructure"

Now, lets understand the conditions imposed under sec 80-IBA to claim a deductions in respect of profits and gains from housing projects

Majorly, the conditions of 80-IBA can be divided into six categories, detailed as below

A. PROJECT

• should be only housing project on the plot of land
• project approved after 1st June, 16 but on or before 31st Mar, 2019
• to be completed within 5 years from the date of approval

B. PLOT AREA

• land measuring not less than 1000 sqm in Mumbai, Kolkata, Delhi Chennai
• land measuring not less than 2000 sqm in any other place

C. FAR UTILISATION

• not less than 90% in Mumbai, Kolkata, Delhi Chennai
• not less than 80% in any other place

D. CARPET AREA

• Residential Unit
• should not exceed 30 sqm in Mumbai, Kolkata, Delhi Chennai
• should not exceed 60 sqm in any other place

• Shops and Other Commercial Establishments
• should not exceed 3 % of the aggregate carpet area of the project

E. ALLOTMENT

• Allotted to an Individual
• No other unit shall be allotted to the Individual or the spouse or the minor children of such individual

F. BOOKS OF ACCOUNT

• assessee should maintain separate books of account in respect of the housing project

Click here for a detailed provision of Sec 80-IBA

Notification of Ministry of Finance vide notification no. 13/6/2009-INF dated 30th March, 2017 brought affordable housing within the ambit of Infrastructure sector and defines affordable housing as below -

"Affordable housing is defined as a housing project using at least 50% of the Floor Area Ratio (FAR) / Floor Space Index (FSI) for dwelling units with carpet area of not more than 60 square meters"

Notification no. 13/6/2009-INF issued by Ministry of Finance dated 30th March, 2017

Thus, a net inference from the conjoint reading of both the clauses i.e., to develop an affordable housing and claim the benefit of profit deduction u/s 80-IBA, will be something like this  -

MASTER STROKE by the central government of India in defining affordable housing with FAR utilisation of 50% with a restriction of 60 sqm carpet area AND giving benefit u/s 80-IBA with a FAR utilisation of 90% / 80% and a restriction of 30 / 60 sqm of carpet area within the cities of Mumbai (B), Kolkata (C), Delhi (D), Chennai (C) and any other places respectively.

I hope this article will help in understanding the joint inference of the provisions of sec 80-IBA and affordable housing.

Please give your valuable feedback in the comments below.

Importance of Possession in Real Estate

There's a million yards to walk before one settles down in one's own home. This is true especially for those who buy their house from a developer.

From the time one books a house to actually getting its possession, there can be plethora of documentation, some disclosed upfront, while others are known over a period of time, which are typically signed blindly by the buyers.

One such document is the possession document between the buyer and developer. Most buyers do not pay much heed to these documents while taking the possession, but they realize the importance of possession after taking the possession of their units.

Building homes involves a lot of process and steps before a buyer can actually occupy his unit for dwelling which we generally call it as "possession of unit to a buyer".

Developers put their heart and soul in marketing, selling and the construction of a property with a lot of focus on building design, materials used, amenities provided, etc. but how many of them do really consider the importance of a satisfactory possession to a respective buyer?

At this stage, the buyers have paid the entire property value, completed registration & all other necessary formalities and now waiting eagerly to take the possession of their unit.

But unfortunately, the happiness of a buyer doesn't lasts long when they are not guided properly with a possession booklet mentioning all the necessary information and the important contact numbers whom a buyer can contact after possession. When a buyer asks "to whom should we contact after possession?".

In general, the answer given to a buyer is "Please contact Facility Management Team" deputed at your premises.

And now, the actual challenges begin because even though the scope of a facility management team is defined somewhere in the agreements signed by the buyer, the practical scenario is totally different due to poor handing over from the project team to a facilities team and eventually, a buyer has to run from the pillar to post to get their issues resolved.

Owning a house is the ultimate dream for most of the people since time immemorial as it gives a secured feeling to an individual of owning their own house and if the possession is satisfactory it acts like a cherry on the top. The happiest moment for a buyer is when they receive a mail or a letter confirmation from a builder stating that the project is ready for possession and they can now move in.  

In addition to all the efforts put forth by the builders, they should also work on customer satisfaction during possession which will definitely help in building their brand image in the market and customers will be willing to purchase and refer their acquaintances in near future.

Unfortunately, in the current scenario the customers are actually not taken care at the time of giving possession of their units by many builders.

Hence, to avoid an unsatisfactory experience of a buyer during possession, following are the few major areas which a builder should inspect in detail before giving possession to a buyer - 

• Door quality, polish and finishing 
• Wall Painting 
• Hairline Cracks 
• Plumbing connections especially the flow and slope in bathrooms 
• No leakage and seepage in the unit 
• Adequate electrical points 
• Tile grouting and hollowness 
• Finishing and the cleanliness of the unit

So, if a developer takes care of the above mentioned points before customer visits for taking the possession, more than half of the work is completed and the buyer will be more than happy to take the possession of his dream house.

A company should also understand the importance of an experienced Customer Relation Manager (CRM) who can satisfy the buyer during handover. Many a times, a small issue not resolved immediately becomes a big concern for buyers dissatisfaction.

Buyers should not feel as if they are only heard or are called only when the commercials are concerned. In such a scenario, a long term relation with the customer can never be build. Handover process should always be a priority for a builder and particularly for a CRM team.

There’s a very old saying --

“All's well that ends well”

As a result, if the customers are satisfied during handover they will definitely consider the same builder again for their next purchase and will also refer to their acquaintances in future.

I hope this article will give the insights to what the customers primarily look for during possession.

Special thanks to Mr. Kumar Kunal for sharing his valuable experience of giving possession to the customers in the real estate Industry.

Please give your valuable feedback in the comments below.

Managing Real Estate Clearance Tracker

Real Estate Industry is known to be one of the unorganized sector wherein a lot of statutory clearances, sanctions and approvals are required from various authorities to start the construction. Naming a few like, building plan sanction, fire NOC, PCB clearance, clearance from the Airport Authority, etc.

Every single clearance has a different validity period and a builder needs to approach various different authorities for the renewal or regularization of all such clearances, whenever required.

In the time where people forget birthdays or anniversaries of their loved ones - is it really possible to remember the validity period of all the clearances, sanctions and approvals having multiple expiry dates? I believe the answer is NO. Then what’s the solution?

So, the solution is to either install a software which pop-ups / highlights the due date of the nearby expiry OR to manage an efficient tracker in MS Excel which indicates the due date and alarms the nearby expiry of various statutory clearances.

We know that the installation of a new software is a costly affair. Hence, it's better to start off with MS excel at no cost and with a user friendly experience.

Clearance tracker has to be divided into two parts i.e. Pre and Post Clearances for better tracking and decision making. Extract of the clearance tracker template is shown below for your reference.

Now, apply conditional formatting with a color coding in MS Excel on Due / (overdue) column after applying todays formula to automatically highlight the nearby expiry or expired clearances.

The above tracker cannot be a permanent solution but will surely act as a relief in a current scenario where no proper format is followed to track the due dates of the clearances.

Usually, it becomes difficult for the liaisoning team to move with urgent haste in various statutory departments for the extension, renewal or regularising various clearances. Needless to mention that the delay in regularization could impact a company's performance.
Tracker has always been a game changer in terms of monitoring a project in real estate industry. However, there are only few organisations who maintains a proper tracker to keep a track on the expiry of all the statutory clearances and are able to avoid last minute rush in regularising the same.

Looking at the above concerns, its indeed a high time to maintain a tracker to avoid last minute surprises.

I hope this article will help to develop a tracker of various statutory clearances required for construction.

Please give your valuable feedback in the comments below.

Decoding CRM Report

Being in the Real estate industry for the past few years, I have often experienced that during the month end, the CRM (Customer Relationship Management) team will be under tremendous pressure to achieve their target collections and submit their reports to the upper management. 

Gradually, when I started analysing and decoding the reasons of the stress faced by the CRM team every month, I found some interesting facts which are rarely scrutinized by the upper management other than few companies or are barely looked into these facts to take necessary steps instead only pressurizing the team on achieving their monthly targets. Undoubtedly, best results are performed under pressure but we also need to look into the critical bottleneck areas to improve the overall performance and support the team.

Many companies follow a standard format of monthly reporting of CRM reports either in excel or through a software.

After spending a lot of time with the CRM team and the upper management, I found a gap in understanding the analytics of the report.

Analysis has always been a vital part in understanding the bottle necks and finding a solution accordingly. However, there are only few companies who analyse the reports and find the critical areas to take the necessary action. Basically, they are the ones who hit the bull’s eye.

Firstly, let me tell you on how to break the stone and understand the various bottlenecks i.e., break the total outstanding into two parts – collectable and uncollectable outstanding.

Now, you must be thinking what is uncollectable outstanding?

Uncollectable outstanding is the outstanding from customers pending due to various reasons which are beyond the control of the CRM team directly i.e., these amounts cannot be collected if those various issues are not resolved, like clarification requested by a customer on GST calculation which may be beyond the understanding of the CRM team and the same is pending with the accounts team, unresolved snags raised by the customers which may be pending with the projects team, disbursement from customers banker which may be pending with the finance team who will arrange an NOC from the lender of the project to whom the unit has been hypothecated, etc.

In the above cases, the CRM team can merely play a role to follow up with the individual departments to resolve the queries at the earliest instead resolving themselves because these issues are beyond their control.

Secondly, once you are through with the segregation of collectable and uncollectable outstanding, the HODs or the upper management should now analyse the turnaround time taken by the individual departments to close the queries raised by the CRM team.

Thirdly, after giving an opportunity of being heard to all the departments concerned including CRM team, a company should formalize an SOP for a standard turnaround time for all the departments concerned to the queries raised by the CRM team so the CRM can effectively communicate a due date to a customer which brings transparency and confidence in the mind of the customer.

Finally, decoding the outstanding numbers into various categories and analysing the bottleneck areas will help the organisation in understanding the actual reasons of delay in collection and will have a better insight to take the necessary action accordingly.

Total Outstanding - Uncollectable Outstanding = Collectable Outstanding

Uncollectable Outstanding = outstanding beyond the control of CRM

I hope this article will be helpful in decoding and analysing the CRM reports.

Please give your valuable feedback in the comments below.