“TAX TREATMENT ON SALE OF FACTORY LAND & SHEDS”


TAX TALK-28.04.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“TAX TREATMENT ON SALE OF FACTORY LAND & SHEDS”

Query 1]
I am a govt. employee. in FY 2013-14, my home loan bank showed interest on home loan
as Rs. 28,500/- in provisional income tax certificate whereas actual interest as shown in
final certificate is Rs. 2,82,73/-. Please tell me how to pay that extra tax online and also
the corresponding challan involved? [N.A. Mahajan-
nilay_am@rediffmail.com]
Opinion:
1.      It’s important for the taxpayer to verify the data recorded in the TDS certificate in Form No. 16 vis a vis actual data.
2.      You can pay the tax online by just logging in at www.incometaxindia.gov.in wherein you will have a link for tax payment on the left hand side of the portal with menu as “Pay tax Online”. You can follow the screen wise instructions & can pay the tax. Following points may be of your held while making the payment:
a] Use “Challan No. /ITNS 280” for making the payment.
b] Select option “(0021) Income-Tax (Other than Companies)” & Assessment Year as “2014-15”
c] Click on Type of Payment as “Self Assessment Tax”

Query 2]
I am managing director of my private limited company incorporated in 1994 at MIDC. Now, I want to sale 10,000 sq ft land with 3,600 sq ft shed out of 16,000 sq. Ft plot owned by company. My purchase price was Rs. 4 per sq ft and sale price is Rs. 250 per sq ft. Shed valuation is Rs. 400/-per sq ft. Kindly advice:
1.      What tax liability arises to private Ltd Company?
2.      Can company re-invest the profits in manufacturing activity to claim tax exemption?
3.      Can this tax be deferred and paid subsequently? [hemant**********@gmail.com]
Opinion:
1.      The company is selling Land (Non Depreciable Assets) and the shed (Depreciable Assets). Both the assets are the part of the fixed assets only in the financial statements.
2.      The profit on sale of land & on sale of Sheds would be required to be calculated separately.
3.      The profit on sale of land would be Long Term Capital Gain (LTCG) as the land is sold after a holding period of more than 36 months. The capital gain has to be worked out on the basis of actual sale price (i.e., @ Rs. 250/- per sq.ft as mentioned in the query) or stamp duty valuation whichever is higher. Indexation benefit is also available while working out the LTCG on the proportionate amount of land value sold (i.e., on 10,000 sq.ft. sold out of 16,000 sq.ft). The tax on LTCG arising on sale of land could be saved by the company u/s 54EC by investing the amount of LTCG within a period of 6 months in the specified NHAI/ REC bonds.
4.      Calculating the profit on sale of sheds (Depreciable assets) & working of the tax treatment would require a professional help & understanding of the provision of Income Tax Act-1961. For the benefit of readers at large, I am trying to simplify it.
5.      Under the Income Tax Act-1961, there is a concept of “Block of Assts” while claiming depreciation. The term “Block of Assets” means a group of assets falling within a class of assets in respect of which same rate of depreciation is prescribed. Resultantly, every depreciable asset is required to be grouped in one particular block on the basis of rate of depreciation admissible on that asset. The shed you are selling now is obviously the part of one particular block for the purpose of Income Tax Act. The sale price of the shed would be reduced from the entire block of that asset. After reducing the sale price from that block of assets, there are four possible probabilities:
a] The block could consist of other assets and the resultant figure is reduced to negative figure at the year end. Or
b] The block could consist of other assets in that block and resultant figure remains a positive figure at the year end. Or
c] The block could consist of no other assets except sheds as sold by you now and the resultant figure is reduced to negative figure. Or
d] The block could consist of no other assets except sheds as sold by you now in that block and resultant figure remains a positive figure.

The tax treatment with all above four probable possibilities would be as under:

In the case of (a) above, the negative figure would represent the profit at the end of the year. It would be taxable as Short Term Capital Gain pursuant to special tax treatment mechanism u/s 50 of the Income Tax Act-1961.

In the case of (b) above, the depreciation would be admissible on the residual amount only and nothing directly would be taxable as a result of sale of sheds in such case.

In the case of (c) above, there is no asset in that particular block at the yearend & negative figure would represent the profit on cessation of that block and would be taxable as Short Term Capital Gain pursuant to special tax treatment mechanism u/s 50 of the Income Tax Act-1961.

In the case of (d) above, there is no asset in that particular block at the yearend & the positive figure would represent the loss on cessation of that block and would be treated as Short Term Capital Loss pursuant to special tax treatment mechanism u/s 50 of the Income Tax Act-1961.

In (b) & (d) above, the short term capital loss could be carried forward for set off in subsequent years. In (a) & (c), the profit would be taxable like other regular profit of the company.

To save tax under (a) & (c) above, you can exercise following options:
a] Make addition (by way of purchase or construction etc) of other assets in the same block i.e. assets entitled to same rate of depreciation during the same year only.
b] Invest the amount of gain in NHAI / REC bonds specified u/s 54EC of the Income Tax Act-1961. [It may interestingly be noted that exemption u/s 54EC is available even in respect of depreciable assets sold after a holding period of more than 36 months. It is a profit that is deemed as short term capital gain u/s 50 and the assets (i.e., shed in your case) still remains a long term capital assets. Exemption u/s 54EC is available on the long term capital assets transferred.]

Further, it may be noted that exemption in 54EC bonds is restricted to a maximum of Rs. 50 Lacs in a financial year. However, in view of few judgments, you can schedule your transaction in between October to March so that you could claim exemption u/s 54EC up to Rs. 1 Cr by investing the amount in two financial years (i.e., Rs. 50 Lacs in each financial year).

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  2. MY PRIVATE LIMITED COMPANY IS SELLING LAND BLOCK AT RS. 100 (PURCHASED AT RS 45) AND BUILDING BLOCK AT RS. 20 (ATTRACTING SHORT GAIN) AFTER 36 MONTHS AND SAME PRIVATE LIMITED COMPANY IS WILLING TO PURCHASE ANOTHER INDUSTRIAL LAND BLOCK OF RS. 120 AND CONTSTRUCT BUILDING ON SAME WITHIN A YEAR.

    MY CONCERN IS LAND BLOCK ONLY, DOES PRIVATE LIMITED COMPANY NEED TO PAY LONG TERM CAPITAL GAIN EVEN IF IT INVESTS IN INDUSTRIAL LAND AGAIN.

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