“BILL DISCOUNTING: WHETHER BUSINESS INCOME OR OTHER SOURCE INCOME ”

TAX TALK-18.08.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

“BILL DISCOUNTING: WHETHER BUSINESS INCOME OR OTHER SOURCE INCOME ”

Query 1]

I have following query. I am agent of some company and I am making advance payment on behalf of parties, who are purchasing material from company. Company is allowing me CD and these parties are making payment after 30 days. Kindly advice whether it is a business income or income from other sources? [Lalit Devpura-lalit.devpura@adityabirla.com]

Opinion:

Prima-facie, it appears that the company is selling the goods directly to the customers. The transaction of purchase & sale is between the parties and you are an intermediary through whom just payment is routed. You are making the payment to the seller on behalf of their purchaser/customers after deducting the cash discount whereas you will be receiving the billed amount from the customer. In such case, your bill discounting income ideally is taxable under the head “Income from Business/profession” as the transactions doesn’t appear to be an isolated single transaction & doesn’t appear to fall in the residual category of “Income from Other source”.

Query 2]

I have the following queries with regard to Real Estate Transactions. Kindly help.

1.      The client has entered into a JV Agreement with the Land owner for construction of 5 flats, out of which 3 flats to be given to the owner and 2 flats are to the Builder.

2.      The cost of each flat is Rs. 25 Lacs.

3.      Now, the percentage of completion is 60%.

4.      So Sales Turnover to be recognized is Rs. 25 Lacs * 2 * 60% = Rs. 30 Lacs (Please correct me if I am wrong).

5.      Cost of Construction incurred till 31^st March is Rs. 25 Lacs.

6.      How to calculate the closing WIP assuming that
a. One flat is booked before 31^st March?
b. Two flats are booked before 31^st March? [Bhagyalakshmi Ramesh- blassociates2003@gmail.com]

Opinion:

1.      The hardest thing to understand is income tax. It gets all the more complicated when it comes to taxation of real estate transactions. A real estate project is generally spreads over for more than one accounting period & so revenue recognition and accounting in such cases still remains a complex issue. There are lot many confusions as to revenue recognitions in such cases. In your specific case, apparently it appears that the risk & rewards in respect of the builders share in the project would be transferred in favor of the prospective or identified buyer only after completion of the scheme, at the time of executing sale deed or handing over the possession of the flat. If it is so, the revenue need not be recognized at the time of booking or during the construction phase of the project. Rather, the revenue would be recognised at the end of the project at the time of executing the sale deed in favor of buyer.  In plain words, even if 60% or more is the stage of construction, no revenue needs to be recognised. Irrespective of the number of booking (one or both), the revenue would be recognised at the time of transfer as stated above. Work in progress (WIP) would consist of all the expenses incurred till the end of the financial year. It will not have anything to do with the stage of completion & closing WIP, in such case, would be carried forward in the next year.

Query 3]

I have a query regarding second housing loan. Please provide solution to following queries. I have purchased one flat at Delhi in 2005 taking housing loan which is cleared in 2012 and the house is in my possession. I was posted at Delhi in 2005 and now shifted to Nagpur in 2007 and is residing in a rented house at Nagpur.  In January- 2014, I had purchased one plot taking a housing loan from SBI reality and now within 18 months, I have to construct a house on that plot as per the requirement of bank. I shall be applying for housing loan in march-2015 for constructing a house. At present, I am not getting any interest certificate from bank for claiming income tax exemption. Bank says after 
completion of construction of house, they will issue it. What will be my tax liability? I am a salaried employee and posted at Nagpur and residing at Nagpur. Whether tax exemption could be claimed for combine construction + plot or only for loan taken for construction? [mskhatib@rediffmail.com]

Opinion:

1.      It may be noted that housing loan taken merely for purchase of plot is not eligible for deduction till the construction of the house property is completed. Only after the construction of the house property, deduction could be admissible. Interest in respect of pre-construction period is deductible in five equal annual installments commencing from the year in which the construction is completed. After the construction of house only, tax benefit of housing loan could be availed. [For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on 31^st March immediately prior to the date of completion of construction /acquisition].

2.      In your case, Nagpur house property would be your second house property. Readers may cautiously note that the tax treatment of housing loan taken for purchase/construction of second house property is different (and not same as that of first house property loan). You & other readers may kindly refer the last month Tax Talk Dated 21.07.2014 wherein the tax benefit and tax treatment of second house property was discussed in length.