TDS BY BUYER OF PROPERTY

[CA DEV KUMAR KOTHARI]

New provisions for tax deduction by buyer of immovable property.

Relevant links and references:

Section 194IA, 194LA and 203A of Income-tax Act, 1961.

New section 194-IA:

A new section namely section 194-IA has been inserted vide the Finance Act 2013, w.e.f. 1st day of June, 2013.

The provision is a procedural provision and is based on transactions to be carried on or after appointed day which is 01.06.2013. This provision is not to impose tax on income of any previous year of any assessee, the provision is only for collection of tax through buyers of immovable properties. Therefore, the provision shall be applicable in respect of transactions of transfer of such immovable properties to which the section applies. The section shall apply, if the consideration is credited or paid, whichever is earlier, on or after 1^st June, 2013.

Therefore, consideration paid (including advance) or credited on or before 01.06.2013 will not be liable for deduction.

The section is reproduced below with highlights added by author for easy analysis, understanding and catch words for memory recall:

[194-IA. Payment on transfer of certain immovable property other than agricultural land.—(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income tax thereon.

(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Explanation.— For the purposes of this section,—

(a) “agricultural land” means agricultural land in India, not being a land situate in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2;

(b) “immovable property” means any land (other than agricultural land) or any building or part of a building.]  

An analysis:

The liability to deduct tax is imposed on any person, who is a transferee and is responsible for paying (other than the person referred to in section 194LA- cases of compensation for acquisition of land and / or building under law)

The provision apply when payment is made to a resident transferor. Thus persons getting a part of consideration as a confirming party or for vacating property or relinquishing any rights in property , but who are not transferor of property will not be covered. Thus any payment made in such situation to a person who is not transferor, will not be subject to tax deduction.

The payment should be of any sum by way of consideration for transfer of any immovable property (other than agricultural land),payment can be in any manner including by any adjustment of recoverable sums from vendor, other dues, book entries or third party adjustment etc..

The time of applicability is at the time of credit of such sum to the account of the transferor or at the time of payment whichever is earlier.

The rate of deduction is one per cent of such credit or payment.

Not applicable: where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

The expression “agricultural land” means agricultural land in India, not being a land situate in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2. Consideration for transfer of such agricultural lands are also exempted.

And “immovable property” means any land (other than agricultural land) or any building or part of a building.]  

The limit and application in case of joint owners:

As per sub-section (1) tax is required to be deducted from the sum credited or paid to a transferor. Therefore, in case of joint transferor, where consideration is paid separately to each joint transferor and account of each joint holder is credited separately, the deduction shall be made separately in name of and on account of each of joint holder.

However, sub-section (2) which prescribes limit for exemption says that “no deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.”

Here we find that limit is fixed qua the consideration for the transfer of an immovable property. Therefore, a possible view is that liability to deduct tax will arise if consideration paid for the transfer of property is relevant and not the amount paid to each of transferor. This appears to be a gray area which can attract litigation. Therefore, a clarification is desirable.

Property and consideration for transfer of property in case of joint owners:

In case of joint owners of property each joint owner has his own share in property and he gets consideration for his own share. Suppose a property LB is jointly owned by H (60%) and W (40%) and amount paid to H is say Rs.60 lakh and to W is Rs.40 lakh.

Here property transferred by H is 60% share in immovable property LB and he receives consideration for this property. He cannot transfer 40% share in property LB because 40% portion ( divided or undivided) is owned by W and only W can transfer that portion.

W own and transfers 40% share in LB and she receives Rs.40 lakh.

In this case the buyer is required to deduct tax from consideration credited or paid to H as the amount is not less than Rs.50 lakh.

The consideration paid to W is Rs.40 lakh which is below Rs.50 lakh, therefore, the buyer is not required to deduct tax.

In this case though property acquired is LB for Rs.100 lakh, however, the amount is to be considered qua each transferor and consideration credited or paid to him.

Interpretation:

On reading of sub-section (2), as stated above , a confusion may arise as to whether the exemption is applicable with reference to full consideration payable or paid for property acquired that is Rs.100 lakh for LB in the example. However, on conjoint reading of sub-section (1) and also the purpose of exemption from deduction in case of consideration payable is less than Rs.50 it is clear that the limit of Rs. 50 lakh is applicable with reference to property transferred by each of joint owner and consideration paid to him for the property transferred by him. Thus tax is to be deducted from consideration paid/ payable to H (Rs.60 lakh) and not from consideration paid / payable to W Rs.40 lakh.

Precautions required:

Credit in account:

The amount payable to each of joint owner should be credited in separate account and not in combined manner and account styled like “vendors of property LB”. In case of above example accounts of H and W should be credited separately for Rs. 60 lakh and Rs.40 Lakh respectively.

The amount should also be paid by separate cheques or drafts duly crossed as A/c payee and preferably in name of vendors, in case of joint owners separately for each vendor.

In case the property is jointly owned and it has not been divided amongst vendors in the deed or document for their acquisition, the property should preferably be divided by metes and bounds by joint owners by way of a settlement and in the transfer deed such share can be specifically mentioned along with consideration paid for such property.

If division by metes and bounds is not possible, the share in undivided property and consideration paid to each of joint owners should be mentioned separately in the deed for transfer of property.

Related provisions referred in the new section:

Section 194L is about deduction of tax at source from payment of compensation on acquisition of capital asset. As there is separate provision in case of such transfer, the new section provides that the new section shall not apply where S. 194L is applicable. Dedution of tax under this section is in fact not required w.e.f. 01.06.2000. this is vide a proviso which reads as follows:

Provided further that no deduction shall be made under this section from any payment made on or after the 1st day of June, 2000.

Therefore, in fact no tax will be deducted from any compensation which is paid even when S. 194 IA is applicable. Thus the persons referred to in section 194L (persons paying compensation or additional compensation for property acquired) are exempted from application of S. 194 IA and 194L both hence not required to deduction tax.

Section 203A which relates to Tax deduction and collection account number (TAN) is exempted from the cases of person liable to deduct or collect tax while buying immovable property. This is because buying an immovable property is not a regular feature and most of buyers are not required to obtain TAN. Therefore, this exemption from applicability of S.203 A is provided in new section 194 IA which is applicable in case of purchase of immovable property only.

Discussions to this article

[Anup Kumar Grover]

In this scenario, consideration was required to be paid in cash, cheque, draft or any other mode, but has not been defined in kind. i.e. where part consideration paid by cheque and part in kind (being development cost) for transfer of specified portion on land. whether section 194IA be application for consideration in kind, whether it covers.