Over 16,000 cases of undisclosed capital gains reflect high cash use or unrealistic guideline values
The business of property in the country’s most expensive real estate market may have seen a considerable presence of cash in the wake of demonetisation, recent data analysis by the Income Tax (I-T) department shows.
I-T officials have identified undisclosed income by way of capital gains from the sale of land and real estate in Mumbai worth ₹7,338 crore in the financial years 2016-17 and 2017-18, indicating that either the city’s Ready Reckoner (RR) rates are highly inflated or that there is a substantial presence of the cash component in property transactions resulting in the under reporting of actual deal values.
Set to issue notices
The field officers are now set to issue notices to 40,409 buyers and sellers who have under reported the ‘deeming’ income considered under the provisions of sections 50(C), 56(2)(7) and 56(2)(10) of the Income Tax Act, 1961. Of the total 16,082 cases detected by tax authorities, 13,147 relate to transactions in the city’s suburbs, while 2,935 deals were recorded in Mumbai City.
The cases have been identified under the aegis of the Interim Action Plan of the Central Board of Direct Taxes (CBDT), which had asked I-T wings in major cities to dispose all cases related to demonetisation and issue notices on violations of high-value transaction norms under Section 285BA of the Income-tax Act. The provisions of 285BA make it mandatory for banks, mutual funds, institutions issuing bonds, registrars and sub-registrar offices (SROs) to record and report high-value financial transactions that exceed ₹30 lakh in an Annual Information Report (AIR).
Based on AIRs
The AIRs for Mumbai, collected from 26 SROs until March 31, 2019, reported numbers that were fourfold higher than the next city on the list, Hyderabad. The capital of Telangana State leads with respect to cases of violation of Section 269SS — of cash payments of ₹5 lakh and above — for 2016-17 and 2017-18, said I-T officials, speaking on condition of anonymity.
For the purpose of computation under 50(C), the RR is deemed to be the rate at which the property was sold if the transaction was reported as having taken place below the RR. The capital gains tax is then levied on the RR instead of the fair market value. A valuation is recommended by the Assessing Officer (AO) if the taxpayer claims fair market value is lower.
“The goal of the provisions of 50(C) is to identify the grey component in a property deal,” explained Vimal Punmiya, a chartered accountant at Vimal Punmiya & Co. “This could be the money the buyers and sellers may have exchanged under the table, which they will never admit to having done. The provision helps the tax department identify the cash component,” he said, adding that the actual cash component would be determined by the assessing officer only once the final assessment had been made.
Maharashtra has kept its RR rates unchanged in fiscal 2019-20 for the second year running. However, most tax and property consultants are of the view that the RR is inflated by as much as 25% in order to maximise revenue collection for the State government’s Inspectorate General of Registration and Stamps (IGR). Despite a slump in the real estate market, revenue collection from stamp duty and registration in the fiscal year 2017-18 was ₹26,481 crore, including ₹7,156 crore from Mumbai. The Mumbai collection for 2016-17 was ₹5,403 crore.
“The State Government should rename it (RR) a Ruthless collection Rate, which has not only crushed businesses but forced owners to opt for leave and license or percentage share basis deals instead of outright sale in a buyer-less market,” asserted Vinod Sampat, President, Registration Fee and Stamp Duty Payers Association. “The RR rates are unrealistic and must be slashed by at least 25% if the government wants a realistic property market for Mumbai,” he added.
Officials in the IGR office said the gap between the RR and fair market rates is even wider when it comes to agricultural land in the moffusil areas of the State, where the RR is set as low as 30% of the market value. In Mumbai, the RR rates per square metre are never correlated with built-up area as required by rules but instead based on the carpet area or super built up area.
“The Maharashtra government lost the plot on the RR in 2009, when despite the price fall and correction it did not lower the rates,” said a developer, who did not wish to be named. “On some occasions in the last 15 years, the RR hike was higher in real per cent terms than the actual price appreciation,” the developer added.
The Central Board of Direct Taxes (CBDT) said it issues the Interim Action Plan every year during the first quarter, to provide a sense of direction to the field offices with regard to the areas of work to be focussed on till the relevant fiscal year’s Central Action Plan is finalised.
“This is an annual exercise which is undertaken every year and has been done so for the past several years,” said CBDT spokesperson Surabhi Ahluwalia. “In line with the same, the Interim Action Plan was issued for the first quarter of the current financial year, being a routine exercise. Furthermore, all areas of work as outlined in the Interim Action Plan are required to be undertaken in all seriousness by the field offices with equal emphasis on all areas of work specified therein,” Ms. Ahluwalia added.
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