Service Tax and Vat on Builders and Developers

Builders and Developers How the controversy arose

•         Supreme Court in case of K.Raheja Development Corporation (2005) 2 STT 178 SC which was a case on Karnataka General Sales Tax Act held that where developer was undertaking construction on behalf of prospective flat owners, it tantamounts to works contract and exigible to sales tax

•         In this case , the assessee had entered into development agreements with land owners. Developer to there after get the plan approved and after completion flats were to be handed over to those land owners who were to get undivided interest in the land also. There after owners to transfer flats to housing society. It was in this case that transaction was held to be works contract

•         On the basis of decision of K.Raheja Development Corporation , DG Service tax , Mumbai vide letter dated 16-02-2006 (withdrawn since 23-08-2007) sought to impose service tax on service part of transaction.

Exemption under s.54/54F is available for several units of residential house

CIT Vs. Gita Duggal, ITA No. 1237/2011, Judgment delivered on: 21.02.2013, High Court of Delhi.
In this case asessee entered into development agreement and was to get multiple units. AO added cost of construction of residential units to sale consideration but allowed exemption under 54 for one unit only. However court allowed exmption for multiple units

Capital Gain on Development Agreements

Where  assessee enters into agreement with developer to surrender his plot or building in consideration of receiving back cash and/or constructed flat/building, the transaction becomes exigible to capital gain.But the moot point is point of taxation of transaction as to whether it is:
i) Point of entering into agreement
ii) registration of plot/building in favor of developer
iii) when new plot/flat/ building is allotted
iv) when possession of plot/flat/ building is  handed over.