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Thursday, 4 July 2013

Section 194 IA – A Write-up

 V Swaminathan B.Sc., B.L., FCA
Prologue
The newly introduced provision, briefly stated, mandates withholding of 1 % tax (TDS) by a transferee of an immovable property, on payment of consideration to transferor, if the consideration exceeds 50 lakhs rupees. The circumstances in which such withholding calls for compliance has no doubt been spelt out in section 194 IA. Further, the procedural rules to be followed for the purpose have been framed and are in force.
Be that as it could have been only expected, according to the view the writer has put forward (THE VIEW), based on an independent study and founded on own conviction, the provision suffers from vital deficiencies of incompleteness. It is so in- complete, for more than one reason. Primarily, in that, the provision, in terms, in particular by reason of the special Explanation there under, the TDS mandate prima facie has application to a case of transfer, only if it is of a building or part of a building; but not to a case where the transfer is of a “unit” of a building comprising what are commonly known as “flats” or “apartments’’. To put it differently, in THE VIEW taken and addressed, the employed wording namely, “part of a building” cannot rightly be regarded to cover within its ambit the units of a building comprising flats or apartments. This, presumably, is an unintended lacuna. If one remembers right, the official impression given was that the new TDS requirement was to enable the Revenue to keep a track of all transactions in immovable property, flats or apartments being no exception, as the object was to try and  circumvent tax evasion.
2. Lately, one has come to take note of a counter view being canvassed in a circle of law experts. The diagonally opposite view so held out by one of them is that, – “ ‘flat’ will definitely get covered under the definition of immovable property which is given as “any building or part of it”.
Regrettably, however, to support his view, no reasoning or logic behind, worthy of a mention, has, despite asked for, been given for giving out such an opinion; that too so rashly, with no reservation whatsoever. So much so, one has no clue or no way to apply own mind to examine, apprise and appreciate the validity or otherwise of such a view.
2.1. Of course, if a layman, not excluding a promoter /builder, or his architect being a professional having a role in building construction, were to be asked, he not being a ‘lawyer’, his abrupt answer could only be expected to be a simplistic but emphatic ‘yes’. But answer from a lawyer, for obvious reasons, cannot be the same or be readily acceptable. For, briefly stated, in the context herein, the poser namely, – whether or not there is a lacuna in the enactment – is on a point of law; a substantial one at that. Hence demands an in-depth examination.
2.2. Be that as it should, it is considered worthwhile to examine in greater details, if not for any other reason, at least with a view  to have own thoughts clarified. May be, also try and evaluate but only incidentally, whether or not the referred counter view has at all any substance. In any event, to be convinced why THE VIEW is not the one better of the two; so as to be sensibly regarded as a largely acceptable and a safer bet.
2.3. In support of THE VIEW several aspects have been put forth and highlighted in as detailed and intelligible manner as humanly possible. Those all are available in public domain, through this website, and others as well. This write-up is mainly to collate and present a gist of the crucial lacuna as has been pinpointed.
3. For an appreciation of THE VIEW in proper light, most important of all, profoundly due regard and incisive consideration must be had to what the law “in terms” actually and factually provides. Equally important is to be guided by wisdom, though gathered in hindsight in the light of past experience. To be precise, a conscious note needs to be made of the legislative history of the ‘law’ and kept in sharp focus.
4. Following are some of the aspects requiring special noting for being of help as a backdrop:
(I) The concept of “Flat” (which is a comprehensive term and includes “Apartment”) is, in comparison, of a recent origin; hence, a stranger to the tax law before. But, certainly, not so recent as to justify or permit any plea of ignorance thereof, until thus far; particularly, if it is not genuine but feigned ignorance.
As is common knowledge, construction and transfer of ‘units’ (flats) have caught up and been increasingly in vogue in the past few decades. That it has been so might be readily gathered also from the changes in the tax law made; lastly in 1988.
May be, anyone of the three words namely, “unit”, “flat” and “apartment”, particularly “unit”, do not find any specific mention in the 1988 amendments under reference ; though ‘unit’ is a description for flat to be very much found in the special State enactments specifically brought on the statute book for the purpose of exclusively governing it. In the IT Act itself, the word “unit” may be found used in some such later enactments as section 80 IB. The reality that unit is not a word to be found in the 1988 amendments, however, cannot be sanely adduced as a valid reason for ridiculing the point made that the object of the 1988 amendments was to bring within the tax net any income from or arising out of the house property in the form of a unit/flat in a building. 
(II) ‘Unit’, otherwise known as a flat in a multi unit- /-storied building, is a creature of the said special State enactments (the special law). As such, for knowing and being fully aware of /familiar with its peculiarly attached characteristics, so also of all the related facets, such as its “transferability” and so on, none including a law expert can afford to prudently fail but has to necessarily bear in mind the specially designed and structured provisions of the separate enactments made by States.
For knowing more, especially the attendant legal implications, in particular of consequences in case of non-compliance with the special law, and fall out problems likely to be faced with in that event, it is recommended to read the articles on the topic published in KLJ and MLJ Journals years ago (see bottom note). For a bird’s eye view, also suggest to read a recent write-up on the site, ‘citizenmatters’@     http://bangalore.citizenmatters.in/articles/4202-the-apartment-law-you-must-know.
In the KLJ publication (2003) – A HANDBOOK ON TAX PRACTICE, the peculiar characteristics of the property called flat, being a unit of a building, and the changes brought in, in the statute (the 1988 amendments) in order to rope it in for taxing the holder as “deemed owner”, have been briefly dealt set out ; refer pages 61, 62, and 63.
(III) As per the case law, for interpreting any provision in the tax statute, among a host of them, the under mentioned are a few of the fundamental principles of ‘interpretation’ as enunciated by courts requiring to be summoned for aid:
   > Internal: 
           One has merely look at what is clearly said
    Nothing is to be read in, or implied
   Not permissible to go by own assumptions or presumptions
   Causus omissus being a well settled rule to be followed
>     External:
           In cases of doubt regarding the construction of an enactment, assistance may be sought  from judicial interpretation of a term, or from previous legislation.
Key Note: For a proper understanding of the legal implications of above, so also other related rules, recommend to mindfully read the commentary and cited case law in the relevant chapter of Kanga and Palkhivala’s Text Book on INCOME TAX ACT. To add, in the writer’s view, for evaluating , as suggested elsewhere herein, as to which of the two views is to be regarded better view, the above rules should necessarily be kept in focus and  applied as is appropriate.
5. Now, adverting to the view canvassed, the point for an in-depth deliberation is this:
Why and how, having regard to its terms, seemingly limited in scope, the tax withholding requirement (u/s 194IA) can be taken to have application to a case where the subject matter of the transaction (of transfer) is ‘unit’ of a building (that is, flat or apartment)?
5.1. Even on a cursory reading, especially  anyone having a reasonably fair knowledge / familiarity with the special law on flats / apartments, so also the related provisions of the law on taxation (particularly, the 1988 amendments), ought not to have any genuine difficulty in readily recognising the types of transactions referred to in the latter.
For a basic understanding, therefore, suggest that one should read the deeming provisions introduced in the Act years ago. If so done,  none can fail to see that the ostensible object  was to bring within the tax net so called ‘units’ of a building , for taxing house property income and capital gains. That, as is to be readily seen, was done through legislative amendments made wef April 1, 1988.
6. What are referred as the 1988 amendments are basically the insertion of, inter alia, clause (iiib) in section 27and clause (vi) in section 2 (47) (vi), both of which are, as required, to be read along with section 269UA.
Before, so also even after, the referred amendments were brought on the statute book, there have been several issues, which perforce had to be taken up to courts, by either the revenue or assessees.
To briefly mention a few,-
(i) In case of a JDA, owner of the land on which a multi-unit building is to be constructed and sold by a builder, -In which year  the property has to be rightly regarded to have been ‘transferred’, for taxing income as capital gains or business income, as the case may be ?
(ii) Is holder of a flat in lawful possession merely its beneficial or equitable owner, or one vested with absolute ownership in its profound sense?
 (iii) Do capital gains arise on sale of shares held in, or of the property held through such shares in, a housing society.
The views the courts took are noted to be not uniform or unanimous but are mutually at variance.  But, the only point of relevance herein hence to be essentially noted is this: Those all are cases in which the issues pertained to property in the form of flats.
For a firsthand knowledge and understanding, would recommend to refer the articles published in  Taxman Journals , wprt sec 27, and 2 (47) before and after the 1988 amendments.
7. Now, again reverting to section 194 IA, as specially provided in the Explanation (b) there under, for its purposes , the term – “immovable property” means “…. or any building or part of a building”.
Flat, -though often confused with, not only by common man but also by advising professionals, – is not the same but is clearly distinct from “part of a building “as found referred to, besides in several other contexts, in the Explanation under section 194 IA. The stated proposition is indisputable; as it finds ample support in the very fact that is the reason why the government itself considered it necessary hence later amended the law so as to specifically bring within the tax net, the so called flats. Reference is to the amendments supra, made way back, wef 1-4-1988.
7.1. Further, should the following be kept in mind, there should be no mind block (difficulty) in understanding that the transactions sought to be specifically covered by the 1988 amendments are only those pertaining to flats:
The key words used therein alone are indicative and conclusive enough for anyone to readily infer and be clear that those all refer only to the transactions governed by the special law; that is, in respect of flats.
To elaborate:
(1). Under the scheme of the special enactments of States, for instance of Maharashtra, there is no ‘sale’ to purchasers envisaged, within its ordinary sense. The distinct nomenclature used is, -Deed of (Transfer of) Apartment (or Deed of Apartment); refer the sections of the State Act; also the Model Form of the Deed.
(2). The final conveyance of the title to the property in the “land and building” is required to be transferred, and its actual physical possession handed over, to the legal entity, – that is, in the case of Flats, the co-operative housing society duly formed and registered.
(3). Unlike in the case of a building owned by more than one as ‘co-owners’, as in the case of say, a HUF or jointly purchased property, in the case of a building comprising flats, purchases are by individuals, independently; and it is only later that they become ‘joint’ owners of the complex, on being admitted as members of the housing society formed and registered. And to evidence, shares are issued to them by the housing society.
For ready reference and noting of the foregoing, -
(A)  Clause (iiib) of Section 27 reads:
<“a person who acquires any rights by way of….or with respect to  any building or part thereofby  virtue of any such transaction as is referred to in clause (f) of section 269 UA, shall be deemed to be the owner of that building or part thereof.” > (highlighting supplied for added emphasis)
(B) Definitions
< 2. In this Act, unless the context otherwise requires, -
        ….
      (47)  “transfer”, in relation to a capital asset, includes,—
 (i) ….
(vi)  any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
 [Explanation 1].—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.>
(C) < 269UA. In this Chapter, unless the context otherwise requires,—
 (a) …
 (d) “immovable property” means—
 (i)  any land or any building or part of a building, and includes, ….
Explanation.—For the purposes of this sub-clause, “land, building, part of a building, machinery, plant, furniture, fittings and other things” include any rights therein;
(iiany rights in or with respect to any land or any building or a part of a building (whether ….. ) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building ;
 (f “transfer“,—
 (i)  ….
(ii)  in relation to any immovable property of the nature referred to in sub-clause (ii) of clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other association of persons or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, such property. >
7.2. Moreover, if one were to look at the Notes on Clauses and the Explanatory Statement (annexed to the relevant Finance Act of 1987, it will be found that these provisions by way of amendments were brought in with a view to setting at rest the then far obtaining controversies and in court litigation. Likewise, if one were to care to diligently go through the case law settling those issues, none can fail to notice that the issues pertained to transactions in flats. For readily locating the citations, reference be made to published articles in Taxmann Journals wprt to those amendments.
7.3. Besides, even according to a harmonious reading of the mentioned sections, as warranted, it must be more than clear that the 1988 amendments all aim at transactions in flats.
To believe or opine to the contrary will, to put it mildly, be tantamount to offending own intelligence or wisdom; besides, of course, the wisdom of the legislature itself in conceiving of and enacting the 1988 amendments.
7.4. It is to be also noted that Section 26 separately and specifically deals with “Property owned by co-owners”. That, one would validly urge, bears on its sleeves the basic distinction in law, between the concepts of “co-owners” and “joint owners”.
These should convincingly clinch the stated propositions ;   rather, take away beyond the pale of any controversy or genuine doubt in any quarters.
In passing, it is worthwhile a mention that, In the comments on some published articles on the topic of DTC, the self-same lacuna observed in the proposed related provisions thereunder have been focussed on. Additionally, have been pinpointed in that context, that with the proposed deletion in the DTC, of the extant Chapter XXA of the Act ( in which the above referred Section 269 UA presently finds its place) all such controversies(same as raised herein wrt section 194 IA), if left unattended, might be rendered all the more conspicuous  and strikingly glaring.
Aside:
This write-up may not be complete without a few Add-ons:
(A)  Pointed attention may be drawn to one of the mentioned articles published  by Taxmann, titled – DEVELOPMENT AGREEMENT OF PROPERTY AND DEEMED TRANSFER UNDER SECTION 2 (47) (v).
It discusses the order dated 9-9-2011 of the Appellate Tribunal in re. Ms. K.Radhika (13 taxmann.com 92)
The article is seen to make for an interesting reading, for more than one reason:
The issue dealt with relates to a JDA for construction of flats, for eventual transfer to buyers.
The provisions of the Act gone into was one of the 1988 amendments ; that is, the newly inserted clause (v) of section 2 (47), which for ready reference is reproduced below:
“(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 1 (4 of 1882 ); “
The case law strongly relied on by the Revenue is of the apex court SC in re. Bharat Co-op. Bank Ltd. v. Co-op. Bank Employees Union (Mar. 22, 2007).
In that case, the Court in the observations in paragraph 14 of its judgment has highlighted two important concepts, often imbibed and followed by the legislature, for sake of convenience. Those are, a mere reference, and reference by citation of one statute in another and incorporation.  To anyone interested, would recommend that the referred article, so also the case law cited, may be usefully gone through, for own enlightenment.
Now, turning to the other 1988 amendments, the point deserving a pointed focus is that, unlike in the said clause (v) in Section 2 (47), the legislature, for reasons not known, in its wisdom or lack of it, has not chosen, or has failed,  to adopt any of the above mentioned two concepts, in framing those other clauses. Albeit, the government has to be taken to having been fully aware that for a proper appreciation of the fact that the types of transactions those all refer are transfers of units, being flats or apartments  specially dealt with only in the State enactments (not in the IT Act) . If so, one is left loudly wondering, why, for sake of clarity, instead of a blank reference, the government ought not to have adopted either of the above referred two concepts; preferably,  the concept of  “reference by citation of one statute in another and incorporation”.
Conceding that this is an aspect entailing a moot point for consideration, better leave it to, besides the Law and Finance Ministries, the law stalwarts in the field for an insightful introspection and serious consideration, to the end of having incorporated suitable amends. No need to add that should help in understanding the 1988 amendments at least in better light, also bring about improvements in the important fields of administration and adjudication of the law.
(B) It might not be out of context, but may fit like a glove (or fit- in like ‘T’!), to recall some quotes, rich in wisdom by any standard, any day; more so, in our (ultra) modern times:
  > It is pre-eminently a time for deep, national introspection. We must be self-critical to meet the truth face to face. The bar is more commercialised than before. Today the law is looked upon, not as learned profession but as a lucrative one. The due process of law has become less due than tortuous and unending.
> Wooden – headedness assesses a situation in terms of preconceived fixed notions while ignoring or rejecting any contra indications. In short it is the obstinate refusal to learn from experience.
       <> To unravel the hidden message of this cryptic quote:
What makes our mind hard and closed? Sages have said that this is an automatic front-line defence mechanism for the protection of our belief systems based on our state of ego. If we encounter an idea or a situation that is not in line with our thinking, we immediately close our mind, we put up a block against it; this is what we call mindset. Ego creates mindset. Mindset is a protective mechanism of self defence because we are scared of what others think about our notions and beliefs. Mindset is self-destructive and we have quite often experienced this. …”
(Source: Article published in TOI - Discourse:Shri Shri Nimishananda)
  In a manner of speaking, the quote is seemingly out of context, especially  in today’s changed scenario; for, we, after all, are ordinary mortals, not ‘Sages’ – in its profound sense.
The Puzzle of Personal Excellence
by  Dianna  Boober
excerpts >
¨ Be receptive to feedback
¨ Some advice you don’t ask for. That is what I call feedback-unsolicited opinions about you or your work those comments are sometimes more valuable than what you do ask for we tend to ask for guidance – and we want it to be positive. Feedback is usually unsolicited and often unfavorable but bit can be most valuable even if embarrassing.
¨ Granted you can get too much negative or contradictory feedback and become discouraged but feedback, properly evaluated, from a contributor can be invaluable in gaining perspective on where you’re going.
¨We need to measure ourselves with someone else’s  yardstick occasionally  if you’re getting the same feedback from several sources -either positive or negative –pay attention.
(Source:  Book titled PERSONAL EXCELLENCE )
> In public affairs, stupidity is more dangerous than knavery.
<>The expression “public affairs” most certainly, would take within its ambit all matters entailing “public interest” or “common good” in a profound sense
> As Lord Buckmaster observed, it would be more true to say of the finest lawyers that, so far from having a narrow outlook on the world, there is no horizon too large for them to gaze at. There is no learning that comes amiss to the lawyer; there is no phase of all the myriad mysteries of the human heart which may not be the subject of the case which he has to consider.
<> It is to be believed, even difficult that be, -these are quotes from the published articles and speeches of the renowned greatest legal luminary, a doyen of the Bar himself, – N A Palkhivala. He was one of those very few popularly known not just for his sharp wisdom but for his exemplary boldness to be self-critical to meet the truth face to face. Shared, though on a selective but random basis, in the fond hope on hopes of being rightly perceived, and attempted to be imbibed with a righteous perspective.
(Source: “WE, THE PEOPLE” and “We, the Nation”)
Epilogue
Paradoxically, above suggestions on points of common concern, though made and underlined through posts on this and other websites, have, by and large, seem to have failed to percolate through; let alone amongst the directly concerned taxpayers (i.e. both deductors / deductees of withholding tax), even in the supposedly well informed circle of advising professionals.
The foregoing observations do not, in one’s conviction, prima facie suffer from any faulty logic; instead, are to be taken to be well reasoned. Pending any new development of any kind, the only option may be to proceed on the premise that – the omission to cover “unit” (flat) for the propose of section 194 IA, in the same manner as resorted to through the 1988 amendments of the other referred provisions of the Act, is patently unintended and a lacuna over sighted.
To sum up: Having regard to the points stressed adequately  to support  THE VIEW , the government, if and when realised, as one earnestly expects, may come out with a suitable amendment of section 194 IA to plug in the correctives. Till then, need not add, to that extent, the TDS mandated would remain in animated suspense. For, there is no way or possible gimmicks one can think of, to read or import into, or treat those facets covered in the 1988 amendments as applicable to, the TDS requirement of  section 194 IA as well ; except through a suitable amendment of the said provision itself.
     Now, it is left open to the stalwarts/ law experts in the field, if not in agreement with the foregoing viewpoints, to come out with an independent but well-reasoned opinion. For, any such useful and purposeful guidance may help out the honest taxpayers and retrieve them from the quandary pushed into, for no fault of them.
Caution: Above thoughts are intended to be shared, solely with a view to provoking like-minded others to do likewise, and openly come out with sane and fruitful ideas- with the avowed only aim for betterment of the law and order scenario; sooner than later,  before the‘trishanku’like situation gets any worse, and the TDS regime is further muddled or messed up.
< Footnote:
Citation of some published Articles on the topic of Flats >
(2003) 3 MLJ Pg.5 (journal)
(2003)(4) KAR. L.J.Pg.1
(2005)(3) KAR.L.J. pg.17
(2005)(5) KAR.L.J. pg.1

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