Supreme Court Plugs Loophole That Allowed Huge Tax Evasion in Property Deals

NEW DELHI: The Supreme Court, through a ruling last week, has now plugged a loophole that allowed entities to escape paying taxes on land deals and redevelopment rights amounting to crores by using the ambit of partnership firms.

It is now thought that the Income tax department might delve into past property deals also.

The means to evade taxes was revaluation- by holding the real estate assets through a partnership, then revaluing the properties at the prevailing market price. New partners were then brought in who would put in cash into the firm. The old partners would then withdraw the money after crediting their capital accounts of their share of the profits, which is allowed for partnership firms.

By employing this method, all stamp duty, capital gains and income tax accruing in a plain property sale or transfer were evaded. New partners were allowed to control the firm through which the money transfers were made,

The SC, in a ruling last week, has ruled that the surplus through revaluation would be taxable in such firms as transfer and a 'capital gains tax' would be imposed. Therefore, the firm would face a tax liability post revaluation and the old partners, who were the ultimate owners of the property and as the `sellers' they can no longer escape paying tax while taking out funds put in by new partners or the 'buyers' joining the firm.

Chartered accountants say that the ruling has vast implications. In real estate deals involving transfer of land and development rights, revaluation was used as an instrument to evade the liability. Revaluation as a means for sparing of tax has been used for decades, they say.

The apex court has now put an end to such a means. The efforts by the I-T department to plug these loopholes were in vain. Now, since the SC has ruled in favour of the tax department, the department will start looking into past transactions and past assessments would be reopened. This can bring about trouble for the real estate industry and in other cases where revaluation was done.

Also read: GMC Sets Property Tax Payment Deadline Of January 1

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