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Section 194IA: Individual Tax Liability in Joint Property Transactions

[Rajdeep Bhattacharjee and Tanishq Rahuja are third year Students of Symbiosis Law School, Pune]


Introduction


Tax Deducted at Source (TDS) is a mechanism used in India for collecting taxes at the source of income. It is a means of ensuring that tax is collected at the time of payment itself, thereby minimising the scope for tax evasion. However, in cases where joint buyers purchase immovable property, wherein the concerned provision is section 194 IA of the Income Tax Act, 1961, the determination of whether TDS is applicable or not has been a matter of concern for judicial authorities, leading to ambiguity and inconsistent judicial decisions as well as lower authorities consistently erring in following precedents. This has resulted in trouble for potential property buyers and has gone against the intentions of the legislators, while also impacting the flow of taxation and revenue generation for the government.


In the case of joint buyers purchasing immovable property, the question arises as to whether TDS should be deducted from the entire amount or only on the proportionate share of each buyer.


The issue of TDS on immovable property purchased by joint buyers has been the subject of many judicial decisions in India. However, the decisions have been inconsistent, with some courts holding that TDS should be deducted from the entire amount, while others hold that it should be deducted only on the proportionate share of each buyer.


The inconsistent decisions have been attributed to the lack of clarity in the law and the varying interpretations made by courts and CIT(A)s i.e., Commissioner of Income Tax (Appeals). This has resulted in confusion and trouble for potential property buyers, who are unsure of the tax implications of purchasing immovable property jointly.


Section 194 IA – Scope & Legislative Intent


The Finance Act of 2013 introduced Section 194(IA) to tackle the menace of black money in real estate transactions. The section requires non-resident transferees to deduct 1% of the Stamp Duty Value or consideration, whichever is greater, as TDS. The seller is also responsible for paying TDS, and any transferee who purchases an immovable property other than agricultural land must adhere to this section.


To prevent tax evasion, Section 194-IA of the Income Tax Act necessitates the buyer of immovable property to deduct 1% TDS from the sale consideration and deposit it with the government. Budget 2022 amended the section to incorporate charges other than principal consideration, such as processing fees and external development charges, in the ambit of consideration. TDS must be deducted from individual payments or credits, or from the SDV of such property, whichever is greater. The provision seeks to increase transparency and accountability in the real estate industry. Furthermore, inconsistent judicial decisions on TDS for immovable property purchased by joint buyers have hampered legislators' efforts to prevent tax evasion, resulting in uncertainty and revenue loss for the government.


When is the provision triggered?


Section 194-IA is triggered when an individual or a HUF (Hindu Undivided Family) purchases an immovable property (other than agricultural land) from a resident seller for a consideration exceeding Rs. 50 lakhs. In this provision, the term "person" refers to the purchaser who is required to deduct TDS on the payment made for the transfer of the property.


In the Union Budget 2022, a new provision was inserted in Section 194-IA to provide relief to home buyers. The amendment stated that if the consideration paid for the transfer of immovable property includes any sum towards the cost of the land and the construction of the building, then TDS under Section 194-IA shall be calculated on the consideration paid for the transfer of the building and not on the entire consideration paid.


The Conundrum


Having already mentioned inconsistent application of the law as a major issue when it comes to its functioning, where the crux of the court’s misinterpretation lies in the question, of whether the threshold limit of Rs. 50 lakh is to be determined property wise or is the individual contribution, in the case of multiple buyers, to be considered material.


Further. the Supreme Court had in the case Union of India v. Kamalakshi Finance Corpn. Ltd. dealt with the binding nature of precedents vis-a-vis Tribunals, and the obligation of officials to give effect to orders of higher authorities in the appellate hierarchy, even if they genuinely believed a claim was not tenable or in the interests of the revenue. The court emphasized that failure to consider and follow previous appellate orders was a grave violation, and Adherence to precedent is necessary if litigants are to have faith in the even-handed administration of justice and the legal system is to attain any degree of certainty. The lower authorities, particularly the income tax officers, have failed on multiple occasions to follow the higher court’s decree in similar matters.


Judicial Clarification & Materiality Purview


In a 2018 judgement concerning 4 joint buyers purchasing a property with a total purchase consideration of Rs. 1,50,00,000 but consideration qua assessee being Rs 37,50,00 for 1/4th undivided shares, wherein the lower authorities had considered the total as per the singular sale deed, being large enough to trigger section 194IA, as the amount on which each assessee was to be liable to pay TDS and consequently imposed fines for failure to deduct TDS at source, the ITAT Delhi bench had found the order erroneous as the party wise payment for the purchase did not cross the 50 lakh threshold required and observed that each transferee is an individual tax entity therefore, the law has to be applied by regarding each transferee as an individual transferee(with their respective contributions as the amount material to the provision). The authorities had further observed that the memorandum explaining the inclusion of section 194IA clearly stated that the provision’s goal is to reduce the compliance burden on small taxpayers.


Furthermore, the tribunal settled the dilemma of multiple sales deeds versus single sales deeds by stating that if a transaction is carried out in multiple ways, the law cannot be construed or applied differently.


ITAT Jodhpur had to deal with a similar matter in the case of Dalpat Singh Nanecha, Bhilwara vs ITO(TDS), wherein the ITO had imposed fines on them under section 201(1)/201(IA) of the Act.


During the hearing, the ITO departmental representative contended that for jointly owned properties, the Rs. 50,00,000/- threshold limit should be determined based on the property value and not on the transferee. Furthermore, the number of buyers and sellers should be irrelevant, and as long as the property value exceeds Rs. 50 lakhs.

In response, the bench stated that in the present case, where the assessee is liable to pay Rs. 31,50,000/- for his share in the property and has already paid the same amount, there is no need to deduct tax at source under Section 194IA of the Act and hence the argument that the threshold limit for joint owners of a property is determined property-wise and not transferee-wise cannot be accepted.


Finally, in the case of Reetu Devi Nanecha vs ITO, the Jodhpur Bench of ITAT ended the confusion by objectively laying the parameters while dealing with this provision.

The ITAT Bench of Jodhpur passed a similar ruling that in cases where the consideration paid by an individual, whether in a joint property worth an amount way beyond the threshold of the said section or for an individual endeavour, did not exceed 50 lakh rupees, regardless of multiple or singular deed, emphasis shall solely lie on whether the transferee is a small taxpayer or not i.e., is their consideration larger or smaller than 50 lakh rupees to determine if he was liable to deduct TDS.


Conclusion


Owing to interpretative smokescreens around the legislation, the intent behind the provision was compromised. Through successive legislation from the judiciary, it was finally obliterated. It is important to note that the crux of the provision was highlighted by the ITAT Jodhpur in its recent judgement by laying down objective parameters. Moreover, this provision empowers small taxpayers to pool in their consideration and jointly buy a large ticket property and yet not bearing the burden of substantial tax consideration. The government also receives the intended tax amount as it is deducted on source pertaining to the consideration as is mentioned. Thereby, the objective sought to achieve by the legislature is realised in toto.

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