VIP Road Chartered Accountants Association

Introduction and Overview

The construction industry has been passing through a lean phase for the last few years. Recognising the importance of this industry, which fulfils one basic need; i.e., shelter, the government has given an incentive by way of a hundred per cent deduction of Income u/s 80-IB. The said provision has also been liberalised over the past couple of years.

Builders, developers and contractors have received the special attention of the Income Tax Department. This is for a variety of reasons, the most significant of them being the method of accounting followed by builders, developers and contractors. The Government made an attempt to simplify matters for small assessees by way of introduction of the presumptive scheme of taxation u/s 44AD. Since its introduction in 1994, the provision has given rise to a number of controversies. The accounting profession has also attempted to streamline accounting issues concerning the construction industry by revising Accounting Standard 7.

In view of the number of controversies regarding the construction industry, it was felt necessary to discuss the various issues in a special story. The object of the special story is therefore to cover comprehensively the accounting and tax issues concerning the construction industry. It needs to be pointed out that the coverage is from the point of view of builders, developers and contractors. Thus, the emphasis is clearly on business income. The issues arising under the head capital gain when a landowner transfers his land or rights therein are not the focus of this special story.

The terms builders, developers and contractors are used interchangeably and treated as synonyms by the revenue. In fact, all the terms have different connotations. A developer is an assessee who acquires rights of development in respect of a plot, entrusts the job of construction to a contractor and sells the constructed premises. A contractor undertakes the job of construction and is not concerned with the selling of the constructed premises. A builder undertakes both the job of a developer and is also involved in the construction to some extent. The roles of the three cannot be divided into watertight compartments, but there are distinct features, which are required to be appreciated while looking at tax and accounting aspects.

The next article by Himanshu Kishandwala deals with the method of accounting in terms section 145. The issues arising due to Accounting Standards prescribed by the CBDT and the Institute of Chartered Accountants particularly Accounting Standard 7 are also dealt with.

The third article by Shri C. N. Vaze deals with the various tax issues as regards treatment of land cost, valuation of work in progress and tax incentives.

The fourth article by Naresh Dharia analyses the presumptive tax provisions u/s 44AD. The article looks at the applicability of the provision at the threshold and the various consequential issues like partners remuneration and interest.

As mentioned in the foregoing paragraphs, builders and developers have always received special attention from investigating agencies and the Income tax department is no exception. The fifth article by C. D. Mehta deals with the various aspects of a survey or search on a builder / developer.

The drafting of agreements be it a development agreement, agreement of sale or a sale deed can give rise to many tax implications both in the hands of the landowner and the developer. The sixth article by Sunil Ramani analyses the nuances of various agreements and also the impact of the Maharashtra Apartment Owners Act and the Bombay Stamp Act.

Apart from Income tax, there are implications under the Sales Tax Act and the Works Contract Tax Act particularly in the case of contractors. Rajat Talati analyses the various issues involved therein, in the last article.

An attempt has been made to cover all the significant issues. I hope the readers will find the articles interesting and useful

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