Deduction under Rule 58(1A) of MVAT Rules, 2005
Query: We have purchased a plot of vacant land for the purpose of development and construction of a residential tower, but there existed a Petrol Pump at one corner of the plot and unless we get the Petrol Pump vacated and merged the plot it was not possible to start construction and we have paid a lump sum to the owners of Petrol Pump to vacate the plot and then started construction of residential tower, somewhere in 2007 and a good number of Flats have been booked before 1st April, 2010.
For the agreements registered after 1st April, 2010, we have opted for composition scheme of 1%.
Now for the assessment of all the years we have claimed the amount paid to owner of Petrol Pump as the additional cost of land u/r. 58(1A) while the assessing officer says that the total amount paid for land shall only be the cost of land as per Rule 58(1A).
Since we have paid a very handsome amount to the owners of Petrol Pump our whole working is disturbed.
Kindly advise whether the Assessing Authority is correct. Kindly also advise any case law on the subject?
The issue involved is about deduction towards land cost from total contract for sale of Residential Premises. The said deduction is provided by Rule 58(1A) in MVAT Rules. In fact the said Rule is now amended and the amended Rule reads as under:
58(1A) In case of a construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the property in the goods (whether as goods or in some other form) involved in the execution of the construction contract is also transferred to the purchaser such transfer is liable to tax under this rule. The value of the said goods at the time of the transfer shall be calculated after making the deductions under sub-rule(1) and the cost of the land from the total agreement value.
The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered.
Provided that, after payment of tax on the value of goods, determined as per this rule, it shall be open to the dealer to provide before the Department of Town Planning and Valuation that the actual cost of the land is higher than that determined in accordance with the Annual Statement of Rates (including guidelines) prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995. On such actual cost being proved to be higher than the Annual Statement of Rates, the actual cost of the land will be deducted and excess tax paid, if any, shall be refunded.â€
Thus the deduction towards cost of land is to be as per above Rule i.e., as per ready reckoner rate. No addition on account of other items is allowable.
If at all higher value then ready reckoner value is to be claimed it can be done by bringing certificate as stated in 2nd proviso i.e., from Department of Town Planning and Valuation.
The validity of above Rule is already upheld by Hon. Bombay High Court in case of
M/s. Confederation of Real Estates Developers’ Association of India â€“ Maharashtra & others (Writ Petition No. 4520 of 2014 & others dated 30-4-2015). Hon. High Court has held as under:
“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of â€œLarsen and Toubro Limited vs. State of Karnataka and Anotherâ€ (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property and along with goods. Though Rule 58(1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The Amended Rule 58(1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI / TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58(1)(h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.
6. The petitioners further contend that Rule 58(1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under rule 58(1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under rule 58(1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an
In this respect there were elaborate arguments, as well as deep consideration by Honâ€™ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of Honâ€™ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. Honâ€™ble High Court recorded its reasons, amongst others in following words;
62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.
63. There is further consideration that the value shall be arrived at, assessed and ascertained on the modality as has been referred to under Rule 58(1)(1A) and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions there from, referred under the rule/formulae. Values and items as referred to under Rule 58(1), 58(1A) and 58(1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58(1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value. The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous rule 58(1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more exible and wider.
64. The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge.
67. The amended provisions define a measure of charge and the standard adopted by the legislature for determining value which may require / press for broader base than that on which the charging proceeds. By now, it is well-settled that stage of collection need not in point of time synchronise with the transfer of property in goods for as is being a long standing position that in our country levy has status of constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58(1B) envisages a method of valuation of tax at the stages as have been referred to under the table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as
Thus the deduction on account of payment to Petrol Pump owner etc. cannot be claimed in addition to Reckoner value. If at all possible obtain certificate from Department of Town Planning for higher valuation and in such case the higher deduction will be eligible.
Deduction for cost of land vis-Ã -vis Rule 58(1A) of MVAT Rules, 2005
A developer entered into an agreement with a Co-operative Society to redevelop their building having four floors and started construction of a residential tower of 10 floors after obtaining the Commencement Certificate from Municipal authorities.
All the old members have been promised to get 15% extra space of flat and a lump sum payment of
Rs. 20,00,000/- each out of which certain amount shall be deposited by the members in Corpus Fund to Society towards increased maintenance expenses.
Now the query is whether the amount of
Rs. 20,00,000/- paid to each member can be considered as cost of land and allowed as deduction u/r. 58(1A).
The issue is similar to one discussed above. No such deduction can be allowable. However, the certificate for higher value can be obtained from Department of Town Planning and Valuation, so as to get higher deduction.