Your approach—purchasing the property jointly with your company, then later subdividing it—is certainly feasible but does involve some tax and regulatory considerations. Here are some points to consider:
1. Joint Ownership and Partition
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Joint Ownership: You and your company can jointly purchase the land as co-owners. For the purchase, both you and the company would contribute funds proportionate to the share each would hold. Ensure that the sale deed clearly specifies each party's ownership percentage to prevent any ambiguity about ownership later. -
Partition Agreement: Once purchased, you can proceed with a partition agreement that legally divides the property based on the initial proportionate ownership. Ensure the partition deed is registered with the local land revenue authority. This partition is generally non-taxable if it only formalizes the ownership proportions established at the time of purchase.
2. Tax Considerations During Purchase and Partition
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Stamp Duty on Partition: In most states in India, a partition deed attracts nominal stamp duty if it is between co-owners and does not involve a transfer beyond what was initially agreed upon. However, you should confirm the stamp duty specifics in your state as they vary across India. -
Income Tax on Partition: A partition of property between co-owners is usually not considered a "transfer" under the Income Tax Act, and therefore, should not trigger any capital gains tax for either the company or yourself at the time of partition. However, any significant deviation from proportionate ownership may raise questions from tax authorities.
3. Implications on Sale of Shares or Property
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Future Sale of Shares: Your strategy of using share transfer to benefit from capital gains tax is sound. When you sell the shares of the company, the capital gains tax on shares could indeed be more favorable than the dividend distribution tax (DDT) applicable if funds were distributed. -
Sale of Property Post-Partition: If you sell the land separately after the partition, each owner (you and the company) would be liable to pay capital gains tax on their respective shares of the property. This transaction would be subject to tax based on the holding period and the nature of gains (short-term or long-term).
4. Regulatory Compliance and Flags
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ROC and Company Law Compliance: Since the transaction involves both you and the company, it may be seen as a “related party transaction” under the Companies Act. Ensure board resolution and other compliance steps (such as disclosures in financial statements) are taken as required under Sections 188 and 184 of the Companies Act, 2013. -
Section 2(22)(e) - Deemed Dividend: Since this is a closely held company and you hold over 10% shares, a loan or advance from the company to you would attract deemed dividend provisions under Section 2(22)(e) of the Income Tax Act. In this case, it’s crucial to document that the funds used for the property were a direct investment by the company rather than an advance or loan to you. -
Transfer Pricing: Since you and your company are related entities, ensure that the property is purchased at fair market value. This could help prevent scrutiny under transfer pricing or anti-avoidance provisions.
5. Recommendations
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Legal and Tax Documentation: Given the complexity and potential tax scrutiny, it’s advisable to have a legal agreement outlining the joint purchase, ownership proportions, and partition process. Also, a valuation report at the time of purchase may substantiate that each party (you and the company) paid fair market value, reducing concerns of transfer pricing or deemed dividend issues. -
Consultation with Tax and Legal Advisors: To ensure that your strategy is aligned with both tax efficiency and compliance, continuous coordination with your CA and a legal advisor is recommended, especially when executing the partition deed and during the subsequent sale, if any.
Final Thoughts
With these steps and documentation in place, the transaction should not raise significant concerns with tax authorities or the ROC, as long as it follows fair valuation, proper documentation, and adherence to tax laws and company regulations.
