NOC before buying high value property u/s 281 of Income Tax
Many prospective buyers of high-end real estate properties are now a days asking sellers to get a “no dues certificate” (NOC or No Objection Certificate) from the revenue (Income Tax) department, fearing problems due to a provision in the taxation laws that allow the tax department to recover pending dues of the seller of the Property from the buyer. In recent past several real estate deals were questioned by the income tax department. Many real estate deals are happening at distressed valuations, and at times deals are happening even below the market rates (“fair value”).
Why obtain NOC (u/s 281)
Given the Income tax department's power under Section 281 to recover “pending dues” from the buyers of the Property, buyers have started demanding that the sellers obtain no dues certificate (NOC) from the Income Tax Department (from Income Tax Officer of Seller of property’s jurisdiction). Buyer should find out Income Tax officer of seller’s jurisdiction through their CA.
Tax evasion & avoidance is a sad reality in India which got complicated with many PMLA (Prevention of Money Laundering Act, money laundering is a process of converting illegally earned money into legitimate money) cases. Many individuals, their families & Firms (including Companies, shell companies) make use of loopholes in the taxation system to avoid tax liability. Section 281 of the Income Tax Act tries to ensure that assessees do not evade taxes while creating a charge or transferring business assets.
The fear is also that the tax department will dispute the “fair market value” or the selling price of these properties, leading to additional tax. In most cases, these high-end properties have seen a substantial drop in price due to the coronavirus pandemic, especially in cases where the seller had a timeline for the sale.
Section 281 of the Income Tax Act speaks about the assesse (taxpayer, seller of the Property) seeking permission from the tax department before selling, transferring assets such as land, building or machinery. Under current regulations, the tax department can question the valuation of any deal, which means that the department can come up with a fair market value, based on fact patterns and regulations, and demand tax on it. Some buyers also fear that the seller may have some pending dues or legal problems with the income tax department which can come to bite the buyer. In some cases, the income tax department has issued notices for capital gains tax to the buyers. Capital gains tax is paid on the profit or margin made by the seller. In rare cases, the revenue department can also ask the buyer to cough up the tax as well. In several cases, getting a go-ahead from the tax department is inviting trouble for sellers. Many sellers fear that demanding such a certificate may lead to fresh scrutiny from the tax authorities and their transactions may get delayed or cancelled.
Obtaining a no objection certificate or prior permission under section 281 of Income Tax Act, 1961 (Section 281 Certificate) is a mandatory ‘conditions precedent’ in a merger, acquisition or a secondary transaction. A general disdain is the time it takes to obtain the permission. Without the permission, the transaction could risk being voided by the tax department.
What does Section 281 says
As per Section 281 of the Income Tax Act, in the event an assessee creates a charge or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, during the pendency of any proceeding under the Act or after the completion thereof, but before the service of notice under Rule 2 of the Second Schedule of the Act, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise. As per the explanation to the section, ‘asset’ includes shares and securities as well.
The section has the following exceptions in which case, such charge or transfer is not void:
i. If it is made for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or
ii. If it is made with the previous permission of the assessing officer.
This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds Rs.5, 000 and the assets charged or transferred exceed Rs.10, 000 in value.
Process for obtaining Section 281 Certificate
The Central Board of Direct Taxes through its Circular No. 4/2011 [F. NO. 402/69/2010-ITCC], dated 19-7-2011 (“Section 281 Circular”), has issued certain guidelines for obtaining the Section 281 Certificate. The format of the application (which also mentions the documents and other information to be provided) is also provided in the said Circular. The assessing officer may, at his discretion, ask for additional documents. The application is to be filed at least 30 days prior to the proposed transaction. The Circular also contains the circumstances under which Section 281 Certificate could be granted by the assessing officer, the timelines within which the assessing officer has to grant/refuse the permission under section 281 and the validity of the certificate granted. It is interesting to note that the Circular provides for an approval timeline of 10-15 days.
The assessing officer would require the approval from the Range Head for granting permission if the value of assets being transferred or on which charge is being created, or the amount of charge being created is Rs.10 crores (Rupees Hundred Million) or more.
Caution about buying property from following types of Seller/s
Seller/s of the high value property should particularly be worried about following types of Seller (Person, their family, Group or Firm including Company) of Property:
1. Person having huge tax liability or litigation (whether pending or likely due to nature of their business/es as many such people like Hawala operators who are regularly tracked by ED, DRI, Income Tax, GST etc.)
2. Person who have regular income tax searches &/or Surveys (Raids) as they are likely to be facing huge potential income tax demands
3. Politically exposed person & their family as they are likely to have issues with Income Tax & Money Laundering matters
4. Persons involved in drug trafficking, Bogus Company operations for Bills, under invoicing, smuggling, and illegal foreign exchange activities etc.
5. Retired bureaucrats & their family as they are likely to have issues with Income Tax & Money Laundering matters (possessing assets beyond their known sources of income)
6. Person who have not filed their Income Tax Returns or are not major tax payers (in last 3-5 years) and suddenly wants to sell property at huge valuation as Income Tax Department is likely investigate these people based on their tax pattern (using Artificial Intelligence) & life style
1) In such cases (highlighted above), it is advisable to demand NOC u/s 281 of the Income Tax Act as a matter of abundant caution.
2) Please remember that Income Tax tracking system (using Artificial Intelligence) will also evaluate buyer’s capacity to buy expensive Property based on your (Buyer’s) own tax pattern, life style & banking transactions.
CA Harshad Shah, Mumbai email@example.com