Confusion galore on real estate contracts
Source: Business Standard
September 22, 2008
Author: Mukesh Butani, Partner
Raheja’s case poses a challenge for RE Developers the taxation of sale of ‘under construction’ unit
transactions has come up for debate after the judgment of the Supreme Court in the case of K Raheja. The
judgment was delivered in the context of Karnataka Sales Tax Act, which clarified the scope and definition of
“works contract”. The facts of the case suggest that the developer (Raheja) responsible for real estate
development and allied contracts entered into development agreement with the land owners.
In pursuance thereto, the developer obtained plan sanctions and constructed residential apartments and
commercial complexes. The agreements between the landowner and developer provided that upon
completion of the construction, the residential apartment or the commercial complex would be handed over
to the purchasers, who would obtain an undivided interest in the land underlying. The question before the
Court was whether the developer was a ‘dealer’ and hence liable to pay turnover tax (on works contract)
under the Karnataka Sales Tax in relation to agreements entered into with the purchasers.
The Supreme Court held that where a developer sold the flat ‘under construction’, such transactions would
be characterized as works contract, since the act of constructing the flat was performed on behalf of the
purchaser. It, however, clarified that if it were a case of sale of fully-constructed flat, it would not be works
contract and hence, no tax would apply. In summary, whether a contract would comprise as works contract
or not would depend upon the determination if it is sale of an immovable property or transfer of movable
property in goods.
Legislative framework
Under the relevant statutes, sale or transfer of immovable property is governed under the Transfer of
Property Act and sale of movable property is government under the Sale of Goods Act and hence liable to