India’s court upholds changes to Insolvency and Bankruptcy Code

V Nagarajan

India’s Supreme Court (SC) upheld the changes to the Insolvency and Bankruptcy Code (IBC) allowing homebuyers to initiate proceedings against erring real estate developers in case of default on debt repayments by including them on par with financial creditors. This comes as a big relief to thousands of home-buyers across the country, who are otherwise moving from pillar to post to recover their investments. At last the apex court provides ray of hope for India’s hapless home-buyers.

In the 2000 odd cases listed or notified under the IBC, close to 200 cases were earmarked for liquidation. While a majority of the cases relate to manufacturing sector, which will be close to 50%, next comes real estate and construction.  

The National Company Law Tribunal (NCLT) has held that homebuyers are neither financial creditor nor operational creditor. It was said that homebuyers are customers who have given advance and accounting-wise they are creditors.  

Earlier the developers had challenged the provision arguing through their counsel that at the most homebuyers could be treated as operational creditors or suppliers of raw materials and not financial creditors. The Supreme Court bench rejected their pleas recently. The ruling has been widely welcomed as this will help revive real estate projects that got stuck due to mismanagement by unscrupulous developers.   Further Section 5(8) (f) states that any amount raised from a real estate allottee shall be deemed to have the commercial effect of a borrowing.  The court has held that since homebuyers or allottees give advances to the real estate developer and thereby finance the project at hand, they are really financial creditors.

The court has further held that it is only in the event of conflict that the IBC will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies and such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA, as well as the triggering of the code.

Meanwhile, in a move that will benefit about 3.5 lakh dwelling units, India’s finance minister Nirmala Sitharaman has said that the government will set up a fund and contribute Rs10,000 crore in it to complete construction of unfinished projects in affordable and middle income category housing. It will contribute in the proposed fund for the housing sector while the rest of the investors would include LIC and other institutions and private capital from banks, sovereign funds and development finance institutions. The fund will be professionally run with experts from the housing and banking sector. In a further boost she said that there will be relaxation of ECB guidelines for affordable housing. The housing building advance will be provided and a special window for affordable and middle income housing will be made available. Projects that are 60% complete will get last mile funding through special window. While there will not be interference with the projects that are under NCLT as the tribunal will decide what has to be done.   Housing finance companies have also been allowed to borrow funds from overseas on easier terms to provide better liquidity.  

I own two properties in India and the rental income is credited to my father’s account in India.  Am I supposed to file IT return or my father for inclusion of this income in the annual IT return? Please guide us. Raghu Kailash, Sharjah.

You, as an NRI, are supposed to report the rental income and file income tax return through ITR-2, if your annual taxable income crosses Rs2.5 lakh in India.  You are eligible to claim deduction for municipal taxes paid in order to arrive at the net taxable income.  There is another provision, which says that you can claim a flat 30% standard deduction. You are also entitled to claim deduction on home loan interest and principal amount every year if you have availed home loan to invest in the properties.   

I bought a second house recently by seeking home loan from a bank.  Am I eligible for tax deduction on the second property? Malavika Harish, Dubai.

Yes. You are entitled for a deduction on the interest amount, provided construction has been completed within five years from the end of the fiscal in which you took the home loan.  Interest amount can be availed in five instalments after construction is completed. The maximum limit is Rs2 lakh, if a house is self-occupied.  If it has been let out, then there is no upper limit on the quantum of interest deduction.  

Is tax deduction compulsory while buying new property in India?  What is the percentage of deduction and is there any monetary limit involved in this transaction? Please advise. Dinesh, Abu Dhabi.  

Yes. If you are buying your new property for Rs 5 million and above then you will have to deduct tax at source at the rate of one per cent from the payments made to the seller. Non-deduction of TDS may result into penalty and prosecution.