Taxability of Joint Development Agreement

[Abhinav Garg]

Taxability of Joint Development Agreement

Joint Development Arrangement (JDA) has always been an area of conflict between the assessee and the tax department. In real estate sector JDA i.e. Joint Development Agreement has emerged as most popular arrangement between land owner and developer.

In this article I will explain taxability of JDA under Income tax law.

Meaning of Joint Development Agreement:

Under joint Development Agreement landowner offers development right to developer for undertaking development of property. The landowner gives a General Power of Attorney to the developer to obtain the required approvals from various authorities necessary for undertaking construction.

Two parties involved in JDA are:

1. Landowner
2. Developer

We will understand income tax provision in both cases one by one

Taxability in hands of Developer:

The income arising to the developer under a JDA, in the form of sale consideration of his share in the developed property is considered as his Business Income and is taxed as per the applicable provisions.

Taxability in hands of Landowner:

The income arising to the land owner either as percentage of built up area in developed property or monetary consideration is taxable under head capital gain in his hands.

Whole area of conflict between Assessee and Income Tax Authority is this calculation of capital gain.

Common issues which generally arises are as follow:

• When does capital gain arises to landowner will be taxable?
• Sales Consideration and COA in case of capital gain to landowner?

To resolve these issues Finance Act 2017 introduced section 45(5A) which read as follow –

• [(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset :
• Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of the said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.
• Explanation.-For the purposes of this sub-section, the expression-
• (i)  “Competent authority” means the authority empowered to approve the building plan by or under any law for the time being in force;
• (ii) “specified agreement” means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;
• (iii)”stamp duty value” means the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.]

Thus newly inserted sub-section 5A of section 45 can be sum up in following points:

• Applicable in respect of JDA entered on or after 01.04.2017
• Applicable only in case of Individual or HUF Assessee
• Only in case Land/Building held as capital asset by Assessee
• JDA should be registered
• It shall not be applicable where landowner transfers his share before completion of project.

 

Thus sub-section 5A of section 45 answers some of questions of Assessees but also give rise to many questions.

Unresolved issues along with author comments are as follows:

• Why the Govt. has not extended the benefit of this section to the assessees other than the Individual and HUF?

• It was intentional move by Government not to extend the benefits offered by this sub section to assessee other than Individial/HUF as there are several other benefits that income tax offers only to Individual/HUF.

•  Whether the indexation will be given up to the date of the Joint Development Agreement or to the date of completion certificate or to the date of registration of constructed flats?

• It may be noted that section 45(5A) simply defers the tax from the date of actual transfer u/s 2(47) to the date of completion certificate. It does not change date of year of transfer of asset. As far as indexation benefit is concerned, section 48 provides that indexation of cost of acquisition in cases of transfer of long term capital asset only.

Clause (iii) of Explanation to section 48 defines the term ‘indexed cost of acquisition as under:

(iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001 , whichever is later;” Above reading will clearly convey that indexation benefit is available till the year of transfer.

• When will be the time limit to make investment u/s. 54 and 54F will be reckoned- From the date of the Joint Development Agreement or from the date of completion certificate?

• In Authors opinion time limit to make make investment u/s. 54 and 54F will be reckoned from the date of completion certificate. In short some old CBDT circular as well as ITAT observation can be used to claim capital gain exemption from the date of “issue of completion certificate”.

TDS Provision

Provision of TDS introduced w.e.f.01.04.2017 for JDA:

Section 194IC has been introduced whereby deduction of tax at source (TDS) @ 10% is made applicable by the developer on any monetary consideration paid/payable to the resident individual /HUF landowner irrespective of amount of payment.