Tax ability of joint development agreement under income tax
By gkkedia Dt. May 12th, 2020
In a Joint Development Agreement (hereinafter referred to as JDA), land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost. The key feature of JDA is that the land owner contributes land and developer undertakes the responsibility of obtaining approvals, property development, launching and marketing the project with his financial resource.
The key benefits arising out of JDA are:
- Huge investment for purchasing land is saved/minimized by the Developer.
- Payment of stamp duty is avoided for transfer of land.
- Lucrative offer/consideration for the landlord.
- Speedy construction of property by the developer.
But the taxation of Joint Development Agreement was never jointly agreed by the A.O. and the Assessee. The dispute lies is in measuring the correct amount of tax under Direct Taxes. Hence it has always been an area of litigation. Irrational determination of date of transfer under Joint Development Agreement, by verbatim application of Section 2(47) of the Income Tax Act, 1961 is driving a way for litigation from decades. Therefore, JDA model is generally challenged by the assessing officers due to the lack of clarity in respect of point of taxation in the hands of landowner and the determination of the amount of taxable consideration received by the landowner.
Analysis of such agreements, valuations, determination of tax liability might become complex and intricate. Hence, consulting an Indian Chartered Accountants Firm may reduce the possibility of any defaults in computation of Capital Gain/Loss and allied tax liability. The same has been discussed as follows:
In the Case of a Land Owner
In the case of a land owner, the consideration received by him is either in the form of:
- Percentage of the sales consideration
- Percentage of the build up area in the developed property
- Point of Taxation in the hands of the Landowner
- Determination of the amount of taxable consideration received by the Landowner
But calculation of Capital Gain is the most controversial part where consideration is in the form of build up area. JDA model is usually challenged on the two grounds:
Taxability of JDA till 31.03.2017
Capital gains are chargeable under the provisions of Section 45 of the Income Tax Act, 1961. As per section 45 of the Act, capital gains are chargeable in the year in which the transfer takes place except in certain cases. As per section 2(47), the word “transfer” amongst other things includes:
“any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882)”, even though the legal right has not been transferred.
In such a case, execution of Joint Development Agreement between the owner of immovable property and the developer triggered the capital gain tax liability in the hands of the owner in the year in which the agreement is entered into and the possession of immovable property is handed over to the developer for development of a project.
The taxing authorities consider this as the point of time u/s 45(1) at which the landlord was supposed to pay the Capital Gain tax as against the fact that the landlord, in real, never received any consideration at that point of time. Contrary to that, the actual receipts or consideration starts accruing only after the property starts developing or developed.
Therefore, it is worth to note that on the date of execution of the JDA, the land-owner has not liquidated the land and has no funds to pay the taxes. This appeared irrational and hence led to litigation.
Further, in the absence of funds, the landowner was also unable to claim the benefits under the Section 54 series. Not only this, the revenue authorities determined fair market value of the project including land as deemed consideration u/s 50D for such transfer when the project is just on papers at the time of signing of JDA, with no real existence, causing genuine hardship to the assessees.
Taxability of JDA after 01.04.2017
With a view to curtail the genuine hardship which the owner of land was facing in paying capital gains tax in the year of transfer, a new sub-section (5A) in section 45 of the Act has been inserted, so as to provide that in case of an assessee being individual or Hindu Undivided Family (HUF), who enters into a registered agreement for development of a project, 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 the part of the project is issued by the competent authority.
Therefore, the tax liability is postponed from the year of transfer of land to the year of completion of project. However, the provisions of this sub section shall not apply where the assessee transfers his share in project on or before the date of issue of the said certificate.
Also, consequential amendment in section 49 was made so as to provide that the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under the said provision of section 45(5A).
In the Case of a Developer
In case of developer, the nature of income would be business income. The property would constitute stock-in-trade for him. Overall, his income comprises of sale proceeds he gets from the buyers of the developed land and the cost would involve the expenditure incurred on development of the property.
Liability to Deduct TDS
A new section 194-IC was also inserted, to deduct TDS on monetary consideration. This section overrides the provisions contained in section 194-IA of the Act, which provides for deduction of TDS @ 1 % on transfer of immovable property where consideration exceeds Rs 50 Lakhs. According to section 194-IC, if under a joint development agreement, any developer pays any amount to the land owner in addition to the share in the project, then such builder shall deduct TDS @ 10 % on such payment.
These amendments have removed the considerable hardship faced by assessees and are welcome steps which will improve the sentiments of the developers and land owners leading to increase in the supply of land to developers.
Analysis of such agreements, valuations, determination of tax liability might become complex and intricate. Hence, consulting an Indian Chartered Accountants Firm may reduce the possibility of any defaults in computation of Capital Gain/Loss and allied tax liability.