Section 45(5A) – Special provision for computation of capital gain in case of joint development agreement (JDA) – Certain concerns to be addressed and scope to be enlarged
The Finance Act 2017 inserted sub-section (5A) in the existing section 45 to provide that the capital gains arising to an individual or Hindu undivided family under a Joint Development Agreement shall be taxed in the year in which completion certificate for the whole or part of the project is received, based on the stamp duty valuation on the date of issue of certificate of completion as increased by cash consideration received, if any. However, the above provisions shall not apply where the assessee transfers his share in the project on or before the date of issue of said certificate of completion, and the capital gains shall be deemed to be the income of the year in which such transfer takes place.
Relief is provided to individuals and HUFs on transfer of capital asset by postponing the date of
taxability from the date of transfer to the date of obtaining of the Completion Certificate which was a matter of concern since quite a long time. This is a very welcome provision which addresses the concern of the tax payer in having to pay tax when he has still not realised the income from the project.
a) In case the owner transfers his share of the property before receipt of the Completion Certificate, then, the benefit envisaged in this amendment will not be available to him. This may cause genuine difficulty since typically in these kinds of JDAs, the owner receives several units of flats/floors as his share of property and while the project is in progress some of the units may be sold by him. Since only some of the units may be transferred when the project is in progress, the benefit of this provision may not be denied in respect of capital gains arising from sale of his
entire share of property.
b) The applicability of this section has been restricted to Individuals and HUFs. The difficulty envisaged by the legislature is faced by all assessees and therefore, this section may be made applicable to all classes of assessees.
c) Due to sluggishness in the economy and scarcity of funds, developers too are entering into this kind of arrangement wherein they forgo part of their total profits by entrusting the task of development to another developer who has the funds required for development of the property. Therefore, similar provision may also be introduced for property held as a business asset.
d) The aforesaid provisions appear to be in line with the existing provisions of section 50C. However, certain safeguards contained in section 50C do not find place in the section 45(5A). For example, section 50C provides that where the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer, then the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer. Similar safeguards may be incorporated in section 45(5A) as well, in a case where stamp duty value is higher than FMV.
e) Competent authority is defined in the Explanation below section 45(5A) to mean the authority empowered to approve the building plan by or under any law for the time being in force. This does not appear to be in sync with the definition of “competent authority” as per section 2(p) of the Real Estate (Regulation and Development) Act, 2016.
f) The provisions of this subsection defers the taxability of capital gains to the year of issuance of the completion certificate. However, the time limit for claiming benefit under sections 54 and 54F of the Act is reckoned from the date of transfer.
It is suggested that:
a) In a case, where only some of the units of flats/floors are transferred by the owner when the project is in progress, the benefit of this provision may not be denied in respect of capital gains arising from sale of the entire share of owner’s property. The benefit may continue to be available in respect of capital gains arising from those units which are transferred after receipt of completion certificate. This would address the concern of the tax payer and at the same time, the Government would realise revenue at an early point of time in respect of those units which were transferred when the project is in progress.
b) The benefit of this section may be extended to assessees other than individuals and HUFs also.
c) The benefit of this section may also be extended to cases where the property is held as a business asset.
d) The safeguards contained in section 50C may be incorporated in section 45(5A) as well.
e) In order to ensure symmetry and consistency, the definition of Competent authority may be the same as per section 2(p) of the Real Estate (Regulation and Development) Act, 2016 wherein “Competent Authority” has been defined as follows- “competent authority” means the local authority or any authority created or established under any law for the time being in force by the appropriate Government which exercises authority over land under its jurisdiction, and has powers to give permission for development of such immovable property;
f) In order to enable the assessee to claim exemption under section 54/54F, it is suggested that the time limit under sections 54/54F are reckoned from the date of issuance of completion certificate.