SPECIAL PROVISIONS FOR COMPUTATION OF CAPITAL GAINS IN CASE OF JOINT DEVELOPMENT AGREEMENT [Section 45(5A)]
Sub-section (5A) was inserted in section 45 with effect from 01.04.2018, i.e., from the assessment year 2018-19. According to section 45(5A), 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.
Legislative intent for introduction of Section 45(5A)
The Memorandum explaining the provisions of Finance Bill, 2017 states as under with respect to the introduction of Section 45(5A):
“With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified 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 part of the project is issued by the competent authority.”
The amendment thus seeks to minimise the genuine hardships that the land owner may face by taxing the capital gains in its hands for area-sharing arrangements under Joint Development Agreement (JDA), in the previous year in which the certificate of completion is issued and not in the year in which the JDA is entered into or the possession of the land is given to the developer pursuant thereto.
Text of Section 45(5A)
[(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.]
KEY NOTE
- Inserted by the Finance Act, 2017, with effect from 01.04.2018.
Conditions
Section 45(5A) is applicable if the following conditions are satisfied:—
(i) Applicable in respect of JDA entered on or after 01.04.2017 (i.e. with effect from Assessment year 2018-19)
(ii) ELIGIBLE ASSESSEE
The assessee is an individual or a Hindu undivided family. He owns land or building or both. In other words, the provisions of section 45(5A) under collaboration agreement will be applicable only in case the land owner is an Individual or a HUF.
(iii) TRANSFER OF LAND/BUILDING TO DEVELOPER
The Individual/HUF (who owns land or building or both) transfers such land or building to developer. The subject asset is land or building or both, whether LTCA or STCA.
(iv) JDA SHOULD BE REGISTERED
Applicable only where a registered agreement/deed is executed.
(v) Stamp duty value is taken as on the date of issue of completion certificate and not as on the date of original transfer.
(vi) SPECIFIED AGREEMENT
The assessee has been entered into a Specified Agreement (Joint Development Agreement) with a builder/developer for the development of a project on land provided by him.
- If the above conditions are satisfied, 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.
Specified agreement (Joint Development Agreement) [Explanation (ii) to Section 45(5A)]
The term “specified agreement” is defined to mean 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.
What is Joint Development Agreement (Specified agreement)?
In layman terms, assume that Mr. ‘A’ own a residential land and builder approach him to construct flats on his land. This arrangement is beneficial for both the parties. The reason being Mr. ‘A’ as a landowner will unlock the value of his land without any additional investment of Single Rupee. From builder’s perspective, he need not invest money to buy land. He can use the same money to construct the property. Therefore, for both the parties the capital requirement is minimal. They enter into a Joint Development Agreement wherein landowner pool his land and builder bear the cost of construction to complete the project.
In a Joint Development Agreement (JDA), a landowner 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 developer undertakes the responsibility for the development of property, obtaining approvals, launching, and marketing the project with his financial resource. The land owner may get consideration in the form of either :
(a) Lump sum consideration; or
(b) Percentage of sales revenue, or
(c) A certain percentage of the newly constructed project on the said piece of land
This depends on the terms and conditions, mutually agreed upon by the parties. In this manner, a JDA helps to pool the resources of both the developer as well as the landowner together. After earmarking a certain portion to the landowner, the remaining area is sold off by the developer directly.
Salient features of definition of Specified Agreement
(a) It is a registered agreement
(b) One of the two parties to the agreement is the person who owns land or building or both.
(c) Another party to the agreement is real estate developer.
(d) Under the agreement, a real estate project will be developed by the developer on such land or building or both.
(e) Consideration is payable by the developer in the form of a share in the developed land or building with or without cash consideration.
In other words, Joint Development Agreement (JDA) is an arrangement in which land owner introduces land and developer agrees to develop land for agreed consideration in cash or kind or both.
Taxability of Joint Development Agreement from the point of view of Land Owner
Land owners liable to capital gains only when the builder completes the construction and gets the completion certificate
As per section 45(5A), capital gains to the land owner arise only after construction of the property is completed and the completion certificate is obtained from the competent authority by the builder/ developer.
Full Value of Consideration in hands of land owner
The full value of consideration in the hands of the land owner will be the stamp duty value of the share of the land owner, being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, 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.
If the builder pays the land owner any excess amount in cash other than giving him his share of the building after construction then the said amount as received by the land owner in excess of his share of building will be added to the Full value of consideration.
Summary of the Full Value of consideration (FVC) as follows:
FVC (in the hands of the land owner) = Stamp duty value of land owner’s portion + consideration received in cash (if any).
Cost of acquisition of the share in the project being Land or Building or both [Section 49(7)]
Where the capital gain arises from the transfer of a capital asset, being share in the project in the form of land or building or both, referred to in section 45(5A), not being the capital asset referred to in the proviso to the said section, cost of acquisition of such asset (i.e. 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 section 45(5A).
Year of transfer
Section 45(5A) deals with two aspects (a) year of taxability and (b) full value of consideration. It does not deal with year of transfer
– ‘Notwithstanding clause’ under Section 45(5A) would apply only to aforesaid two aspects
– Therefore year of transfer remains same i.e. the year in which the transfer takes place under Section 2(47)
Thus, the year of transfer might not be same as year of taxability.
KEY NOTE
Section 45(5A) would not defer the date of transfer. It would only defer the time of taxation.
Year of Taxability (i.e. determination of the taxable event) – Capital gains earned by the owner in a JDA will be taxed only in the year in which Certificate of Completion for the project (i.e. new property) is issued
As per Section 45(5A), the taxable event of, i.e., the transfer of title of land by the landowner (only in the cases of individuals and HUFs) to the developer under a JDA, arises on receipt of the certificate of completion for the whole or part of the project, issued by the competent authority provided the landowner does not transfer his share in the project to any other person on or before the date of issuance of said certificate of completion.
In other words, capital gain shall be chargeable to income-tax as income of the previous year in which the certificate or completion for the whole (or part of the project) is issued by the competent authority.
KEY NOTE
This is a relief to the land owners who were earlier liable to capital gains as soon as they entered into the collaboration agreement.
Cost of construction of the land owner’s portion that the owner buys after construction of the complete structure
In a collaboration agreement, if after reconstruction the owner buys a portion of the property and pays the builder for the cost of construction on his portion of the property then the payment given by the owner to the builder for the owner’s portion is construction of a new residential house which is eligible for exemption under section 54 or 54F depending on the nature of capital asset sold as per the terms of agreement.
If the owner of the property sells his portion of the property that he acquired after the collaboration agreement within three years of acquisition, then the exemption taken by the owner in respect of the construction of property will be withdrawn in the year of sale of his portion and the income will be treated as short term capital gain in the year of sale.
Taxability of Joint Development Agreement from the point of view of Builder/ 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.
Provisions of Section 45(5A) shall not apply
(i) Where the assesse transfers his share in project on or before the date of issue of the completion certificate
The Section 45(5A) shall not apply where the assessee (the land owner) transfers his share in the project to any other person on or before the date of issue of said certificate of completion, and the capital gains shall arise to the land owner as per the other provisions as applicable under the act and 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 the sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer takes place.
(ii) The Section 45(5A) would not have any impact on the tax liability arising from JDAs entered into by individuals and HUFs in respect of immovable property held as stock-in-trade.
Case of conversion of land held by land owner as capital asset to Stock-in-trade before entering in to JDA
Section 45(5A) is applicable only in case of transfer of capital asset under JDA. In case of conversion of capital asset to stock in trade by owner thereof before executing a registered development agreement, the benefit of section 45(5A) i.e. deferment of tax liability till date of completion of project is not available and capital gain on conversion and consequential business gain on sale/transfer of stock in trade, shall be taxable as provided in section 45(2) of the Act.
(iii) Section 45(5A) is not applicable where entire sale consideration is received/receivable by the landowner in monetary terms.
(iv) If there is no transfer under section 2(47) in the case of a specified agreement, section 45(5A) does not apply. Capital gains should arise from the transfer of a capital asset, being land or building or both, under a specified agreement. Transfer could be in any manifestation of section 2(47) and it is not confined to section 2(47)(v) alone.
(v) The subject asset is land or building or both, whether Long Term Capital Asset or Short Term Capital Asset. If the subject asset is interest in land or building or both like easements, leasehold rights, tenancy rights, TDRs, etc., section 45(5A) does not apply.
Computation of Capital Gain
The individual/HUF (who enters into joint development agreement) gets a share in the developed project. The stamp duty value of his share (being land or building or both) in the developed project as increased by any monetary consideration received or accruing as a result of the transfer of land or building or both by the owner. For the purpose of calculating full value of consideration, stamp duty value shall be the value on the date of issuing of completion certificate.
Consequences if land owner transfers his share before issue of completion certificate
The benefit of above mentioned special tax regime shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion. In such a situation, the capital gains (as determined under general provisions of the Act) shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without taking into account the above provisions.
Provisions Illustrated [Section 45(5A)]
| S. No. | Particulars | Amount (in Rs.) |
| (i) | Mr. ‘X’ purchased a residential plot on 01.01.2000 for | 50,00,000 |
| (ii) | FMV of plot as on 01.04.2001 is | 65,00,000 |
| (iii) | ABC Builders enters into a development agreement with Mr. ‘X’ on 01.05.2017 on the following terms and conditions,
(a) Mr. ‘X’ will hand over the possession of plot to ABC Builders on 01.05.2017. (b) ABC Builders will pay a cheque of 60,00,000 to Mr. ‘X’ on 01.05.2017. (c) ABC Builders will construct 10 residential units on the plot of land and will give 6 units to Mr. ‘X’. The 10 units will be completed by 30.06.2019 and on that date 6 units will be handed over to Mr. ‘X’ (d) The stamp duty value of plot as on 01.05.2017 is 2 crore. (e) The stamp duty value of each flat on 30.06.2019 is 45,00,000. |
Case 1: The project completion certificate is issued by the authority on 30.06.2019. 6 units are handed over to Mr. ‘X’ on 30.06.2019.
Case 2: The project completion certificate is issued by the authority on 30.04.2020 and on that date the stamp duty value of each flat is Rs. 50,00,000. 6 units are handed over to Mr. ‘X’ on 30.04.2020.
Analysis of Example:
- There is a ‘transfer’ on 01.05.2017 in the hands of Mr. ‘X’ since he has given possession of residential plot pursuant to development agreement.
- However as per section 45(5A) introduced by Finance Act 2017, the capital gains shall not be taxable in the previous year 31.03.2018 but shall be taxable in the previous year in which the certificate of completion is received from competent authority.
- Section 45(5A) is applicable since the assesse is an Individual.
- The holding period of residential plot shall be taken from 01.01.2000 to 30.04.2017 i.e. Long Term.
- As per section 55, the COA of plot is Rs. 50,00,000 or FMV as on 01.04.2001, whichever is higher. Therefore, COA of plot is Rs. 65,00,000
- Sale Consideration = Stamp Duty Value (SDV) on the date of issue of completion certificate of his share plus consideration received in cash.
| Solution : Capital gain shall be worked out as follows:- | |||
| Case 1: Assessment Year 2020-21 | |||
| S. No. | Particulars | Working | Amount (in Rs.) |
| (i) | Sale Consideration
Stamp Duty Value (SDV) of 6 flats on 30.06.2019 + Cash received |
(45,00,000 X 6 + 60,00,000) | 3,30,00,000 |
| (ii) | Less: Indexed COA | 65,00,000 X272
100 |
1,76,80,000 |
| (iii) | Long Term Capital Gain | 1,53,20,000 | |
Case 1: Assessment Year 2021-22
| (i) | Sale Consideration
Stamp Duty Value (SDV) of 6 flats on 30.04.2020 + Cash |
(50,00,000 X 6 + 60,00,000) | 3,60,00,000 |
| (ii) | Less: Indexed COA | 65,00,000 X 272
100 |
1,76,80,000 |
| (iii) | Long Term Capital Gain | 1,83,20,000 |
Definition of ‘transfer’ as per Section 2(47)(v) of the Act says that 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. Section 53A of the Transfer of Property Act, 1882:—
“53A. Part performance
Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:
PROVIDED that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance.”
Liability to Deduct TDS on monetary consideration (payment under joint development agreement) [Section 194-IC]
Section 194-IC was inserted by the Finance Act, 2017 with effect from 01.04.2017 to deduct TDS on monetary consideration. 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.
In other words, if the property owner receives any monetary consideration under the JDA, the payer will have to deduct tax at source @ 10%. There is no TDS on paying consideration by way of share in the new property.
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.
Text of section 194-IC
[1][PAYMENT UNDER SPECIFIED AGREEMENT
194-IC. Notwithstanding anything contained in section 194-IA, any person responsible for paying to a resident any sum by way of consideration, not being consideration in kind, under the agreement referred to in sub-section (5A) of section 45, shall at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax thereon.]
KEY NOTE:
- Section 194IC inserted by Finance Act, 2017, with effect from 01.04.2017.
WHO IS RESPONSIBLE FOR TAX DEDUCTION
Any person responsible for paying to a resident any sum by way of consideration (not being consideration in kind) under a joint development agreement, is responsible for tax deduction under section 194-IC. (i.e. Tax at source by the developer on the Landlord/s)
TIME OF TAX DEDUCTION
Tax is deductible at the time of credit of such sum to the account payee or at the time of payment thereof in cash or by issue of a cheque/draft or any other mode, whichever is earlier.
RATE OF DEDUCTION
Tax is deductible at the rate of 10 per cent. If PAN of recipient is not available, tax is deductible at the rate of 20 percent.
THRESHOLD LIMIT – NIL
Provisions of Section 194-IC in Brief
(i) There is a TDS applicable on collaboration agreements @ 10% with effect from Assessment year 2018-19. (Section 194IA with 1% TDS is not applicable in this case).
(ii) Under this section 194IC, the builder has to deduct tax @ 10% on payment of any amount in cash to the land owner for buying his share of property under a collaboration agreement.
(iii) TDS is required only in respect of cash component : TDS will be deducted only on the amount paid in cash/cheque by the builder to the land owner and the value or stamp duty value of the land owner’s portion will not be added for the purpose of calculating TDS.
(iv) TDS will be deducted on the entire amount paid in cash/cheque and not on the amount any capital gains that may arise to the land owner.
(v) In case of NRs, section 195 would apply.
GST Applicability to Joint Development Agreement
As per Notification No. 4/2018 – Central Tax (Rate) dated 25.01.2018, the GST is applicable only on the Landowner and developer transaction.
So When a developer enters into a development agreement with a Landowner, GST would become payable by the Landowner when the developer transfers possession or the rights in the constructed complex, building or civil structure, to the Landowner by entering into a conveyance deed or allotment letter.
Hence, when the Landowner receives a constructed property from the Developer in exchange for providing land, the Landowner would become liable for payment of GST. The GST rate applicable on such a transaction would be 18%.
Joint Development agreement (JDA) – In the absence of registration agreement did not fall under Section 53A of the Transfer of Property Act – Not liable to capital gains tax
Dismissing the appeal of the revenue, the Court held that in absence of registration of joint development agreement, agreement did not fall under section 53A of Transfer of Property Act, 1882 and, consequently, section 2(47)(v) did not apply. Accordingly, not liable to capital gains tax. (Related Assessment year : 2007-08) – [PCIT v. Chuni Lal Bhagat (2019) 262 Taxman 210 :103 taxmnn.com 378 (P&H)]
KEY NOTE :
SLP of revenue is dismissed – PCIT v. Chuni Lal Bhagat (2019) 262 Taxman 209 (SC)
Depository – Security – Demat – Multiple accounts – FIFO method – Should be applied to account wise and not person wise
The assessee contended that FIFO method should be applied person wise and not account wise. Tribunal held that it would lead to an anomaly for identification of shares. After the introduction of Section 45(2A) and Depositories Act,1996, those participating in the depositories mechanism will have to accept FIFO as a way of maintaining securities. (Circular No. 768, dated 24th June, 1998 (1998) 232 ITR 5 (St)) (Related Assessment years : 2009-10, 2010-11) – [Radhika Roy v. DCIT (2019) 200 TTJ 665 : 73 ITR 239 (ITAT Delhi); Dr. Prannoy Roy v. DCIT (2019) 200 TTJ 665 : 73 ITR 239 (ITAT Delhi)]
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