Taxability of Capital Gains in case of Specified Agreements.

{Section 45 (5A) of Income Tax Act}

Taxation of Specified Agreements Pre Introduction of Sec.45 (5A): –

Transfer: Includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred.

Applying the definition of transfer, under these Joint development agreements, the transfer took place in the year in which Immovable property, being land or building or both handed over to the developer.

Consequently the capital gains tax liability in the hands of the owner would arise in the year in which the possession of immovable property is handed over to the developer for development, even though the consideration for such transfer may be received after a year are a two.

Taxation of Specified Agreements Post Introduction of Sec.45 (5A): –

Concept of Postponement of taxability of capital gains is being introduced by this section with a view to minimize the genuine hardship being faced by the owner of land or building in paying capital gains in the year of Transfer.

Section 45 (5A) provides as follows:

In case of an assesse being INDIVIDUAL/HINDU UNDIVIDED FAMILY who enters into a specified agreement for development of a Project the capital gain arising from such transfer 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.

Non-applicability of the beneficial Provision:

  • The above said provision will not apply if the assesse transfers his share in the project on or before the date of issue of completion certificate.
  • Thus capital gains tax liability shall be deemed to be arise in the previous year in which such transfer took place.
  • Value of consideration in such a case would be the Fair market value of the land/building on the date of such transfer.

Joint Development Agreement at Glance:

Joint Development Agreement at Glance

Note:

  • The above said provision of Sec.45 (5A) is applicable only to Individual/ Hindu Undivided Family, so the concept of Postponement of Taxation of Capital gains applies to them only
  • As this section is not applicable to Company/Partnership Firm, in case they transfer any land/building for development, tax liability on such capital gains would arise in the year in which the transfer took place. (i.e tax liability would remain as if this section is not introduced)

Example:

Mr. B enters into a Joint Development Agreement with M/s. XYZ Developers Pvt Ltd on 01/04/2018 and handed over the Immovable property to M/s. XYZ Developers Pvt Ltd on the said date and as a result of such agreement, Mr. B is entitled to receive 4 flats out of total 10 flats and in addition to flats an amount of Rs.500000/- and for the said project, Completion certificate is issued by the competent Authority on 01/05/2019.

Fair Market Value of Flat on 15/10/2018: Rs.2500000/-

Fair Market Value of Flat on 01/05/2019: Rs.3500000/-

Fair Market Value of Flat on 31/10/2019: Rs.4000000/-

Land on which JDA was entered was purchased by Mr. B on 01/04/2002 for Rs.1000000/-

Discuss the tax implications if Mr. B transfers 1 flat on 15/10/2018 and another 2 flats on 31/10/2019?

Ans: –

If Mr. B transfers a flat on 15-10-2018:

As when Mr. B transfers a flat on 15-10-2018, on which date Completion certificate is not received by the developer, then in such case tax liability will be:

Sale Consideration = FMV of flat on 15-10-2018 2500000

 

(-) Cost Of Acquisition of Land by Mr. B (1000000*1/4*280/105) (666667)
Net Taxable Long Term Capital Gain 1833333

This amount of rs.1833333/- is taxable under the head Capital gains (Long Term) for the P.Y 2018-19.

On receipt of Completion Certificate (i.e on 01-05-2019):

Sale Consideration = FMV of Flats on 01-05-2019 + Cash Consideration

[(3*3500000) +500000]

 11000000
(-) Cost of Acquisition (1000000*3/4*289/105) (2064286)
Net Taxable Capital Gain (Long Term) 8935714

This amount of rs.8935714/- is taxable under the head Capital gains (Long Term) for the P.Y 2019-20.

Cost of Acquisition for determining capital gains on subsequent sale of share of developed property = Full Value of Consideration as per sec.45 (5A) = 11000000/- for the remaining 3 flats.

If 2 flats were sold on 31-10-2019:

Sale Consideration (2 flats*Rs.4000000) 8000000
(-) Cost of Acquisition (11000000*2/3)  (7333333)
Net Taxable short term Capital Gain 666667

This amount of rs.666667/- is taxable under the head Capital gains (Short Term) for the P.Y 2019-20.

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