Joint Development Agreement (‘JDA’) is the most common and popular form of arrangement for constructing properties in our Country. It is a preferable form both to the Developer and to the Landowner. But there are some issues regarding the taxability of JDA under Income Tax Act, 1961 (‘the Act’).
We know that Finance Act, 2017 has introduced Section 45(5A) of the Act w.e.f. April 01, 2018 (i.e. Previous Year 2017-18) and the purpose to introduce the said section was to ease the genuine hardship faced by the landowners in case of JDA. In this regard, the explanation given in the memorandum to the Finance Act, 2017 for insertion of the new sub section states as follows:
‘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 aforesaid explanation seems to give a view that section 45(5A) of the Act has been introduced as a beneficial provision with an intent to mitigate the hardships faced by landowners.
Earlier provisions of taxation
The income arising to the developer under a JDA, in the form of sale consideration of his share in the developed estate is considered as his ‘Business Income’ and is taxed as per the applicable provisions. Whereas, the amount received by the Landowner in any form is considered as ‘Capital Gains’. But the main difficulty lies in its calculation.
The taxability of capital gains in the hands of the landowner, arising on transfer of title of land from the land owner to the developer in a JDA has always been a litigative issue. The JDA model is often challenged by the Assessing Officers due to lack of clarity relating to taxation in the hands of landowners and also the determination of the amount of taxable consideration received by the landowner.
Till March 31, 2017 (i.e. before insertion of new provision of section 45(5A) of the Act), the capital gain arising in the hands of the landowner was governed by Section 45(1) of the Act, i.e., it was taxable in the year in which the transfer of capital assets took place. Any gain or loss arising from transfer of Capital Asset shall be considered as a Capital Gain or Loss as the case may be. Section 45(1) of the Act, is charging section and provides that-
“Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EB, 54F, 54G and 54H, be chargeable to income tax under the head ‘Capital Gain’ and shall be deemed to be the income of the previous year in which the transfer took place.”
Under the JDA, the landowner gives the possession of their land to the Developer to develop the property. However, the ownership of the land is not transferred and only possession of land is handed over to developer, but the same is considered as ‘transfer’ under the Act for the purpose of calculation of capital gain.
The expression ‘transfer’ is defined in Section 2(47) of the Act. The provisions of clause (v) and (vi) to Section 2(47) of the Act accord a wide meaning to the expression ‘transfer’, bringing within its ambit even to include those transactions which would have otherwise not been considered as ‘transfer’ under the general law. These clauses cover the following transactions:
a. 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 Transfer of Property Act, 1882 [Section 2(47)(v)]; or
b. any transaction …………which has the effect of transferring or enabling enjoyment of any immovable property [Section 2(47)(vi)]
The definition of ‘transfer’ under section 2(47)(v) includes any arrangement or transaction whereby any rights are handed over in execution of part performance of contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (‘TOPA’) even though the legal right has not been transferred. Thus, whenever JDA were executed, the department resorted to definition provided under section 2(47)(v) and imposed capital gain tax liability in the hands of the land owner in the year in which: -the JDA is entered into, and the possession of immovable property is handed over.
The tax department, relying upon the said definition of transfer, has always contended that the taxability of the capital gains in the hands of the landowner, arises as soon as the JDA is signed and entered into between the landowner and the developer. It does not matter that property is not built-up and transfer to prospective buyers. Therefore, tax department considered the taxable event as and when the JDA is signed and entered into between the landowner and the developer.
The law regarding the point of transfer under JDA has evolved through a catena of judgements, where judicial fora have held that there is a ‘transfer’ by the landowner to the extent of the developer’s share in the land, on the date of entering the JDA itself and that capital gains is triggered in the hands of the landowner at that point in time.
Likewise, the Bombay High Court in the case of Charturbuj Dwarakadas Kapadia v. CIT (2003) 260 ITR 491 (Bom) held that the ‘transfer’ as far as the landowner is concerned takes place on the date of entering into the JDA on the ground that possession given to a developer would also fall within the ambit of the ‘transfer’ under Section 53A of the TOPA read with Section 2(47)(v) of the Act. In view of the above, transfer happens on the date of entering into JDA, itself.
What was hardship to landowners?
By virtue of this, mere execution of JDA between the landowner and the developer triggered the tax liability under the head capital gains. Such gains were taxable in the hands of the landowner in the year in which the JDA was entered into, and the possession of the immovable property was handed over to the developer.
It is to be noted that under a JDA, the owner would generally receive the consideration only in the future, once the project has been completed. Therefore, in the old mechanism of taxation [i.e. before section 45(5A)], the landowner was expected to pay the capital gain tax at the time of entering into a JDA, while in reality, he never received any consideration at that point in time. The owner had to pay the taxes from his pocket in the absence of any real consideration, which caused a genuine hardship.
Tax department considered the taxable event as and when the JDA is signed and entered into between the landowner and the developer. But the biggest question which arises is ‘when the project is just on papers at the time of signing of JDA, with no real existence, what would be the taxable value of consideration in the hands of the landowner’.
To give the answer of the above question, the tax department contended that as per the provisions of section 50D of the Act, which reads as under:
“Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”
In view of the above, the taxable value of consideration in the hands of the landowner would be the fair market value of the project including land on the date of execution of the JDA.
Pursuant to provisions of Section 50D of the Act, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer’ but project under JDA takes times to complete (2 to 3 years) and is subject to fluctuation risk. Therefore, fair market value of the project on the date of execution of JDA is not justified.
Various courts applying the provisions of Section 50D of the Act have held that the ‘fair market value of the land transferred shall be considered as the full value of consideration and construction cost of the super structure cannot be taken as the basis for computing capital gains’. This provision of the Act, which in force till March 31, 2017, was unclear and led to several litigations.
Provisions of Section 45(5A) of the Act.
As mentioned above, Section 45 of the Act is the charging section of the income chargeable under the head Capital Gains. In the ordinary course, a transaction is subject to capital gain in the year of transfer of the capital asset. In case of the JDA or Specified Agreement (‘SA’) where the capital asset being land, building, or both have been transferred to the developer, such transaction is taxable in the year of transfer.
It is submitted that there may be significant time gap between the year in which the transfer took place and the year in which the consideration is received. Therefore, landowner of the capital asset faced difficulties in payment of taxes.
To minimise the hardship to the assessee, the amendment was bought up to insert section 45(5A) in the Act. The Finance Act 2017 has inserted a new section 45(5A) in the Act w.e.f. 01.04.2018 which reads as under:
45(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 Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.’.
As new sub-section (5A) in section 45 of the Act, overrises the provisions of Section 45(1), therefore, the taxable event 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 issue of said certificate of completion. The landowners would no longer be required to discharge the tax at the time of entering into a JDA, as was the case in the erstwhile provisions.
Further, new sub-section (5A) in section 45 of the Act also provides that the stamp duty value of land or building or both, of the landowner’s share in the project/developed estate, on the date of issuing of certificate of completion by the competent authority, to the land owner, as increased by any monetary consideration received by the landowner, 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, under section 48 of the Act.
However, in a scenario where the owner transfers his share of the project before the said certificate is issued, the capital gains shall be taxable in the year in which the transfer takes place and the new provision under section 45(5A) of the Act would not be applicable. Consequently, the normal provisions under section 45 of the Act, before the insertion of subsection 5A would only be applicable.
Crux of the provisions of the newly inserted sub-section 5A is enumerated below;
- This applies to JDA done after 1st April, 2017.
- It applies to assesses of individuals and HUF.
- The building or land is treated as a capital asset by the landowner.
- It will be applicable only where a registered agreement or deed is executed.
- The tax liability gets extended till the completion of the project.
- The landowner’s share of the Stamp Duty Value of land or building, on the date, when the certificate is issued, the cash received shall be deemed to be the full value of consideration.
- It is not applicable where the share is transferred before the completion of the project.
- It will not be applicable where the landowner receives the entire sale consideration in cash.
Applicability of new Section 45(5A) to unregistered agreement.
As mentioned above, the new sub-section has many essential conditions one of which is that the ‘specified agreement’ should be a registered document. Specified agreement is defined to be one ‘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.’
In view of the definition, any agreement which create right to develop the land (i.e. JDA), shall be construed as the specified agreement. The said specified agreement should be registered otherwise the provisions of the new section cannot be made applicable to unregistered agreement. So, question that comes into our mind what would be the point of taxability in case of unregistered agreement.
Taxability in case of unregistered agreement.
Before going to taxability in case of unregistered agreement, it is much important to note that unregistered agreement is covered under ‘Benami Transaction’ w.e.f. from 1.11.2016, therefore, consequences thereof may be faced. The Explanation under Section 2(9) of The Prohibition of Benami Property Transaction Act, 1988 provides that
“For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force,—
(i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered.
Further, after the judgment of Hon’ble Supreme Court in the case of CIT v. Balbir Singh Maini (2017) 398 ITR 531 (SC) earlier provisions of taxation mentioned above (i.e. Section 45(1), Section 2(47)(v) and section 50D) shall not be applicable in case of unregistered documents. The Hon’ble Supreme Court in the case of Balbir Singh Maini (supra) held that the provisions of Section 2(47)(v) and (vi) will not apply in cases where the JDA is not registered. The Court held that ‘transfer of land through an unregistered document by giving possession of the property for limited purpose of development would not amount to transfer and hence Capital gains would not arise.’
The Hon’ble Supreme Court in its landmark judgement in the case of “CIT v. Balbir Singh Maini” Civil Appeal No. 15619 of 2017 held that the provisions of ‘transfer’ under section 2(47)(v) of the Act, are not applicable since JDA entered into by the taxpayer with developers is not registered. In order to qualify as a ‘transfer’ of a capital asset under section 2(47)(v) of the Act, there must be a ‘contract’ which can be enforced in law under Section 53A of TOPA. There is no contract which can be taken cognisance of, for the purpose specified in Section 53A of the TOPA after the amendment to the Registration Act, 1908 in 2001 unless the said contract is registered. Since JDA was never registered, the JDA has no efficacy in the eye of law, therefore, no ‘transfer’ can be said to have taken place.
In Balbir Singh Maini (supra), the Hon’ble Supreme Court has taken into consideration that amendments were made in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words “the contract, though required to be registered, has not been registered, or” in Section 53A of the 1882 Act have been omitted. Simultaneously, Sections 17 and 49 of the 1908 Act have been amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of 1882 Act) is registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument. Section 17(1A) and Section 49 of the Registration Act, 1908 Act, as amended, read thus:
“17(1A). The documents containing contracts to transfer for consideration, any immovable property for the purpose of Section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then they shall have no effect for the purposes of the said Section 53A.” “49. Effect of non-registration of documents required to be registered. No document required by Section 17 or by any provision of the Transfer of Property Act, 1882 (4 of 1882), to be registered shall-
(a) affect any immovable property comprised therein, or
(b) confer any power to adopt, or
(c) be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered:
Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1887 (1 of 1877) or as evidence of any collateral transaction not required to be effected by registered instrument.”
The Hon’ble Supreme Court observed in para 20 as :
“20. The effect of the aforesaid amendment is that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA in the present case, is not registered, then it shall have no effect in law for the purposes of Section 53A. In short, there is no agreement in the eyes of law which can be enforced under Section 53A of the Transfer of Property Act. This being the case, we are of the view that the High Court was right in stating that in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act shows that in the eyes of law, there is no contract which can be taken cognizance of, for the purpose specified in Section 53A. The ITAT was not correct in referring to the expression “of the nature referred to in Section 53A” in Section 2(47)(v) in order to arrive at the opposite conclusion. This expression was used by the legislature ever since sub-section (v) was inserted by the Finance Act of 1987 w.e.f. 01.04.1988. All that is meant by this expression is to refer to the ingredients of applicability of Section 53A to the contracts mentioned therein. It is only where the contract contains all the six features mentioned in Shrimant Shamrao Suryavanshi (supra), that the Section applies, and this is what is meant by the expression “of the nature referred to in Section 53A”. This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the Amendment Act of 2001, yet the aforesaid expression “of the nature referred to in Section 53A” would somehow refer only to the nature of contract mentioned in Section 53A, which would then in turn not require registration. As has been stated above, there is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no “transfer” can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken; whether only a licence was granted to develop the property; and whether the developers were or were not ready and willing to carry out their part of the bargain. Since we are of the view that sub-clause (v) of Section 2(47) of the Act is not attracted on the facts of this case, we need not go into any other factual question.”
What is position of tax liability in case of unregistered agreement after Balbir Singh Maini case?
Now, in case of unregistered agreement, two situations come before us-
– first unregistered agreement is covered under ‘Benami Transaction’ w.e.f. from 1.11.2016;
– Second, as per Balbir Singh Maini case, if an agreement, like the JDA, is not registered, then it shall have no effect in law for the purposes ofSection 53A of TOPA Act and therefore no transfer under section 2(47)(v) of the Act.
In view of Balbir Singh Maini case, if JDA is not registered, then there is no transfer. Further if there is no transfer of capital assets, then there is no capital gain tax under section 45(1) of the Act and no relevance of section 50D of the Act. Therefore, now in case of unregistered JDA, if the landowner gives the possession of their land to the developer to develop the property, it shall have no effect in law for the purposes of Section 53A of TOPA Act and therefore no transfer under Section 2(47)(v) of the Act. Further, Section 45(5A) will not be attracted as JDA is unregistered.
But, at the time of completion of project or completion of construction work, landowner make the registry of land and building in favour of developer for their part of land and building as per the agreement, there will be transfer of capital assets under section 45(1) of the Act and capital gain will arise in the hands of the landowner. However, may be that developer will not pay any consideration for that part because developer has constructed the land but same shall be considered as barter systems i.e. construction by developer for landowner and transfer of flats by landowner in favour of developer. In this situation, mostly there will a Short-Term Capital Gain (‘STCG’) because immediately after construction, landowner shall transfer the land and building/flats/units in favour of developer which is not hold by landowner more than 24 months. In this case, landowner will not be entitled for exemption under section 54 of the Act because there is no Long-Term Capital Gain (‘LTCG’). Further department will deny the exemption under section 54F of the Act as the same is also available in case of LTCG. However, the landowner can demand the exemption under Section 54F for the land part in property transferred to developer, if the same had been hold by landowner for more than 24 months.
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