Income Tax on Joint Development: Post amendment scenario

The concept of joint development agreement is common now a days because of its advantage of bringing together of both landlords and the developer. The landlord who has land with insufficient funds to develop such land can reap the benefit of current market price after the development. Always the price for developed property is greater than the undeveloped or under developed property. It is advantageous for the builder since he can save the huge investment on the land.

The landlord pay the tax after liquidating his share of property, hence he prefer to pay the tax after receipt of his share of built up or developed area. The department wants to tax at the time of entering into joint development with General Power of Attorney in favour of the developer upon receiving the non refundable deposit. There was a continuing dispute between the Landlords and the income tax department on the time of taxation. The department has started issuing notices to landlords based on the rulings of Honorable Karnataka High Court in the case of Dr. T.K.Dayalu, where it was held that capital gain is to be paid if there is non-refundable deposit with possession of such land as per section 53A of the Transfer of property Act.

This was causing lot of hardships to the landlords because there was no cash inflow at the time of Joint Development Agreement. Even though refundable or non refundable money is received, it was not enough to pay the taxes.

Scenario after finance act 2017:-

The finance act 2017 has inserted a sub section 5A to section 45 which is effective from 01.04.2018 i.e. AY 2018-19  reads as under:-

Capital Gains:-

45(1) 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, 54EA, 54EB, 54F , 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place

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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 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.

Analysis:-

As per the amended section the landlord has to pay capital gain tax after obtaining completion certificate from the competent authority. The value of consideration is higher of either stamp duty value or the amount received from the prospective buyers. The proviso also stated that in case if the landlord transfers his share before obtaining completion certificate, the capital gain is to be chargeable to tax in the year in which such transfer was made. The government has given breath taking time to the landlord to pay the tax, hence it will increase the confidence of the landlords for entering the Joint Development Agreement. 

Tax at source by the developer on the Landlord/s:-

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.

Analysis:-

This section stipulates that the person i.e. Developer has to deduct Tax at Source on the Landlord/s on the consideration given to him either in cash or kind or both. The rate of TDS is at 10%.In this section it is stated that the Tax deducted Source is on consideration. Here the section uses the word “not being consideration in kind,” i.e. the share of the property of the landlord is not subject to TDS. The amount paid by cash, cheque or by making credit entries in his books has to deduct TDS. 

Conclusion:-

Insertion of sub section 5A to section 45 has given clear picture of the intention of the legislature and will reduce tax litigations. It will boost the confidence of the landlords to enter into joint development agreements.

(Republished with Amendments)