CA Sudeep Chhallani
Introduction
Due to high-sky increase in land prices and avoiding outright purchase of land by making heavy investment today real estate developers often enter into the Joint Development Agreement (JDA) with the land owners wherein the real estate developers are entrusted with the task of developing land.
Similarly the land owners also want to encash the opportunity in booming real estate sector of the country. In laymans language the Joint Development Agreement can be understood as the transaction similar to barter wherein one person hands over the clear title of the property in consideration of flats/ monetary payment or combination of both. While entering into JDA there are many minute points to be considered; if ignored the dispute might arose at the latter phase of development.
This article deals with taxation on part of the landowner.
We all might be aware that there are ample of judiciary issues regarding taxation of landowner in case of Joint Development Agreement. And hence today I took this as my discussion topic.
Page Contents
Before Finance Act, 2017, the taxation Rules for landowners are as under:
The taxability of the 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, arises as soon as the JDA is signed and entered into between the landowner and the developer.
Hence the main issue which the landowners contend that in a JDA, any consideration, either monetary in the form of specified share in the sale consideration or non-monetary in the form of specified share in the built-up/developed estate, accrues to the landowner, only after the construction/development of the developed estate, which entails a time period of atleast 2-3 years, and as such in the absence of accrual of any income in the hands of the landowners, at the time of signing/execution of the JDA, the taxable event does not arise.
As per the contention of triggering of the taxable event at the time of signing/execution of the JDA, the biggest question which arises for consideration 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. Hence, in such situation 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.
Against these provisions various landowners raised an appeal stating that the projects under JDA run for an average 2 to 3 years and that the prices of real estate are subject to fluctuation, how could one determine an apt fair market value on the date of execution of JDA?
To solve these all the confusion, clashes and unending legal matters in front of higher authority, Finance Act, 2017 come up with the amendments with respect of taxability of Capital Gains in the hands of Land Owner and how the consideration will be calculated for the same.
After Amendments of Finance Act, 2017, the taxation Rules for landowners are as under:
Determination of date of Transfer:
A new sub-section (5A) in section 45 is inserted to be issued to shift the capital gain arising on JDA to the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority in case of an assessee being individual or Hindu undivided family provided the assessee does not transfer his share in the project to any other person on or before the date of issue of said certificate of completion.
Determination of Consideration:
The stamp duty value of land or building or both, in the project on the date of issuing of said certificate of completion given to the land owner 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.
These amendments bring very positive approach towards real estate sector since so many doubts and issues faced by the landowners got resolved because of these amendments and now they can freely enter into joint Development Agreement.
Further, one last point relating to taxation of JDA is TDS Provision, Section 194-IC is introduced so as to provide that in case any monetary consideration is payable under the specified agreement, tax at the rate of ten per cent shall be deductible from such payment.
I hope this article is helpful for you to bring clarity regarding Joint Development Agreement and its taxation under Income Tax Act.
(Author is Partner with Chhallani Agarwal & Associates)
(Republished with Amendments by Team Taxguru)
What about the taxation of Capital Gain or the business income, of the partnership firms owning the land n entering in to Joint development Agreement with the Developers? What will be the point of taxation?