CA Sudeep Chhallani
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.
Usually landowner gets his share in constructed property spread over different years; the constructed portion to be received by the landlord is part of his sale consideration
The issues regarding taxability of development agreements have remained contentious issues and have been subject of litigation between the taxpayers and revenue department over the years on handling over the possession vide General Power of Attorney, Possession of Land, whether construction activity has been commenced or not etc.
1). Usually in a property transaction a developer or a builder incurs tax liability under business profits while as owner of land, an assessee, is taxable under the head of capital gains tax. The primary taxable event in this regard remains ‘transfer’ of capital asset, e., property under consideration.
2). The term transfer under section 2(47) includes transfer by way of sale, exchange or relinquishment of asset. These are some of the direct modes of transfer. In the context of property transactions such transfers entail execution of registration of conveyance deed.
Earlier way back in 1980, in order to avoid the implication of Capital Gain the landowners use d to play the mischief of issuing General Power of Attorney deferring the tax payment. By such arrangement the developer would be put into possession of the property for consideration and the landowner would thereby confer ownership, like privileges on developer without executing conveyance deed. This arrangement was made in order to avoid Capital Gain and defer the tax payment.
In order to curb such malpractices the Income Tax Authorities amended the definition of:
sec 2(47)(v) 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 (4 of 1882).
1. The inserted sub-clause provided that any transaction allowed possession of immovable property by General Power of Attorney would be considered as Transfer irrespective of whether consideration is paid or payable by any means or mode.
2. Thus two clauses “Possession” and “General of Power of Attorney” become the driving force to attract the capital gain on which basis the department heavily relied.
3. But, there was no scope that counsels representing the landowners would easily accept the fact and let water flow peacefully. The counsels argued and applied test of “ Possession”
What amounts to possession?
If possession is given but construction activity has not been started?
4. Thus it developed “Test of Possession of Property”; possession is wider term and many inferences can been drawn from it ! The issue was whether capital gains tax could arise merely on entering into in a development agreement where developer had not actually initiated the development agreement and had no intention of doing so?
5. The courts now starting looking the aspect from the view whether there was actual developer, whether the developer has intended to honour his performance or whether any activity has been carried out in other to find out the year of taxation of capital gain.
Thus emerged the concept of “Possession to develop clause”
Few citations wherein the development agreement was entered still not taxed in that; applying test of possession and development.
a. BINJUSARIA’S CASE: Binjusaria Properties (P) Ltd vs. ACIT Hyderabad “B” Bench.
In Binjusaria Properties (P.) Ltd.’s case (supra), the assessee was a private limited company that entered into development agreement-cum-GPA with the developer. A reading of the said agreement indicated that what was handed over by the assessee to the developer was only a ‘permissive possession’. By virtue of said agreement the assessee-company was entitled to receive consideration in the form of 38% of the residential part of the developed area from the developer. The assessee-company also received a refundable deposit from the developer which was to be refunded on the complete handing over of the aforementioned 38% developed area to the assessee. Tribunal was dealing with issue whether development agreement was assessable to tax in the year in which such agreement was entered into, as was claimed by the Revenue or in the relevant subsequent year.
Section 2(47) of the Income-tax Act, 1961 – Capital gains – Transfer (Land development agreement) – Assessment year 2006-07 – During relevant year, assessee entered into a development agreement of land with a developer in terms of which developer had to develop property according to approved plan and deliver 38 per cent of constructed area to assessee – Assessing Officer opined that since transfer had taken place in terms of development agreement-cum-GPA, assessee was liable to pay capital gain tax in assessment year in question – Whether in view of fact that developer had not done anything to discharge obligations cast on it, capital gains could not be brought to tax in year under appeal merely on basis of signing of development agreement.
b. Similarly in ITAT HYDERABAD BENCH ‘B’
Where assessee entered into a development agreement with a builder for construction of a housing project, but no construction work was carried out during relevant year, said agreement could not be said to be a contract as referred to in section 53A of Transfer of property Act and, accordingly, provisions of section 2(47)(v) cannot be invoked.
In a nutshell there is difference between conditional willingness to perform and absolute willingness to perform. Conditional willingness may be dependent upon obtaining necessary permissions from the authorities before the project is started or consideration is paid. This would not be covered under section 53A of the Transfer of Property Act and, hence, would escape the provisions of section 2(47)(v) of the Act, because if the agreement is studded with a condition then it is only an offer and not a contract. Willingness to perform must be absolute for section 2(47)(v) to come into operation.
Thus there are three main propositions to be considered while deciding the tax proposition on Joint Development Agreement:
a. Possession and General Power of Attorney and development agreement has been executed further fact that the payment has been postponed to future date is irrelevant.
Follow Bombay High Court’s decision in Chaturbhuj Dwarkadas Kapadia’s.
b. Possession has been handed over but from the facts it can be demonstrated that the developer has not performed or not intended to take any efforts which may result in breach of contract- consequently does not amount to transfer u/s 2(47)(v).