G.V. Hemalatha Devi
Smt. G.V. Hemalatha Devi is an IRS officer of 1987 batch currently posted as Principal Commissioner of Income-tax-2, Pune. She has done M.Sc. and Ph.D in Agricultural Science from Prestigious Indian Agricultural Research Institute (PUSA), New Delhi and L.L.B. from Osmania University, Hyderabad. She has worked in Income-tax Department in various levels dealing with assessment, investigation, audit, appeals, I & CI, administration etc. She has also worked in different capacities as Managing Director, Andhra Pradesh Handicrafts Development Corporation, Chief Executive Officer in Khadi Village Industries Board, Commissioner for women and child welfare and also as Additional Secretary, Public Enterprise Department, with Government of Andhra Pradesh.
As per the provisions of Sec. 45 of Income Tax Act, 1961, a person is liable to capital gains in the year in which transfer takes place, irrespective of receipt of sale consideration. However, a new amendment, Sec. 45(5A) is introduced by Finance Act, 2017, with effect from 01/04/2018, providing great relief to individuals / HUFs. According to this amendment, the individuals/ HUF who enters Joint Development Agreement with the builder are liable to capital gains in the year in which the certificate of completion is issued by the competent authority. Therefore, the tax liability is postponed from the year of transfer of land to the year of completion of construction. Nevertheless, there are several practical issues involved with reference to year of taxability and application of other provisions like Sec. 54, Sec. 54F, etc. which are discussed in this article.
According to the provisions of Sec. 45(1) of Income Tax Act, 1961, the capital gain is chargeable in the hands of transfer or in the year in which transfer takes place irrespective of the fact whether the sale consideration was received or not. This created tremendous hardship to the individuals who are transferring the land for development, who are thus becoming liable to pay huge taxes in the form of capital gain though they have not received the full consideration. The issue can be better understood with an example given as under:
A landlord owns an acre of land. He enters into Joint Development Agreement on 01/04/2018 with the builder. As per the agreement, the landlord gets 40% of share of the flats constructed and builder gets 60% of the share of the flats constructed. The total number of flats to be constructed on one acre land was 60. Accordingly, the owner gets 24 flats and the builder gets 36 flats. Further, as per the JDA, the construction has to be completed by March 2021, i.e within a period of 03 years. The landlord in turn enters into an agreement with the perspective customers and receives only 10% of the sale consideration for each flat. He enters an agreement of sale
for 09 flats in F.Y.2019-20,
for 06 flats in F.Y.2020-21, and
for 04 flats in F.Y.2021-22.
As per the provisions of Sec.45, the landlord becomes liable to capital gain during F.Y.2018-19, i.e A.Y.2019-20 as he entered JDA during F. Y. 2018-19. However, he received no advance/ sale consideration from purchasers. Therefore, he is put to genuine hardship and is in no position to pay tax on capital gain. To address this genuine hardship, an amendment was introduced in the form of Sec. 45(5A) which read as under:
It is estimated that the GSTN is going to 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.
As per this amendment, the liability, in the hands of landlord to pay tax on of landlord to pay tax on capital gain, gets postponed to the year in which construction of project is completed and certificate of completion is obtained from the competent authority.
The amendment is applicable only to individuals and HUF. It is applicable only if the capital asset is land and/or building.
The amendment also provides for charging of capital gain if the landlord transfers his shares in the project before the completion certificate. In such a case, the capital gain will be chargeable in the year in which such transfer takes place. There is ambiguity here. If one goes through the Finance Bill 2017, it says that year of taxability is year of transfer of land not the year of transfer of flats. If this interpretation is followed then there is no need for amendment at all.
Now, coming to the practical issues that crop up while taxing the capital gain are:
i. Whether all the 19 flats will become liable to tax in A.Y. 2019-20?
ii. Whether 09 flats will be taxable in A.Y 2020-21, 06 flats in A.Y. 2021-22 and 04 flats in A.Y. 2022-23?
iii. If all the 19 flats will become liable to capital gain in A.Y. 2019-20 itself, how is he expected to discharge his capital gain tax liability ? Further, how is he expected to make the investment u/s 54 / 54?
Further, there is no clarity on the following issuse:
1. Whether the indexation will be given up to the date of Joint Development Agreement or to the date of completion certificate or to the date of registration of flats. If flats are sold before completion certificate but over period of time, how to compute the cost of asset with indexation?
2. Further, time limit to make investment u/s. 54 and 54F will be reckoned from date of Joint Development Agreement or from the date of completion certificate?
Since the issues are relevant for A.Y. 2018-19, clarification from CBDT will be of great help to avoid unnecessary litigation.
Further, it is necessary to examine whether the above transactions fall within the purview of Section 53A of Transfer of Property Act, 1882. The essential conditions as per the Section are:
a. There should be a written contract between the seller and the purchaser.
b. The contract should be for consideration.
c. The contract is for transfer of immovable property.
d. The purchaser has taken possession of the property and has done something/ paid part consideration in furtherance of contract.
e. The purchaser is willing to perform his part of the contract.
In such circumstances, even without executing the sale deed, the purchaser acquires right in the property and the seller will be under an obligation to execute the sale deed upon full payment by the purchaser.
As per Section 2(47) of the Income Tax Act, 1961, the transfer in relation to Capital Asset includes:
i. the sale, exchange or relinquishment of the asset; or
ii. the extinguishment of any rights therein; or
iii. the compulsory acquisition thereof under any law; or
iv. in a case where the asset is converted by the owner thereof into, or
v. is treated by him as, stock-in-trade of a business carried on by him,
vi. such conversion or treatment; or
vii. any transaction involving the allowing of the possession of any
viii. immovable property to be taken or retained in part performance of a contract of
ix. the nature referred to in Section 53A of the Transfer of Property Act, 1882: or
x. Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
Thus, the land lord when he enters into sale agreements with purchasers of flat, there is no handing over of possession by the landlord as the flats are still under construction. So the provisions of Section 53A are also not attracted.
8.Therefore, in case of Joint Development Agreements, for the harmonious interpretation of Sec.45, Sec.45(5A), Sec.54 and Sec.54F, the capital gains on transfer of immovable property being land or building or both, should be taxed in the year the landlord executes sale deed for flats, and the capital gain tax liability should be restricted only to those units which were sold in that particular year.