Taxability of Joint Development Agreement under Income Tax law

Taxability of Joint Development Agreement (‘JDA’) under Income Tax Law

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 IT Act’).

Taxability in the hand of Developer-

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.

Taxability in the hand of Landowner-

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.

The Government in 2017 introduced a new provision of Section 45(5A) of the IT Act. Therefore, the legal position of taxability of capital gain may be divided as under.

– Before the amendment by Finance Act, 2017;

– After the amendment by Finance Act, 2017.

Before the amendment by Finance Act, 2017 (till AY 2017-18):- 

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 IT 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.”

In view of the above, Capital Gains arise on “transfer” of a capital asset.  As per Section 2(47)(v) of the IT Act, the expression “transfer” amongst other things includes: 

“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)” 

It is submitted that 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.

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 IT 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 IT 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.

“CIT v. Balbir Singh Maini” Civil Appeal No. 15619 of 2017.

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 IT 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 IT Act, there must be a ‘contract’ which can be enforced in law under Section 53A of the Transfer of Property Act, 1882 (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.

The Supreme Court also observed that the income from the capital gain on a transaction has never materialised and it is a hypothetical income. There is no profit or gain which arises from transfer of capital asset. The taxpayer did not acquire any right to receive income, in as much as alleged right was dependent upon the necessary permissions being obtained. There was no debt owned to the taxpayers by the developers, and therefore, the taxpayer have not acquired any right to receive income under JDA. Therefore, no profit or gains ‘arose’ from the transfer of capital asset so as to attract Section 45 and 48 of the Act.

After the amendment by Finance Act, 2017 i.e. w.e.f. 01.04.2018 (AY 2018-19):- 

As mentioned above, Section 45 of the IT 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 IT Act. The Finance Act 2017 has inserted a new section 45(5A) in the IT 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 the 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 IT 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.

Further, new sub-section (5A) in section 45 of the Income Tax  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 s 48 of the IT Act.

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. 

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.