CA Pratik Anand

These days collaboration agreements in case of properties are very common with more and more people entering into such agreements for properties.

Ques: What is a collaboration agreement of a property?

Ans: A Collaboration agreement is an agreement between an owner of the property and a builder/developer etc.

In a collaboration agreement, the owner of the property enters into an agreement with the builder/developer to demolish and reconstruct the property of the owners and to sell a portion (ex: one or more floors) of the new property to the builder and keep the other portions with himself after reconstruction.

Let us now look at the taxation aspects of the collaboration agreements entered between owners and builders.

The first thing to understand here is that the owner of the property sells the land right of the property to the builder. In lieu of the land right, the builder agrees to reconstruct the property for the owner and give back a portion of the property to the owner and purchase the other portion from owner. Therefore, in effect the land right sold by the owner is only of the portion that the builder undertakes to purchase from the owner for a consideration.

That land right that is sold by the owner is a capital asset under the Income Tax Act’1961 and which attracts capital gain on sale.

For the portion that the owner purchases after reconstruction, he pays the builder for the cost of construction of such portion alongwith a mark-up that the builder may keep.

Ques: How does the taxation of collaboration agreements work?

Ans: When the owner sells the land right to the builder, he incurs capital gain on such sale pursuant to the collaboration agreement.

When the owner enters into a collaboration agreement, he sells the right of the portion that will be transferred to the builder after construction. This right is a capital asset.

This right is either treated as a sale of land right or sale of a residential house property depending on the facts and circumstances of the case.

There have been case laws for the treatment of the sale of land right as follows:

  1. If the owner sells his residential house to the builder and asks him to demolish and reconstruct the same and to divide the portions as per the agreement, in this case the courts have taken the interpretation that this is a sale of residential house.
  2. If the owner sells his residential house to the builder after demolition and asks him to reconstruct the same and to divide the portions as per the agreement, in this case the courts have taken the interpretation that this is a sale of land right and not sale of residential house property.

Ques: What happens to the cost of construction of the other portions that the owners buys after construction of the complete structure?

Ans:    In a collaboration agreement, after reconstruction the owner buys a portion of the property from builder. He pays the builder for the cost of construction on his portion of the property.

Here it is important to note that after the sale of land right through a collaboration agreement, the payment given by the owner to the builder for the owner’s portion is construction of a new residential house which is eligible for exemption u/s 54 or 54F depending on the nature of capital asset sold as per the terms of agreement.

Therefore, the capital gain in case of collaboration agreement works like this:

Sale consideration is the consideration that the builder pays the owner for transfer of builders’ portion of the property.

The amount which the owner pays to the builder for the owner’s portion after construction is construction of a new house eligible for exemption u/s 54 and 54F.

Here there are some important points to be noted:

  1. In order to claim exemption u/s 54 or 54F, the construction of the owner’s portion should be completed only after the sale of the right of the builders’ portion. This construction should be completed within 3 years from the date of sale of the builders’ portion.
  2. If the owner of the property sells his portion of the property that he acquired after the collaboration agreement within three years of acquisition, then the exemption taken by the owner in respect of the construction of property will be withdrawn in the year of sale of his portion and the income will be treated as short term capital gain in the year of sale.

Hope you find the above useful.

(The author is a CA in practice at Delhi and can be contacted at: E-mail: contact@capratikanand.com, Mobile: +91-9953199493)

Author Bio

Qualification: CA in Practice
Company: Pratik & Associates
Location: New Delhi, New Delhi, IN
Member Since: 10 Jun 2017 | Total Posts: 52
Pratik Anand is the founder of youronlinefilings.com, an online startup for business registrations, annual business compliance services, Tax filings, book keeping, legal consultancy etc. He is a Chartered accountant by profession and has special flair and expertise in the area of direct Taxation. H View Full Profile

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One response to “Taxation of collaboration agreements of properties”

  1. Priyank says:

    In such a case, a construction contract should be executed between owner and builder specifying cost of construction and payment to builder be made by cheque/DD for the construction amount. Such amount of cost of construction can then be added to the acquisition cost of the property and capital gain be calculated by deducting the indexed cost of acquisition plus current cost of construction from the purchase price of the floor received.

  2. jatin khanna says:

    what if the property is directly sold to the third party. and what if owner also sold one more floor with in 3 years is it short term or long term cap gain? what is the cost of acquisition of that floor and also cost of indexation if any?

  3. ig says:

    Will it create any difference if the sale deed for the builder floor is created between the owner and the third party.

    Although collaboration agreement between the owner and builder exists.

    After reading the above article it seems that the agreement for sale should be with builder

  4. V K khanna says:

    Nicely written article. Its an eye opener to many of the owners who are under the general impression that since no consideration is involved either in the transfer of built up floor or flat to the Builder and the Builder in lieu thereof is constructing the remaining portion of the building for them, there is no capital gain and hence payment of no capital gain tax by the owner. I have always taken a stand that in the collaborative agreements, there is always an element of capital gain tax which the owner has to discharge under the circumstances.

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