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:
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:
Hope you find the above useful.