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. Through this article, I have tried to explain how the taxation of these collaboration agreements works especially considering the amendments made by Finance Act’ 2017 applicable w.e.f AY 2018-19.
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.
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 of the new property to the builder (ex: one or more floors) and keep the other portions with himself after reconstruction.
Ques: How does the taxation of collaboration agreements work?
Ans: 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 him. 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.
The land right that is sold by the owner is a capital asset under the Income Tax Act’1961 and attracts capital gain on its sale pursuant to a collaboration agreement.
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 are the recent amendments in the taxation of collaboration agreements?
Recent amendments relating to collaboration agreement under income tax Act’1961
Insertion of new sub-section (5A) to Section 45 w.e.f AY 2018-19:
The following sub-section was inserted with effect from the 1st day of April, 2018, namely:—
‘(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 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 Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.’.
Ques: Is there any implication of amendment under section 45(5A)?
Ans: Yes, there is huge significance of the insertion of sub-section 5A to section 45 of the Income Tax Act’ 1961; this significance relates to the time when the capital gains arise/taxed in the hands of the land owner. As per the new section 45(5A), capital gains to the land owner arise only after construction of the property is completed and the completion certificate is obtained from the competent authority by the builder/developer.
This is a major relief to the land owners who are now liable to capital gains only when the builder completes the construction and gets the completion certificate. Earlier the land owners were liable to capital gains tax as soon as they entered into a collaboration agreement.
Ques: Is the amendment is applicable to agreements entered into prior to 01.04.2017 also?
Ans: In the opinion of the author, if you have entered into a collaboration agreement before 01.04.2017, then you were liable to capital gains tax at the time of entering into the agreement with the builder.
However, if you have entered into the agreement on or after 01.04.2017, then capital gain is applicable after the construction is completed and completion certificate is obtained.
Ques: What will be the full value of consideration in the hands of the land owner?
Ans: The full value of consideration in the hands of the land owner will be stamp duty value of the portion that the land owner gets after completion of construction.
If the builder pays the land owner any excess amount in cash other than giving him his share of the building after construction then the said amount as received by the land owner in excess of his share of building will be added to the Full value of consideration.
We can summarise the Full Value of consideration (FVC) as follows:
FVC (in the hands of the land owner) = Stamp duty value of land owner’s portion + consideration received in cash (if any).
Ques: Will the taxation be the same if the land owner before the completion of construction by the builder sells his portion to some other person?
Ans: The provisions of sub-section (5A) shall not apply where the land owner transfers his share in the project on or before the date of issue of certificate of completion, and capital gains shall arise to the land owner as per the other provisions as applicable under the act and capital gains shall be deemed to be the income of the previous year in which such transfer takes place.
Ques: What happens to the cost of construction of the land owner’s portion that the owner buys after construction of the complete structure?
Ans: In a collaboration agreement, if after reconstruction the owner buys a portion of the property and pays the builder for the cost of construction on his portion of the property then 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.
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.
Ques: To whom will the provisions of section 45(5A) applicable?
Ans: An important point to remember is that the new provisions under collaboration agreement will be applicable only in case the land owner is an Individual or a HUF.
Ques: On what date will the stamp duty value be considered for calculating full value of consideration (FVC)?
Ans: For the purpose of calculating FVC, stamp duty value as on the date when completion certificate is obtained will be considered.
Ques: Is there any other significant amendment relating to taxation of collaboration agreements?
Ans: Another important amendment is the introduction of TDS on collaboration Agreements introduced w.e.f AY 2018-19
Recently a new section has been inserted under the Income Tax Act’1961 i.e Section 194-IC.
This section is effective for AY 2018-19 and reads as under:
Sec 194-IC: Payment under specified agreement
Notwithstanding anything contained in section 194-IA, any person responsible for paying to a resident any sum by way of consideration, not being consideration in kind, under the agreement referred to in sub-section (5A) of section 45, shall at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax thereon.”.
- To summarise the amendment, we can say that now there is a TDS applicable on collaboration agreements @ 10% w.e.f AY 2018-19. (Section 194IA with 1% TDS is not applicable in this case).
- This section is important from the point of view of the builders. Under this section the builder has to deduct tax @ 10% on payment of any amount in cash to the land owner for buying his share of property under a collaboration agreement.
- TDS will be deducted only on the amount paid in cash/cheque by the builder to the land owner and the value or stamp duty value of the land owner’s portion will not be added for the purpose of calculating TDS.
- TDS will be deducted on the entire amount paid in cash/cheque and not on the amount any capital gains that may arise to the land owner.
(The author is the founder of youronlinefilings.com an online platform for filing income tax returns, company incorporation, accounting/bookkeeping, audits, Fema related compliances etc. He can be contacted at: firstname.lastname@example.org or email@example.com or Mobile: +91-9953199493)
(Republished with Amendments)