The taxability of capital gains arising on transfer of title to land from the land owner to the developer in a Joint Development Agreement (JDA) has always been a heated issue. The taxation of Joint Development Agreement was never jointly agreed by the A.O. and the Assessee. There were a few hiccups in the law that were driving a way for litigation from decades:
Irrational determination of date of transfer to be the date on which JDA is entered, by verbatim application of Section 2(27) of the Income Tax Act, 1961.
Vague mode of determination of sale consideration on execution of JDA using fair market value by application of Section 50D of the Income Tax Act, 1961. The fair market value arrived by assessee never appeared to be fair to the A.O. and vice verse!
Both these issues have been resolved in the recently announced Budget and let’s analyse the same.
If a developer makes an outright purchase of land in the initial stages of the project, given the fact that the land prices have been ever-increasing at a sky rocketing speed, would lead to huge investment at the start of the project without any revenue generation for few years leading to cash crunch to the developer. Hence the model of JDA’s got fancied in the real estate market and the developer would join hands with the landowner leading to a two way win-win situation:
Benefit to Developer: No heavy initial investment. Payment to landowner can be made as and when collections are made from the customer or by sharing of the built up area with the landowner.
Benefit to Landowner: Landowner with low technical insights on real estate development can now reap the benefits of higher consideration on sale of developed estate than outright sale of land.
OPERATION OF JDA:
In JDA, the share of consideration with the landowner might be either of the following ways:
Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the sale consideration of the project as and when the collections from the customers are made.
Non Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the built up area with the landowner.
TAXABILITY UNTIL NOW:
The taxability of JDA in the hands of the developer is under business income and in the hands of the landowner it is under capital gain. (I would restrict the discussion to capital gains).
Determination of date of Transfer:
Capital Gains arise on “transfer” of a capital asset. As per Section 2(47) of the Income Tax Act 1961, the word “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)”
This clause gave a deemed effect of transfer on satisfaction of the following conditions:
1. There should be a contract for consideration in writing and same should be signed by the transferor;
2. The contract should be for transfer of immovable property;
3. The transferee should have taken possession of the property and has done something for furtherance of the contract;
4. The transferee should be ready and willing to perform his part of the contract; and
5. In this case even without execution of sale deed, the transferee acquires the right in the property and the transferor cannot claim any right in respect of property under consideration other than the rights expressly provided in the terms of contract.
All the above conditions analysed in the case of JDA:
|1||The JDA provides for the consideration, either monetary or non monetary in most cases.|
|2||The JDA deals with the transfer of immovable property / rights in the immovable property|
|3||In most cases the developer undertakes an irrevocable power of attorney in his favour to deal with the land, to obtain permission for development, to develop the property etc. Further in most cases the developer gives a security deposit to the land owner on the execution of the JDA.|
|4||Both the landowner and developer are willing to perform their part of the JDA|
|5||Sale deeds are generally registered in the name of the ultimate buyer to avoid the intermediate stamp duty cost however the developer undertakes an irrevocable power of attorney in his favour.|
Considering the above, the assessing officers contented that the date of execution of the JDA was the date of transfer of the capital asset. However it is worth to note that on the date of execution of the JDA, the landowner has not liquidated the land and has no funds to pay the taxes and hence this appeared irrational and hence led to litigation. Further in the absence of funds the landowner was also unable to claim the benefits under the Section 54 series, causing genuine hardship to the assesses.
Determination of Consideration:
Considering that the land owner is required to pay the taxes on the date of execution of JDA, the biggest question is that when the project is just on the JDA with no real existence, what will be consideration. For this purpose I would like to draw attention to Section 50D of the Income Tax Act, 1961, which says,
“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.”
Now, this section leads to even more confusion considering that fact that the projects under JDA run for an average 2 to 3 years and that the prices of real estate are subject to fluctuation, how could one determine an apt fair market value on the date of execution of JDA?
A few Judicial decisions:
Dwarka Das Kapadia v. CIT /180CTR (Bom.)107/260 ITR 491(Bom)/; Bombay HC held that if the contract, read as whole, indicates passing of or transferring of complete control over the property in favour of developer, then the date of contract would be relevant to decide the year of chargeability. Thus the essence of Section 2(47) (v) may be considered, when there is transfer of complete control over the asset by the owner to the developer.
Charanjit Singh Atwal v. ITO Ward-VI(1) Ludhiyana; it was held that Irrevocable General Power of Attorney which leads to overall control of property in hands of developer, even if that does not involve exclusive possession of developer, would constitute transfer within the meaning of Section 2(47) (v) . It was held that the possession contemplated by provisions of Section 2(47) (v) of the Income tax Act, 1961 does not require handing over exclusive possession. What is required is that the transferred by virtue of possession should be able to exercise from overall intended purposes.
M/s. Binjusaria Properties Pvt. Ltd. Hyderabad versus Asstt. Commissioner of Income-tax: As on date there was no developmental activity on the land which is subject matter of development agreement – The process of construction has not been even initiated and no approval for the construction of the building is obtained – Thus, the sale consideration in the form of developed area has not been received – Mere receipt of refundable deposit cannot be termed as receipt of consideration – the AO calculated the capital gain on the entire land, even though the assessee has retained 38% share to itself.
General Glass Co. Ltd. Vs DCIT 108 TTJ 854 (Mumbai): Where payment of balance consideration within stipulated time is essence of the agreement of sale and such payments are not made in time by the transferee, such a contract does not confer any
right on the transferee as envisaged under Section 53A of the Transfer of Property Act and provisions of Section 2(47)(v) cannot be applied in such a situation
S. Ranjith Reddy 35 Taxmann.com415 (Hyderabad): ITAT Hyderabad has held that where nothing happened during the relevant previous year except execution of the agreement or no progress or construction had taken place it could not be held that the developers had performed its obligation as envisaged by Section 53A of Transfer of Property Act.
WHAT’s THE CHANGE?
The Budget 2017, has provided ramping revolution in the taxability of JDAs putting an end the ever existing disputes. The proposed amendments are:
Determination of date of Transfer:
A new sub-section (5A) in section 45 is proposed to be issued to shift the capital gain arising on JDA to the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority in case of an assessee being individual or Hindu undivided family provided the assessee does not transfer his share in the project to any other person on or before the date of issue of said certificate of completion.
Determination of Consideration:
It is proposed to provide that the stamp duty value of land or building or both, in the project on the date of issuing of said certificate of completion given to the land owner as increased by any monetary consideration received, 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.
Tax Deduction at Source:
A new section 194 – IC is introduced so as to provide that in case any monetary consideration is payable under the specified agreement, tax at the rate of ten per cent shall be deductible from such payment.
These amendments are removing the considerable hardship faced by the assessees and are a welcome step which will improve the sentiments of the developers and land owners leading to increase in the supply of land to developers. Hope these amendments will numb the pain of demonetisation, the hit the real estate transaction hard.