Transfer pursuant to an unregistered joint development agreement (JDA) and the timing of tax liability
This article analyzes the timing and tax liability arising from a transfer under an unregistered joint development agreement (JDA) between a taxpayer and a developer, focusing on capital gains tax implications under Indian law. The main issue is whether capital gains arise in the year of the JDA execution or upon completion of construction or issuance of the occupancy certificate.
Section 45(5A), introduced in 2017, applies only to individuals and HUFs with registered JDAs, taxing capital gains in the year of completion certificate issuance.
Recent 2024 amendments removed indexation benefits, introduced a uniform 12.5% tax rate on long-term capital gains with grandfathering for pre-2024 acquisitions.
Assuming a taxpayer (not an individual or HUF) executes a joint development agreement (JDA) with a developer in January 2020 for 60% of land granting general power of attorney (GPA) for constructing a residential complex. Under the agreement and general power of attorney, the taxpayer transfers rights to 60% of land in return for 40% of the built-up area. The JDA agreement is not registered by either party. Construction is completed in March 2024, and the occupancy certificate is obtained in October 2024, making the building.
The key question is whether capital gains will arise in the previous year relevant to assessment year (AY) 2020-21- when the JDA and GPA were executed- or instead in the year when construction finishes, or when the occupancy certificate is obtained.
The taxpayer should review the JDA and with GPA to confirm if the developer’s rights over the property extend to only 60%, whether such rights are conditional or attached to some conditions (e.g., subject to obtaining necessary approvals or project failure or rescindment of agreement, etc.), and whether both parties have rights to specific performance under the contract.
Second, is the developer prepared to fulfill his contractual obligations under section 53A of the Transfer of Property Act, 1882 (TPA)? Is it right to develop 60% of the land conditional only on performing their part of the contract?
2(47) of the Income Tax Act defines ‘transfer’ inclusively, so that it is not exhaustive, and would include within its ambit transactions that may be alien to the concept of transfer under the general law, viz. Transfer of Property Act, 1882.
Clauses (v) and (vi) were introduced in section 2(47), with effect from 01/04/1988. They provide that “transfer” includes-
- any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, and
- any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property.
Section 45(5A) being substantive provision, cannot be applied to development agreement entered prior to AY 2018-19 and that too is applicable only to individuals and HUFs.
S. 2(47)(v) was introduced in the Act from AY 1988-89 because prior thereto, in most cases, it was argued on behalf of the taxpayers that no transfer took place till execution of the conveyance.
Under section 2(47)(v) any transaction involving allowing possession to be taken over or retained in part performance of a contract of the nature referred to in S. 53A of the Transfer of Property Act would come within the ambit of S. 2(47)(v). To attract S. 53A, the following conditions need to be fulfilled:
1. there should be a contract for consideration;
2. it should be in writing;
3. it should be signed by the transferor;
4. it should pertain to transfer of immovable property;
5. the transferee should have taken possession of the property; lastly,
6. the transferee should be ready and willing to perform his part of the contract.
The 2001 amendments to the Registration and the Transfer of Property Acts alter the entire complexion of the matter because no contract transferring rights in an immovable property (IP), where it was unregistered, can be recognized in law, i.e., under section 53A itself. S. 2(47)(v) would thus, w.e.f. 24/9/2001, be valid only qua registered agreements.
However, S. 2(47)(vi) would get attracted. The constraining factor of registration of a contract would not prevail as it does in the case of S. 2(47)(v). Any agreement or arrangement or a transaction in any other manner, which has the effect of transferring or enabling the enjoyment of an immovable property, would fall within the ambit of transfer under section 2(47). Therefore, the transaction between the taxpayer and the developer constitutes “transfer” under section 2(47) liable to capital gains for AY 2020-21 [pls see P. George Jacob v. ITO [IT Appeal No. 558 (Coch) of 2022, dated 2-3-2023]; Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003] 260 ITR 491 (Bom.); Prameela Krishna v. ITO [2014] 42 taxmann.com 185 (Kar.); Potla Nageswara Rao v. DCIT [2014] 365 ITR 249 (AP)]. Even though in Potla Nageswara Rao (supra) it was held that levy of capital gain arises in the year of entering into development agreement.
The law on this matter is patently clear, so that any agreement or arrangement or a transaction in any other manner, which has effect of transferring or enabling the enjoyment of an immovable property, would fall within the ambit of transfer under section 2(47) of the Act. It is immaterial that the completion is delayed or consideration be delivered to the taxpayer, completing the transaction, as indeed, to the buyers of residential flats with over 60% of the land or realize his investment by selling them to the extent not already sold during the construction. 40% of the built-up area is the consideration which can equally be in kind. However, the AO must take the cost of construction of the property. Since the agreement is entered into in January 2020 the cost of the land [at 60% land] or its fair market value as on 1st April 2001 if acquired prior to that date and its indexed cost of acquisition** should be considered for sale consideration.
Further, it is well-settled that income is to be taxed in the hands of the right person and for the right year, and it is being offered to tax in the hands of another person or year would be of no moment in law, for which, apart from sections 3-5 of the Act, we may refer to some decisions, viz. CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) and CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 (SC).
The decision in the case of CIT v. Balbir S. Maini [2017] 398 ITR 531 (SC) may not come to the rescue of the taxpayer because that decision is, firstly, principally with reference to section 2(47)(v) and, besides, a case of project failure, leading to the Hon’ble Apex Court finding that there was in fact no accrual of income, placing reliance on its own decisions in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC); Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) and CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC).
In Kanak Bhanj Deo v. ITO [2025] 176 taxmann.com 738 (Orissa) [SLP dismissed [2025] 176 taxmann.com 963 (SC)], the assessee entered into a JDA with a developer regarding her property in 2012. She received the possession certificate for her share of the constructed property in 2016. The AO taxed capital gains from the transfer under the JDA in AY 2017-18. Both the Tribunal and the High Court agreed with this decision, stating that because the assessee did not declare any capital gain in AY 2012-13 when entering the JDA, she was not eligible for relief for capital gains taxation in that year. Since she received the developed portion in 2016, the capital gains became taxable to her in AY 2017-18 according to S. 45(5A).
Comments
45(5A) introduced by the Finance Act, 2017 provides that if an assessee, being individualor HUF, enters into a Joint development agreement with a builder or joint developer, capital gain arising from transfer of capital asset, being land or building or both, under such agreement shall be chargeable to 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. However, if owner of land or building transfers his share in the project to any other person on or before the date of issue of certificate of completion, the capital gains shall be computed as per general provisions of the Act without taking into account the above special provisions and it shall deemed to be the income of the previous year in which such transfer takes place. The stamp duty value of the land or building in respect of the owner’s share in developed project on the date of issuing of certificate of completion by the competent authority as increased by any monetary consideration received (whether in cash, cheque or any other mode) shall be deemed to be the full value of the consideration received or accruing to the owner as a result of the transfer of the capital asset.
‘Specified agreement’ has been defined under section 45(5A) to mean a registered agreement in which landowner allows the developer to develop real estate projects on the land contributed by him in consideration of a share in the developed real estate with or without payment of part of the consideration in cash. It implies that a joint development agreement in which part of the consideration is received by the landowner in kind shall inter alia take the character as ‘specified agreement’.
**It should be noted that indexation was also a key factor for computing long-term capital gain from the transfer land or building or both under JDA. However, the Finance (No. 2) Act, 2024 removed the indexation benefit and introduced a uniform tax rate of 12.5% on long-term capital gains. To ease the transition to these new rules, the Government has introduced a grandfathering provision. This provision allows resident individuals and resident HUFs to still apply indexation on land or building acquired before 23-07-2024 and pay tax at the old rate of 20% if the tax under the new law (i.e., tax calculated at 12.5% without indexation benefit) results in a higher amount.
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