Section 45 of the Income Tax Act 1961 provides that any profits and gains from the transfer of a ‘capital’ asset’ shall be chargeable to tax under the head ‘Capital Gains’. Capital Gains is taxable as it bears income character. Income as defined in Section 2 (24) of the Act includes inter-alia any capital gains chargeable under Section 45.
Meaning of Joint Development Agreement
In a Joint Development Agreement for construction of residential buildings land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.
The issue which arises is whether Capitals Gains Tax for the land owner and Developer arises at the time of signing the Joint Development Agreement, at the time of handing over possession of land to the Developer for Development, at the time of registration of the Collaboration Agreement, at the time of receiving the constructed residential building, or at the time of selling the residential building.
Two important terms in the context of capital gains are ‘capital asset’ and ‘transfer’. In order that chargeable capital gains get generated, there has to be a ‘capital asset’, a transfer of the capital asset and any profit or gain arises from such transfer.
In a Joint Development Agreement, the owner of the property sells the land right of the property to the builder, in lieu of which the builder agrees to reconstruct the property and give back a portion of the property and purchase the other portion of the property from the owner. The land right that is sold by the owner is a ‘capital asset.’ Under the Act the sale of land pursuant to the Joint Development Agreement, attracts capital gain.
Under Section 45 of the Income Tax Act, capital gain is chargeable to tax in the year in which “ transfer” takes place except in certain cases. As per the judgments of several High Courts, the point where the capital gains are deemed to accrue will purely depend on the terms of Joint Development Agreement.
Legal Position Uptill AY – 2017-18
The Finance Act,1987 introduced sub-clause (v) and (vi) to Section 2 (47) of the Act and brought into tax ambit, even deemed transfer which is otherwise not transfer under the general law.
As per Section 2 (47)(v) of the Income Tax Act, 1961, the definition of ‘Transfer’ includes interalia:-
“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).”
In other words, transfer includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. Thus by legislation by incorporation, transfer in part performance of contract as provided in Section 53A of the Transfer of Property Act was made applicable to transfer of capital asset for capital gains tax purposes.
The Bombay High Court held in a landmark case of Chaturbhuj Dwarkadas Kapadia v. CIT 260 ITR 491 (Bom.) that the execution of Joint Development Agreement would amount to transfer and the owner would be liable to capital gains tax at the time of execution of the Joint Development Agreement itself, disregarding the time when the construction was substantially complete or the handing over of possession to the owner.
The proposition which held the field was further elaborated upon by the Authority for Advance Ruling in the case of Jasbir Singh Sarkaria 294 ITR, which laid down that where the land owner has given irrevocable POA (effective control over land was transferred) and possession of the land in pursuance of the Developer, it would be treated as transfer of land by the owner to Developer for the purposes of Section 2(47)(v) of the Act.
The turning point in determination of the taxable event was introduced with the C.S. Atwal judgment by the Punjab & Haryana High Court (2015) 378 ITR 244 (P&H), in which it was held that since collaboration agreement is unregistered, Section 53 A of the Transfer of Property Act cannot be applied to such unregistered document. The clauses of the registered power of attorney were treated to be mere license to enter the land for the purpose of Development and which could not be treated as transfer of possession. It was also held that where the Development was not carried out due to non fulfillment of obligation by the Developer, clause (v) of Section 2(47) will not be attracted.
This contentious issue, to some extent was resolved and addressed by the Hon’ble Supreme Court in its judgment in the case of CIT v. Balbir Singh Maini  86 taxmann.com 94 and 251 Taxman 202 (SC), wherein judgment in C.S. Atwal was affirmed. It was held that giving of possession of land for purposes of development under an unregistered joint development agreement could not be regarded as giving rise to capital gains.
The registration and other Related Laws (Amendment) Act, 2001, was brought in with simultaneous amendments in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. Thus, unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of 1882 Act) is registered, it shall not have any effect in law for the purpose of Section 53A.
Therefore, in order to qualify as a ‘transfer’ of a capital asset under Section 2(47)(v), there must be a ‘contract’ which can be enforced in law under Section 53A of the Transfer of Property Act.
Legal Position since A.Y. 2018-19
With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, a new sub-Section (5A) has been inserted in Section 45 of the Income-tax Act w.e.f AY 2018-19, to provide that in case of an assessee, being an individual or a Hindu undivided family, who enters into a specified agreement for development of a project, 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.
For JDAs entered into on or after 01.04.2018
The Finance Act, 2017 inserted a new Section 45(5A) in the Income-tax Act, 1961, which reads as under:
45. (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 :
Determination of the Taxable Event
As per the newly inserted sub-Section (5A) of Section 45 of the Act, the taxable event of, i.e., the transfer of title of land by the landowner (only in the cases of individuals and HUFs) to the developer under a JDA, arises on receipt of the certificate of completion for the whole or part of the project, issued by the competent authority provided the landowner does not transfer his share in the project to any other person on or before the date of issuance of said certificate of completion.
This is a relief to the land owners who were earlier liable to capital gains as soon as they entered into the collaboration agreement.
Full Value of Consideration in hands of land owner
It has also been provided that the stamp duty value of the share of the land owner, being land or building or both, in the project on the date of issuing of said certificate of completion 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.
Consequential amendment to Section 49 of the Income-tax Act has also been made to provide that the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under Section 45(5A) of the Income-tax Act.
Benefit of Regime not available on transfer by land owner
It is also provided that benefit of this regime shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion. In such a situation, the capital gains as determined under general provisions of the Income-tax Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Income-tax Act without taking into account the aforesaid provisions.
Exemption U/s 54 or 54F
If after reconstruction the owner buys a portion of the property and pays the builder/developer for the owner’s portion of the property then the payment given by the owner to the builder/developer 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 terms of the Agreement.
However, 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 would be withdrawn in the year of sale of his portion and the income would be treated as short term capital gain in the year of sale.
Taxability of Joint Development Agreement from the point of view of Developer
In case of developer, the nature of income would be business income. The property would constitute stock in trade for him. Overall, his income comprises of sale proceeds he gets from the buyers of the developed land and the cost would involve the expenditure incurred on development of the property.
Liability to deduct TDS
Consequently, a new Section 194-IC was also inserted vide Finance Act to 2017 to deduct TDS on monetary consideration. This Section overrides the provisions contained in Section 194-IAof the Act, which provides for deduction of TDS @ 1 % on transfer of immovable property where consideration exceeds Rs 50 Lakhs. According to Section 194-IC, if under a joint development agreement, any developer pays any amount to the land owner in addition to the share in the project, then such builder shall deduct TDS @ 10 % on such payment.
Though the amendment to Section 45 of the act is a positive development, certain issues still remain. The amendment has sought to defer the tax payment till receipt of completion certificate. However, time limit for claiming benefit of exemption from long-term capital gain U/s 54 & 54F has not been extended till issuance of completion certificate.