Exchange of property results in capital gain tax liability


Query 1] Exchange of property 

My father co-owns a plot with his brother. A builder has approached for development of it. He is ready to give certain sum and 3 flats in exchange.

  1. What would be the best way to go about it legally and considering tax implications? Sale of the plot to the builder or Transfer of the plot in exchange of considerations? What would be the way to minimize tax implications? Income Tax and Capital Gains Tax? If so, what would be the tax implications and on whose part?
  2. Can the flats be register in the names of the family members?
  3. may the consideration be do in the way that uncle gets all the money and father keeps all the 3 flats? Can that be off set for LTCG?

Some more facts are:

1) Father and uncle own only one house each in different cities currently.

2) The uncle buy another flat this financial year which is under construction and possession expect next year (Agreement is do though).



“A taxpayer may engineer his transactions to minimize taxes, but he cannot make a transaction appear to be what it is not”- Irving Loeb Goldberg

Though transactions may sound simple from the commercial angel, it is not so from the income tax point of view. The complexity and tax implications need to be understood beforehand as stitch in time saves nine.

The capital gain liability arises whenever capital asset is transferred & is irrespective of the consideration whether received in cash or in Kind.

In your case, your father & uncle would be entering in to a development agreement with a builder whereby (i) construction would be done by the builder for many flats (ii) land owners would be getting 3 flats and (iii) builder would be getting balance flats against construction of entire building.

In short, against transfer of certain share of land in favor of developer, land owner would be getting construct flats. There is a misconception amongst taxpayer as most of them believes in “no cash-no tax”. It is not so. Tax liability could arise even without involvement of any cash elements in the transactions. In the present case, even if the land owners are not getting any amount in cash, still the transactions could result in income tax liability.

Reason: It is exchange of property whereby share in the land is exchang against the construct flat. “Exchange” of property results in capital gain tax liability. The taxation of such transactions is complicat affair. The most important mute question here is the “Year of taxability” of the transactions. There are no set guidelines as to the date, Year of taxability, the manner of ascertainment of the capital gains. In the hands of the owner in such cases (whether on completion of contract or on transfer of undivided interest to the Builder or prospective flat owners before the completion of construction).

The capital gain tax liability arises in the year in which “transfer” took place. Under the Income Tax Act-1961, transfer 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” [Section 2(47)(v)]. Effectively, any transaction which allows possession to be take over or retained. In part-performance of the contract would come within the ambit of “Transfer”. So, if the land owners have granted the possession to the developer not in the capacity of buyer but only in the capacity of developer. Even then it may be treat as Transfer u/s 2(47)(v).

With above point in mind, two probability as to the year of taxability of such transaction could be the year in which (a) the Development agreement is sign or
(b) construction is complete and Flats are hand over back by the builder to the land owners.

If the Development agreement grants an unqualified, uninterrupted and irrevocable right of possession. To the developer at the time of signing the documents, then capital gain shall be chargeable to tax in the year of executing Development Agreement itself. Exchange of property However, if the development agreement stipulates the transfer (or possession) of land to the builder. At the time of handing over of the 3 constructed flats to the landowners, capital gain shall be chargeable to tax in the year of completion of construction and handover of all the flats to the land owners.

Coming to the specific issues rais in the query, it may be note that:

  1. Whether sale or development Agreement:
    On sale of plot, the tax liability would be affixed upfront and no ambiguities and confusion would be there. By development agreement, though complexities and ambiguities would be there, but the tax liability could be deferr. Tax liability, timing etc would depend upon the drafting and stipulations of agreement & arrangement with the builders/developer.
  2. For income tax exemption & to avoid litigation, it is always advisable to purchase the flat in the name of the land owner itself and not in the name of any other persons /family members.
  3. You can do documentation in such a way that uncle gets all the three flats and your father gets the cash. But the tax liability may not be favorable in such case. They can plan their transactions. In such a way that both of them get maximum tax benefit of exemption u/s 54F. Exemption u/s 54F is available if the net sale consideration is invest for purchase or construction of another house property. Within a specified period. Further, there are two more stipulations u/s 54F as under:
    a) Taxpayer should not own more than one house property, other than the new asset, on the date of transfer of the original asset.
    b) Taxpayer should not purchase any residential house, other than the new asset, within a period of two years. After the date of transfer of original asset or constructs any other residential house, other than the new asset. Within a period of three years after the date of transfer of the original asset. Exchange of property
    Your uncle can claim an exemption u/s 54F against purchase of their existing under construction. Flat for which he has already executed agreement to sale. If he purchases this property (for which agreement to sale is already done by him), he would own two flats and no exemption u/s 54F would be available against the flat he would be getting out of the present development agreement with the builder & he would further be violating the condition (b) mentioned above. Further, purchase of 3 flats by any of the land owners. Also restricts the exemption claim u/s 54F as exemption clause restricts the claim towards purchase of “one” flat only.

Drafting & planning would play very crucial role in determining the ultimate tax liability. Timing, consideration & taxability would depend upon multiple factors like the terms, conditions & stipulations etc in the Development Agreement & various other individual issues of the taxpayer.  Generalized reply may not be possible in such cases. However, above brief discussion would certainly help the land owner to take required safeguard while entering in to development agreement. In view of the complexity of law & heavy stake involved, readers are advised to obtain individual professional advice before entering into such transactions/ agreements.

Exchange of property

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