Special Taxation provision for Joint Development Agreement [JDA]
Timing of taxation is one of the most crucial & controversial issues in income tax. For obvious reasons, taxpayers would love to defer the incidence of taxation to the last point whereas department seek to tax it at the earliest possible occasion. This is all the more critical when it comes to taxation of “Joint Development Agreement”. JDA is one of the most preferred mode of developing a real estate forms of real estate which is entered into between a property owner and a builder/developer, former contributes property & later undertakes the responsibility of getting required approvals, construction, investment and marketing the project with their past experience, expertise & resources. It is a win-win situation for both, as land owner gets a better price realization after its development and developer mainly gets relaxation from initial substantial capital deployment in land. Taxation of JDA has been a matter of divergent views and controversy as far as the timing and amount of taxation is concerned. It is summarized as under:
- Prior to the 2017:
Taxation of JDA was governed by the normal taxing provision & there was no special tax provision for taxation of JDA. Under the normal taxing provision, the tax liability used to arise at the time of signing JDA as it is normally coupled with the handing over of the ‘possession’ of the property to the developer for its development. As a result, taxpayer were liable to pay the capital gain tax even if the amount is not received or even when there were contingency as to the completion of the project. In a landmark judgment by the Bombay HC in Chaturbhuj Dwarkadas Kapadia (2003) 29 Taxman 497, it was held that the date of signing the development agreement is relevant for taxation & other conditions such as completion of construction or handover of possession of completed portion back to the owner is not at all relevant. The judgment was subsequently followed in various other court decisions.
- After 2017:
By the Finance Act-2017, Section 45(5A) is introduced to remove the genuine & practical hardships in JDA taxation. Pursuant to section 45(5A), individuals/ HUF who enters Joint Development Agreement with the builder are liable to capital gains in the year in which the certificate of completion is issued by the competent authority. As a result, the tax liability gets deferred from the year of mere signing the documents and handing over of possession to the year of completion of construction. One must note that Section 45(5A) specifically covered the issue of taxation of JDA for Individual/ HUF only & any JDA by Firm , Compnay would continue to be governed by old taxation regime as was exsiting prior to above amendment. Key feature of new scheme of taxation as provided by Section 45(5A) provided are as under:
Timing of Taxation:
The liability to pay capital gains tax now will arise only after the project is ‘completed’ and not prior to that (even if the possession of property is handed over by the owner to the builder/developer at the time of signing development agreement). The capital gains will be chargeable to tax in the year in which the certificate of completion for the entire or a part of the project is issued by a competent authority. In short, now no liability is there at the time of signing of the agreement itself u/s 45(5A). As a result of this, the issue faced by the property owner in paying capital gains tax in the year of ‘transfer’ is resolved.
Amount of sale consideration:
For levy of tax, the sale consideration in the hands of the property owner against transfer of share in the property by owner in favor of the developer is aggregate of;
(a) Stamp duty value of the property received by the property owner from builder as his share in the developed property on the date of issue of completion certificate and
(b) amount received in cash/cheque.
This benefit will not be available if owner’s share in the project is transferred to another person before issue of completion certificate. In such a situation, the capital gains will be taxable in the year in which such transfer took place.
Tax Deduction At Source (TDS):
TDS @ 10% is applicable on the payment done by the developer to the property owner pursuant to JDA.
Section 45(5A) has simplified the taxation of JDA, albeit for Individuals / HUF only. It would be better if the scope of section 45(5A) is now stretched further to other categories of taxpayers like Firm, AOP, Companies etc.