Controversy: Capital Gain Exemption & Taxation of Joint Development Agreement u/s 45(5A)

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Controversy: Capital Gain Exemption & Taxation of Joint Development Agreement u/s 45(5A)

Capital gain computation is a mechanism full of interesting & controversial issue. Section 45 deals with capital gains wherein sub section (1) provides that any profits or gains arising from transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head ‘Capital gains’ and it shall be deemed to be the income of the previous year in which the “TRANSFER” took place.  Deviation from this general rule is provided by the Finance Act, 2017, by inserting a new sub section (5A) to section 45 applicable from 01.04.2018, i.e. Assessment Year 2018-19. Section 45(5A) expressly defers the point of taxability from the point of transfer in cases of Joint Development Agreements (JDAs). It may be noted that JDA is referred to as “specified agreements” in section 45(5A).

Section 45(5A) reads as under:

“(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:

Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of the said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.

Explanation.-For the purposes of this sub-section, the expression-

(i) “competent authority” means the authority empowered to approve the building plan by or under any law for the time being in force;

 

(ii) “specified agreement” means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;

(iii) “stamp duty value” means the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.”

The Memorandum explaining the provisions of Finance Bill, 2017 explains the purpose of introduction of Sec. 45(5A) in the Income Tax Act -1961 as under:

“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, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or 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.”

One may note the following key features of this special taxing provision of JDA:

  1. This section starts with a non obstante clause which means it overrides other normal provision of section 45(1).
  2. It is applicable only to individuals and HUFs.  Other entities like Firm, AOP, Company, etc will not be governed by section 45(5A) and hence
  3. As section 45(5A) deals only with the capital assets being in the nature of land or building.
  4. The provision defers the incidence of tax from the incidence of transfer. It is specifically provided that if owner of land, building or both transfers such an asset through the JDA then capital gain arising out of such transfer is provided to be taxable not at the time of signing or handing over the possession of the property but at the time of issue of completion certificate with respect to such asset.
  5. Logic is aptly clear that in most of the cases the completion certificate will be issued after the date of transfer of asset only. Deferment of tax incidence will result in perfectly aligning the natural justice to the taxpayers.
  6. The term ‘transfer’ has been defined under section 2(47) of the Act. The definition of transfer under section 2(47) includes any sale, exchange or relinquishment of the asset, or the extinguishment of any rights therein. It may also include transfers in the nature of 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.
  7. No diversion is provided even under section 45(5A) with regard to the date of transfer but only the instance of taxability has been deferred by it. In short, unlike other provision, the year of transfer and year of taxability is different in case of section 45(5A) which is not there in generalize scheme of capital gain taxation [exception is in case of section 45(2) which provides for capital gain taxation in case of conversion of capital assets in to stock in trade] to coincide in cases of Joint Development Agreements.
  8. There is a very stringent provision in section 45(5A) which provides that if the share of project is transferred before the issue of completion certificate then provisions of section 45(5A) will not be applicable on this transaction. In such cases, capital gains will be taxed as per normal provisions of the Act.
  9. For capital gain computation, the period of holding is relevant. Period of holding is relevant for whether the assets is a short term or long term capital assets & for indexation benefit. Question remains as to the computation of the period of holding in case of taxation pursuant to section 45(5A). It may be noted that section 45(5A) simply defers the tax from the date of actual transfer u/s 2(47) to the date of completion certificate. However, no such specific provision is provided to stretch the period of holding. In my view, for reckoning the period of holding, normal provisions of the Act will prevail. To elaborate further, even for the purpose of capital gain recognition, the transfer took place at the time of transfer as covered in section 2(47). Its only the tax which will be covered at a later date at the time of issue of completion certificate. As far as indexation benefit is concerned, section 48 provides that indexation of cost of acquisition in cases of transfer of long term capital asset only. Clause (iii) of Explanation to section 48 defines the term ‘indexed cost of acquisition’ as under;
    (iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferredbears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001 , whichever is later;” Above reading will clearly convey that indexation benefit is available till the year of transfer.
  1. Now, the question of capital gain exemption u/s 54, 54F or 54EC is very relevant in such situation.
    First of all, section 45(5A) don’t change the year of “Transfer” but simply changes the year of “Taxation”. Whether, for exemption u/s 54, etc, the date of signing the agreement coupled with possession would be relevant or the date of issue of “completion certificate”? There are few special observation which must be noted in this regard:
    a) CBDT has issued a circular no. 791 Dated 02.06.2000 which was issue to allow capital gain exemption for person covered by section 45(2). It is provided that exemptions provided in section 54EA/54EB/54EC will be available from the date of transfer has to be taken as the sale of stock in trade only. In short, though for capital gain computation, the date of conversion is relevant but for capital gain exemption, the date of sale of stock is relevant.
    b) Ranchi bench of the ITAT in the case of Rajesh Kumar Adukia vs. DCIT, ITA 14/Ran/2018, dated 30.10.2019 has at para 20 concluded as under:

20. At thus juncture, I take cognizance of CBDT Circular No.791 dated 2.6.2000 (supra), which clarified that for the purpose of claiming deduction u/s. 54EA/54EB/54EC, the date of transfer shall be the date on which the stock-in-trade is sold or otherwise transferred by the assessee and not on the date of conversion of the capital asset into stock-in-trade. Further, Special Bench of ITAT Kolkata in the case of Octavius Steel & Co. Ltd (supra) has held that on conversion of capital asset into stock-in-trade, there is no profit as no can make profit out of himself. Further, as per amended sub-section(2) of section 45 of the Act, which was inserted by the Taxation Legislation (Amendment Act), 1984 w.e.f. 1.4.1985, notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock in trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Therefore, in view of above CBDT circular and order of Special Bench of Kolkata Bench of the Tribunal in the case of Octavius Steel & Co. Ltd (supra), I have no hesitation to hold that the Assessing Officer was also not correct in denying benefit of section 54F of the Act to the assessee on the ground that residential flat was not constructed after the date of transfer but alongwith saleable flats.”

Similar view was also confirmed subsequently in Nisha Sarawagi vs. ACIT, ITA No. 137/Ran/2019, dt. 02.03.2020.

In short, the benefit of above CBDT circular as well as ITAT observation can be used to claim capital gain exemption from the date of “issue of completion certificate” However, the views will be full of controversy till CBDT clarifies on the scope of its Circular No. 791 in the present scenario. Someone following conservative approach of taxation must consider the “the date of transfer u/s 2(47) as the date for capital gain exemption u/s 54,54F, 54EC etc. However, the applicability of above views cannot be overruled in the applicable cases.

Capital gain exemption provision provides that if the assessee doesn’t invest the amount within the year of transfer then such amount need to be demarcated by depositing the amount in the Capital Gains Account Scheme. The views above will hold equally good for deposit of the amount in the capital gain deposit account scheme (CGDAS).,

SUGGESTION TO IMRPOVE THE IMPACT OF SECTION 45(5A):

In my overall opinion, to offer the intended benefit and avoid possible controversy, Government must come out with the following amendment:

  1. The provision is not applicable to Firm, Companies, etc. It should be extended to all the categories of the taxapeyrs.
  2. Benefit of circular No. 791 as discussed above need to be widened.
  3. Holding period for Capital gain computation as well indexation benefit should be on the basis of “issue of completion certificate” and not with reference to section 2(47) alone.
  4. Even the legislature may consider to incorporate the scheme of presumptive taxation in case of section 45(5A) to avoid the multiple issue of tax controversy.

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