Joint Development Agreements Under Scanner: Common Tax Mistakes Landowners Are Making
Joint Development Agreements (JDAs) have come under increased verification and scrutiny by the Income Tax Department in recent over the last couple of months. Several landowners who entered into such arrangements years ago are now receiving queries and notices, often to their surprise. A common reaction is, “I have not sold my property; I have only given it for development—so why tax?” In some cases, landowners have received part consideration in cash or cheque, while in others the entire consideration is in the form of enhanced constructed area only. The confusion arises because a JDA is neither a simple sale nor a routine investment transaction. From a tax perspective, it is a specialized transaction requiring careful understanding and correct reporting.
A Joint Development Agreement involves transfer of development rights in land, sharing of constructed area, and in many cases, monetary consideration as well. Most of the disputes being seen today are not due to deliberate concealment of income, but due to assumptions made at the time of signing the agreement or while filing the return of income. One of the most widespread mistakes is the belief that capital gains arise only when cash consideration is received. Many taxpayers assume that unless substantial money is received, there is no taxable event. In JDAs, consideration may be partly or wholly in kind, such as flats or commercial units, or a mix of cash and kind. Taxability does not depend merely on the receipt of money, but on the nature of the agreement and the specific provisions applicable to it.
Another major area of confusion relates to section 45(5A). It is often believed that every JDA automatically falls within this provision. This assumption is incorrect. Section 45(5A) applies only to a ‘specified agreement’ entered into by an individual or HUF, where the consideration consists of both monetary consideration and consideration in kind. If the entire consideration is only in kind, that is, only constructed area with no cash component, section 45(5A) does not apply. Similarly, where the entire consideration is only in cash, the transaction also falls outside the scope of section 45(5A). In both such cases, the benefit of deferring capital gains tax to the year of issue of occupation or completion certificate is not available, and the general provisions governing capital gains become applicable. Incorrect application of section 45(5A) has resulted in wrong determination of the year of taxability in many cases.
Mistake regarding the year of taxability is another common issue. Where section 45(5A) is applicable, capital gains are chargeable to tax in the year in which the certificate of completion or occupation is issued by the competent authority. However, where the section does not apply, taxability depends on the facts of transfer as per the agreement. Many taxpayers either postponed taxation indefinitely or offered it in an incorrect year, leading to inconsistencies and scrutiny.
Incorrect claim of TDS credit is also frequently noticed. In several JDAs, the developer deducts tax at source on the monetary component of consideration. A common mistake is claiming credit for such TDS in the year in which it is deducted, even though the corresponding capital gains are taxable in a later year. Credit for TDS should be claimed in the year in which the related income is offered to tax, that is, generally the year in which the occupation or completion certificate is issued, where section 45(5A) applies. Mismatch in TDS credit often leads to CPC adjustments and avoidable tax demand/correspondence.
Another serious and often overlooked mistake is non-reporting of the JDA transaction in the return of income. Many property owners do not disclose the JDA at all, under the presumption that since no tax is payable in that year, there is no requirement to report it. This presumption is risky. JDAs are registered documents, and the Income Tax Department is now actively extracting information from multiple sources. Data is being sourced not only from the Registrar or Sub-Registrar offices but also from the RERA authorities. Details of land, project registration, promoters, development rights and sharing ratios are increasingly available through these channels. Non-reporting of the transaction weakens the taxpayer’s position when verification or scrutiny is initiated at a later stage.
Ignoring stamp duty value and valuation aspects is another recurring mistake. Development agreements are captured in stamp records, and understatement or nil disclosure of consideration without proper explanation becomes a red flag. Similarly, arbitrary or unsupported valuation of flats or constructed area received under a JDA often results in disputes and additions during assessment.
Many landowners also assume that the builder or developer will take care of all tax compliances. This is a misplaced assumption. The tax obligations of the developer and the landowner are independent of each other. Even if the developer has deducted TDS or complied with his reporting obligations, the landowner remains responsible for correct disclosure of capital gains, year of taxability, exemptions and other related compliances in his own return of income.
Another frequently missed aspect is exemption planning. Sections such as 54 and 54F may offer relief in suitable JDA cases, but only if the conditions and timelines are strictly complied with. Many taxpayers either miss the exemption window or incorrectly assume that receipt of residential units automatically qualifies them for exemption. Lack of timely planning often results in avoidable tax liability.
The recent wave of scrutiny indicates that JDA are no longer low-visibility transactions. Information from registrar offices, stamp valuation authorities and RERA is being collated and analyzed. JDAs are closely tracked and examined, often years after execution. The current verification drive should serve as a reminder that such transactions require proper understanding and careful reporting.
In conclusion, JDA cannot be approached casually from a tax perspective. Incorrect assumptions regarding section 45(5A), year of taxability, valuation, TDS credit and reporting obligations have resulted in notices and prolonged litigation for many landowners. Proper analysis at the time of execution and accurate disclosure in the return of income can prevent years of anxiety later. In taxation, timely clarity is always far better than delayed explanations.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
