Query 1]

With reference to recent changes in the budget regarding Capital Gain calculation, I have following query:

1. From which financial year, amendment in sec 45 sub sec 5A (capital gain) will be applicable?
2. If we do the development agreement before 31^st March 2017, we have to pay Income Tax at the time of agreement? Or, can we pay at the time of completion or at the time of sale deed?
3. From which financial year, the amended in section 55 (Regarding change of base year for calculation of capital gain from 1981 to 2001 as mentioned in the last issue of Tax Talk dated 13.03.2017) will be applicable? [Ashvini Nagpurkar-ashvininagpurkar@gmail.com]

Opinion:

Joint Development agreements (JDA) are currently the most prevalent form of estate development in the real estate sector. JDA is entered into between a property owner and a builder/developer to construct a residential/commercial scheme on the property belonging to the property owner. It’s an arrangement between the owner of property and a developer, whereby property owner contributes property & developers undertakes the responsibility of getting required approvals, construction, investment and marketing the project with their expertise & resources. Taxation of JDA was a complicated affair in the hands of property owner.

Present provision:

1. Presently, there is no specific separate taxing provision for taxing JDA. It is taxable under the regular & normal provision i.e., Capital gain liability arises whenever capital asset is transferred. It is not dependent on the receipt of consideration. Simply, 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 taken over or retained in part-performance of the contract would come within the ambit of “Transfer”.
2. As development is not possible without handling over the possession of the property, in most of the cases, income tax liability was triggering in the hands of the property owner at the time of merely signing JDA. Under the present scenario of taxation, various issues such as contingency in the completion, possibility of cancellation, mode of computing sale consideration in the hands of owner etc were not at all finding the place in the taxing provision & were subject of enormous litigation in courts.

 

New Amendment:

To remove the existing genuine & practical hardships in JDA taxation, new taxing provision [Section 45(5A)] is proposed to be incorporated in the Income Tax Act-1961 which provides for explicit mechanism for charging of capital gain tax in the hands of property owner in case of JDA. Finance Bill-2017 has proposed the following amendment:

1. Timing of Taxation:
   The liability to pay capital gains tax will arise in the year the project is completed and not before (even if the possession is handed over 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. Clearly, no liability would be there at the time of signing of the agreement itself. As a result of this, the issue faced by the property owner in paying capital gains tax in the year of transfer before receiving any consideration would stand resolved.
2. Amount of sale consideration:
   Stamp duty value of the property owner’s share in the developed property on the date of issue of completion certificate as increased by money received in cash/cheque or other mode is proposed will be considered as full value of consideration (i.e., sale price) against transfer of property owner’s share.
3. Restrictions:
   a] This benefit will not apply when the property owner’s share in a project has been transferred to another person before the date of issue of the certificate of completion. In such a situation, the capital gains will be taxable in the year in which the transfer took place without considering the proposed provisions.
   b] In order to claim the benefit of new section, property owner should not transfer a share in the project to another person before the date of issue of the completion certificate.
   c] The proposed amendment is made applicable to Individual & HUF alone. Other entities like Firm, AOP, Companies etc would continue to be governed by the existing taxing provision as mentioned above.
   d] The new provision is applicable only in respect of property held as “capital Assets” & not on property held by owner as Stock-in-trade.
4. Applicability:
   These amendments will take effect from the assessment year 2018-19. i.e., amendment proposed is applicable for all the JDA singed on or after 01.04.2017.
5. Tax Deduction At Source (TDS):
   TDS is applicable on the payment to be done by the developer to the property owner pursuant to JDA. TDS is @ 10% on such payments.

 

It is indeed a welcome move by the Government as the proposed amendment would provide great relief to the property owner signing JDA. It not only provides for clarity on the point of taxation (when the construction of immovable property is completed) but also provides the clarity regarding amount of sale consideration (stamp duty value on the date of issue of completion certificate). It will overrule various Court judgments in favor of the taxpayers.

 

As far as specific queries raised by you are concerned, it may be noted that if the development agreement is signed on or before 31^st March 2017, it will be governed by exiting provision which provides for taxation at the time of handling over of the possession. Section 45(5A) is applicable from the financial year commencing from 01.04.2017. The change in the base year from 1981 to 2001 (in section 48) is also applicable on sale of the properties after 01.04.2017.

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