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Taxation of Joint Development Agreement [JDA]
“Hardest thing to understand is income tax”- Albert Einstein.
“Income tax is leviable only on receipt of income” is the normal presumption of the taxpayer. It’s not always correct. Actual receipt of income is not the sole criteria for income tax, more particularly when it comes to property transactions.
Sale of property by investors results in capital gain income & tax liability gets crystallized as & when the ‘transfer’ took place. For the purpose of Income Tax Act-1961, ‘Transfer’ includes even certain transactions wherein ‘possession’ is handed over to the buyer. That is, even if the sale deed is not executed or entire consideration is not received by the owner, even then the income tax liability get attracted if the ‘possession’ is handed over by the owner to the buyer, builder or developer.
One important & welcome change was carried out by the Finance Act-2017 so as to neutralize the illogical tax consequences in case there is Joint Development Agreement (JDA). JDA is one of the most preferred forms of real estate development which is entered into between a property owner and a builder/developer wherein 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, landowners and the developers & so considered as a preferred mode of real estate development.
Prior to the 2017, the tax liability generally used to arise at the time of signing JDA as it is generally coupled with the handing over of the ‘possession’ of the property to the developer for its development. It has resulted in lot of disputes & litigation as the taxpayer were made 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 the development agreement is relevant for deciding the timing of taxation & it is not relevant whether construction was substantially complete or the handover of possession of some portion of the completed scheme back to the owner. The judgment was subsequently followed in various other court & tribunal pronouncements.
To remove the genuine & practical hardships in JDA taxation, special taxing provision [Section 45(5A)] was introduced in the Income Tax Act-1961 by Finance Act-2017 which provides for explicit mechanism for charging of capital gain tax, 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 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. 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 the date of 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 is applicable on the payment to be done by the developer to the property owner pursuant to JDA. TDS is @ 10% on such payments.
Above beneficial provision of section 45(5A) has a limited application. It is applicable only if the property owner is an Individual & HUF. Other entities like Firm, AOP, Companies etc would not be governed by the special taxing provision of section 45(5A) and they would be liable to pay the tax at the time of ‘transfer’ i.e., receipt of income will not be necessary for its taxation and capital gain tax liability would arise at the time of ‘transfer’. Rather than restricting to Individual & HUF, it would have been better if the benefit of section 45(5A) is broaden so as cover all the categories of taxpayers.