Sale of Flat Received under Joint Development Agreement& Capital Gain Taxation
I have a query regarding the taxation of the capital gain tax liability.
Mr. A & Mr. B are the joint owner of a property in the ratio of 60: 40 respectively. They both have acquired a property under a will & gift in the following manner.
- A acquired from his Grandfather 100% share in the house property as a result of will in the year say 2015. The property was acquired by the Grandfather prior to 2001.
- Mr. A gifted Mr. B, 40 % share in house property by gift deed in the year F.Y. 2016-17.
Both A and B entered into a Joint Development Agreement (JDA) with a builder in April-2017. Under JDA, Builder has agreed to give (i) one flat to each owner and (ii) some money in addition to one flat to owner A.
Both the sale deeds are registered at Government value (of say Rs. 1 Cr) in March 2020. My questions are
- i)If owner B wants to sell his flat immediately for some financial needs then it will attract STCG?
- ii)If yes then what will be the cost of Acquisition for Owner B for calculation of STCG tax if he sales it in F.Y. 2020-21?
iii) What will be the tax impact in the hands of Mr. A?
Please guide. [ ****rao.m********@gmail.com]
Opinion:
- Joint Development Agreement (JDA) was entered in April – 2017 and so the taxation of the capital gain would be governed by the provision of section 45(5A) of the Income Tax Act – 1961.
- Section 45(5A) is introduced to remove the genuine & practical hardships faced by Individual / HUF entering into JDA. Pursuant to section 45(5A), individuals/ HUF who enter JDA 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 or handing over of possession to the year of completion of construction. Key feature of new scheme of taxation as provided by Section 45(5A) provided are as under:
a) Timing of Taxation:
The liability to pay capital gains tax now will arise only after the project is ‘completed’. The capital gains will be chargeable to tax in the year in which the certificate of completion is issued by a competent authority for the entire or a part of the project.
b) Amount of sale consideration:
For levy of tax, the sale consideration in the hands of the property owner is aggregate of;
(a) Stamp duty value of the property received by the property owner from the builder as his share in the developed property on the date of issue of completion certificate and
(b) amount received in cash/cheque etc.
c) Restrictions:
This benefit will not be available if the owner transfers his share in the project to another person before the issue of completion certificate. In such a situation, the capital gains will be taxable in the year in which such transfer took place.
d) 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.
- In your specific case,
a) Timing of Taxation:
The capital gain tax liability would arise in the financial year 2019-20 (AY: 2020-21) when the completion certificate is issued and the sale deed is executed by the builder in favor of Mr. A & B.
b) Sale Consideration:
Sale consideration in the case of Mr. A would be the Government value of the flat (i.e., Rs. 1 Cr) plus Cash consideration received. In the case of Mr. B, sale consideration would be the Government value of the flat (i.e., Rs. 1 Cr).
c) Cost of Acquisition:
The property was originally acquired by the Grandfather prior to 2001. The FMV as on 01.04.2001 will be deemed as the cost of acquisition and the same will be apportioned in between A & B in the ratio of 60:40 respectively. The same will be eligible for indexation benefit also
d) Computation of Capital Gain
The difference between the sale considerations as computed in (b) above & indexed cost of acquisition as computed in (c) above will be the amount of Long Term Capital Gain (LTCG).
e) Tax Implications in the hand of Mr. B sells his flat immediately:
B would be liable for LTCG on the amount computed under (d) above. If Mr. B wishes to sell the flat then the Cost of acquisition of the new flat received from builder shall be Rs. 1 Cr i.e., the full value consideration deemed earlier as per (b) above. On such sale, any amount received over and above Rs. 1 Cr will be deemed as Short Term Capital Gain (STCG).
f) Tax Implications in the hands of Mr. A who wants to retain the flat:
Since Mr. A doesn’t want to sell the flat, he can claim an exemption u/s 54 of Rs. 1 Cr towards his investment in the house property. Tax liability would arise only if the LTCG amount as computed in (d) above exceeds Rs. 1 Cr.
[Controversy: Section 45(5A) is just deferring the mode of computation of capital gain and timing of taxation. The year of “Transfer” has not been changed by the Finance Act – 2017 wherein section 2(47) was not touched upon. Some controversy & disputes may arise as to (a) the year up to which the indexation benefit would be available and (b) admissibility of capital gain exemption u/s 54, 54F, 54EC etc. However, since all such provisions are beneficial provisions, it is likely to be settled in favour of the taxpayers by the judiciary in years to come.]
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