Introduction
1. Joint Development Agreement (JDA) means an agreement or an arrangement between the landowner and the developer wherein the land owner contributes the land to the project and the developer undertakes the construction/development of the said land into a developed estate, at mutually agreeable terms and conditions. Depending on the facts and circumstances of the case, multiple variations of this structure can be seen in the real estate sector, with the broad contours of the arrangement remaining the same.
Joint Development Agreements (JDAs) are common features in the real estate sector and are beneficial to both the landowners and the developers. The developers are not required to make huge investments for the outright purchase of the land and thereby blocking their working capitals and the landowners can reap the benefits of the expertise of the developer in obtaining higher considerations for a developed estate rather than just the bare piece of land.
In a JDA the landowner usually gets the consideration from the developer for contributing his land to the project and the said consideration may be in monetary terms or in non-monetary terms.
Monetary consideration includes specified share in the sale consideration of the project as and when the collections from the customers are received. Non-monetary consideration includes specified share in the built-up/developed estate.
Direct Tax Perspective
2. The income arising to the developer under a JDA, in the form of sale consideration of his share in the developed estate is considered as his business income and is taxed as per the applicable provisions.
The income arising to the landowner arising on transfer of title of land under a JDA, either in the form of specified share in the sale consideration or in the form of specified share in the developed estate, is considered as capital gain in his hands.
The taxability of capital gains in the hands of the landowner, arising on transfer of title of land from the land owner to the developer in a JDA has always been a litigative issue.
3. Legal Position uptill AY 2017-18
3.1 For JDAs entered into on or before 31-3-2017 :
3.1-1 Determination of the Taxable Event/Date of Transfer of Land by the landowner to the developer - Capital Gains arise on "transfer" of a capital asset. As per Section 2(47)(v) of the Income-tax Act, 1961, the expression "transfer" amongst other things 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 (4 of 1882)."
The Revenue Authorities, relying upon the above definition of transfer, have always contended that the taxability of the capital gains in the hands of the landowner, arising on transfer of title of land from the land owner to the developer in a JDA, arises as soon as the JDA is signed and entered into between the landowner and the developer.
Contrary to this, the assesses (landowners) contend that in a JDA, any consideration, either monetary in the form of specified share in the sale consideration or non-monetary in the form of specified share in the built-up/developed estate accrues to the landowner only after the construction/development of the developed estate, which entails a time period of atleast 2-3 years, and, as such, in the absence of accrual of any income in the hands of the landowners, at the time of signing/execution of the JDA, the taxable event does not arise.
3.1-2 Determination of Taxable Value of Consideration - Considering the Revenue Authorities' contention of triggering of the taxable event at the time of signing/execution of the JDA, the biggest question which arises for consideration is when the project is just on papers at the time of signing of JDA, with no real existence, what would be the taxable value of consideration in the hands of the landowner?
The Revenue Authorities contended that as per the provisions of section 50D, which reads as under:
"Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer."
The taxable value of consideration in the hands of the landowner would be the fair market value of the project, including land on the date of execution of the JDA.
This leads to even more confusion and uncertainty, considering the fact that the projects under JDA run for an average of 2 to 3 years and that the prices of real estate are subject to fluctuation, how could one determine an apt fair market value on the date of execution of JDA?
This contentious issue, to some an extent was resolved and addressed by the Hon'ble Supreme Court in its landmark judgment in the case of "CIT v. Balbir Singh Maini [2017] 86 taxmann.com 94/251 Taxman 202 (SC)".
The Hon'ble Apex Court in the said case considered the issue as to whether giving of possession of land for purposes of development under an unregistered joint development agreement could be regarded as giving rise to capital gains, and after referring to the 2001 amendment to the Registration Act, 1908, categorically held that an unregistered agreement was not covered by section 53A of the Transfer of Property Act, 1908.
Further, the Hon'ble Apex Court also considered whether the signing of the joint development agreement or giving of possession could be said to be a transaction, which had the effect of transferring or enabling the enjoyment of the immovable property, which could also give rise to capital gains. According to the Apex Court, the purpose of this provision was to bring those transactions within the tax net, where, though title of the property was not transferred, in law, there was in substance a transfer of title in fact. On a reading of the joint development agreement, the Hon'ble Court noted that the owner had continued to be the owner of the property throughout the development of the property, and had at no stage sought to transfer rights similar to ownership to the developer. At the most, only possession was given under the agreement and that too, for the limited purpose of development. The Hon'ble Apex Court, therefore, held that this clause also did not apply to the transaction, and that there was no transfer giving rise to capital gains.
Therefore, the principal ratio which emerged out of the above judgment of the Hon'ble Apex Court is that part performance of such an unregistered agreement (JDA) by the landowner, by giving possession of the property for the limited purpose of development, would not amount to a transfer, and, hence, would not give rise to capital gains.
4. Legal Position since AY 2018-19
4.1 For JDAs entered into on or after 01.04.2018 - The Finance Act, 2017 inserted a new section 45(5A) in the Income-tax Act, 1961, which reads as under:
45. (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. |
4.1-1 Determination of the Taxable Event - As per the newly inserted sub-section (5A) of section 45 of the Act, the taxable event of, i.e., the transfer of title of land by the landowner (only in the cases of individuals and HUFs) to the developer under a JDA, arises on receipt of the certificate of completion for the whole or part of the project, issued by the competent authority provided the landowner does not transfer his share in the project to any other person on or before the date of issue of said certificate of completion.
4.1-2 Determination of Taxable Value of Consideration - The newly inserted sub-section (5A) of section 45 of the Act, provides that the stamp duty value of land or building or both, of the landowner's share in the project/developed estate, on the date of issuing of certificate of completion by the competent authority, to the land owner, as increased by any monetary consideration received by the landowner, 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 u/s. 48 of the Act.
4.1-3 Legislative intent for introduction of section 45(5A) -The Memorandum explaining the provisions of Finance Bill, 2017 states as under with respect to the introduction of Section 45(5A):
"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."
The amendment thus seeks to minimise the genuine hardships that the land owner may face by taxing the capital gains in its hands for area-sharing arrangements under JDA, in the previous year in which the certificate of completion is issued and not in the year in which the JDA is entered into or the possession of the land is given to the developer pursuant thereto.
4.1-4 Unaddressed Issues in the said amendment to section 45 of the Act -
| (i) | It has not been made clear as to why the benefit of the said amendment has been restricted only to individuals and HUFs and has not been extended to other persons/assessees entering into JDAs who shall continue to bear the hardship of prepayment of taxes. | |
| (ii) | The amendment seeks to defer the tax payment from entering into the JDA till receipt of the completion certificate. However, time limit for claiming benefit of exemption from long-term capital gain u/ss. 54 & 54F continues to reckon from date of transfer (which as per Revenue Authorities' contention is the date of entering into the JDA) and has not been extended until the date of issuance of completion certificate. | |
| (iii) | It has also not been made clear as to whether the benefit of indexation on cost/improvement, as per the Explanation to section 48, would be available till the year in which completion certificate has been received or only till the year in which the JDA has been entered into. | |
| (iv) | The newly inserted section 45(5A) of the Act provides for the adoption of stamp duty value of the land or building or both, of the landowner's share in the project/developed estate, on the date of issuing of certificate of completion by the competent authority, to the land owner, as the deemed full value of the consideration received or accruing as a result of the transfer of the capital asset u/s. 48 of the Act, in line with the similar provisions u/s. 50C of the Act. However, unlike section 50C wherein a provision has been made to refer the valuation of the land and building to a valuation officer if the assessee challenges the adoption of stamp duty value, no such provision for reference to the Valuation Officer has been made in section 45(5A) of the Act. |
Conclusion
5. The recent amendments to the legislative provisions concerning the taxability of the income arising in a Joint Development Agreement (JDA), by way of insertion of a new sub-section (5A) in section 45 of the Income-tax Act w.e.f. AY 2018-19, is indeed a welcome and positive development and initiative aimed at removing the uncertainty and confusion regarding the determination of the taxable event in a JDA and the taxable value of the consideration u/s. 48 of the Act, for the purpose of taxation of the resultant capital gains in the hands of the landowners, thereby providing the much needed relief to owners of property/land, being individuals or HUFs, who enter into JDA agreements. However, in order to make it more effective and fruitful, it is indeed the need of the hour that the Legislature and the concerned enforcement agencies must take cognizance of the above mentioned unaddressed issues and address the same in right earnestness.
Refer:[2018] 98 taxmann.com 431 (Article)
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