The taxability of capital gains arising on transfer of title to land from the land owner to the developer in a Joint Development Agreement (JDA) has always been a heated issue. The taxation of Joint Development Agreement was never jointly agreed by the A.O. and the Assessee. There were a few hiccups in the law that were driving a way for litigation from decades:
Irrational determination of date of transfer to be the date on which JDA is entered, by verbatim application of Section 2(27) of the Income Tax Act, 1961.
Vague mode of determination of sale consideration on execution of JDA using fair market value by application of Section 50D of the Income Tax Act, 1961. The fair market value arrived by assessee never appeared to be fair to the A.O. and vice verse!
Both these issues have been resolved in the recently announced Budget and let’s analyse the same.
If a developer makes an outright purchase of land in the initial stages of the project, given the fact that the land prices have been ever-increasing at a sky rocketing speed, would lead to huge investment at the start of the project without any revenue generation for few years leading to cash crunch to the developer. Hence the model of JDA’s got fancied in the real estate market and the developer would join hands with the landowner leading to a two way win-win situation:
Benefit to Developer: No heavy initial investment. Payment to landowner can be made as and when collections are made from the customer or by sharing of the built up area with the landowner.
Benefit to Landowner: Landowner with low technical insights on real estate development can now reap the benefits of higher consideration on sale of developed estate than outright sale of land.
OPERATION OF JDA:
In JDA, the share of consideration with the landowner might be either of the following ways:
Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the sale consideration of the project as and when the collections from the customers are made.
Non Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the built up area with the landowner.
TAXABILITY UNTIL NOW:
The taxability of JDA in the hands of the developer is under business income and in the hands of the landowner it is under capital gain. (I would restrict the discussion to capital gains).
Determination of date of Transfer:
Capital Gains arise on “transfer” of a capital asset. As per Section 2(47) of the Income Tax Act 1961, the word “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 insection 53A of the Transfer of Property Act, 1882 (4 of 1882)”
This clause gave a deemed effect of transfer on satisfaction of the following conditions:
1. There should be a contract for consideration in writing and same should be signed by the transferor;
2. The contract should be for transfer of immovable property;
3. The transferee should have taken possession of the property and has done something for furtherance of the contract;
4. The transferee should be ready and willing to perform his part of the contract; and
5. In this case even without execution of sale deed, the transferee acquires the right in the property and the transferor cannot claim any right in respect of property under consideration other than the rights expressly provided in the terms of contract.
All the above conditions analysed in the case of JDA:
|1||The JDA provides for the consideration, either monetary or non monetary in most cases.|
|2||The JDA deals with the transfer of immovable property / rights in the immovable property|
|3||In most cases the developer undertakes an irrevocable power of attorney in his favour to deal with the land, to obtain permission for development, to develop the property etc. Further in most cases the developer gives a security deposit to the land owner on the execution of the JDA.|
|4||Both the landowner and developer are willing to perform their part of the JDA|
|5||Sale deeds are generally registered in the name of the ultimate buyer to avoid the intermediate stamp duty cost however the developer undertakes an irrevocable power of attorney in his favour.|
Considering the above, the assessing officers contented that the date of execution of the JDA was the date of transfer of the capital asset. However it is worth to note that on the date of execution of the JDA, the landowner has not liquidated the land and has no funds to pay the taxes and hence this appeared irrational and hence led to litigation. Further in the absence of funds the landowner was also unable to claim the benefits under the Section 54 series, causing genuine hardship to the assesses.
Determination of Consideration:
Considering that the land owner is required to pay the taxes on the date of execution of JDA, the biggest question is that when the project is just on the JDA with no real existence, what will be consideration. For this purpose I would like to draw attention to Section 50D of the Income Tax Act, 1961, which says,
“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.”