CAPITAL GAINS ON DEVELOPMENT AGREEMENT
What is Joint Development Agreement?
A Joint Development Agreement is an agreement between a landowner and a real estate developer to construct new projects. The constructor carries out construction and legal work in a joint development of the capital, whereas the landowner provides the land.
Under the current provisions of section 45, capital gain is taxable in the year in which the transition occurs, except in certain situations. The definition of 'transfer' includes, inter alia, any arrangement or transaction where any rights are handed over in execution of part contract performance, even if the legal title has not been transferred. In such a scenario, execution of Joint Development Agreement between the owner of immovable property and the developer triggers the capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project.
After the Bombay High Court decision in the case of Chaturbhuj Dwarkadas Kapadia, until the recent amendment in the 2017 Union Budget, the incidence of taxation by way of capital gains on the execution of a development agreement of an immovable property by an owner of an immovable property was a much litigated issue.
A new sub-section (5A) has been added in section 45 to provide that, in the case of an assessee who is an individual or Hindu undivided family and who signs a particular project creation agreement, the capital gains are taxable as income from the previous year in which the completion certificate is given by the competent authority for the whole or part of the project.
It was further proposed in the Union Budget 2017 to provide that, on the date of issue of the said certificate of completion, the stamp duty value of its share, whether land or building or both, in the project as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset.
It has also been proposed to provide that the benefit of this scheme will not apply to an assessee who transfers his share of the project to any other person on or before the date of issuance of said completion certificate.
It was also proposed to provide that, in such a situation, the capital gains as determined under the general provisions of the Act shall be deemed to be the previous year's income in which such transfer took place, and shall be calculated in accordance with the provisions of the Act without taking into account these proposed provisions.
It was also proposed to incorporate a consequential amendment in section 49 to ensure that the cost of obtaining the share in the project being land or building or both, in the hands of the landowner, is the sum that is deemed to be the maximum value of consideration under the proposed clause.
These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years. It is also proposed to incorporate a new section 194-IC into the Act to provide that, in the event that any monetary compensation is due under the agreement stated, tax at a rate of ten per cent is exempt from such payment. This modification will take effect from 1 April 2017.
Section 45(5) recently introduced in the 2017 Union Budget is reproduced as:
[(5A) Notwithstanding anything contained in subsection ( 1), where a capital gain arises from the transfer of a capital asset to an assessee, an individual or an undivided Hindu family, a land or a building, or both, under a specified agreement, the capital gains shall be subject to income tax as earnings of the preceding year in which the completion certificate for the whole or part of the income tax is imposed.
Provided that the provisions of this sub-section do not apply where the assessee transfers his share of the project on or before the date of issue of the said certificate of completion and the capital gains are deemed to be the earnings of the preceding year in which such transfer takes place and the provisions of this Act, other than those of this sub-section, apply to p
Explanation.—The term for the purposes of this subsection --
I "Competent authority" means the authority authorized to approve, for the time being, the building plan by or under any law;
(ii) "specified agreement" means a registered agreement in which a person owning a land or a building, or both, agrees to allow another person to develop a real estate project on that land or a building or both, with or without payment of part of the consideration in cash, in respect of a share, being a land or a building or both in that project;
(iii) 'stamp duty value' means the value adopted or assessed or assessed by any government authority for the purpose of paying a stamp duty in respect of an immovable property that is a land or a building or both.
194-C.I. Notwithstanding anything found in section 194-IA, any person liable for paying to a resident any amount by way of calculation, not taking into consideration in kind, pursuant to the agreement referred to in subparagraph (5A) of section, shall at the time of crediting such sum on the payee 's account or at the time of payment in cash or by issue of a check or draft or by any other mode whom the payeee is entitled to pay in cash
Disclaimer: The above information is for educational purposes only.