The last decade has viewed the tremendous growth in the Real Estate; it also witnessed the growth in legal disputes regarding tax matters.
A Joint Venture between the landowner and a Developer is considered the most preferable way for the development of property.
In a Joint Development Agreement between Landowner and Developer for construction of residential buildings on a land measuring X acres of landowner, the common issues which generally arises are as following:
a) When does the Capital gain Tax arise for the landowner and developer? Is it at time of signing the joint development agreement, at the time of receiving the constructed residential buildings, or at the time of selling the residential buildings?
b) In case, if there is breakdown of joint development project, does landowner has to pay the capital gains tax.
As per S.45 (1) of the Income Tax Act, any gain arising from the transfer of a capital asset during a previous year is chargeable under the head Capital Gains in the immediately following assessment year.
However, S.45(2) of Income Tax Act, gives certain exemptions to not to treat certain assets as capital assets like any stock in trade, consumable stores or raw material held for the purposes of business or profession. And, as per the facts Developer is engaged in Construction business, so for him, constructed property is stock-in-trade. It cannot be treated as a capital asset. Any surplus that is generated by developer on sale of stock-in-trade would be chargeable to tax as business income. Therefore, Developer is not liable to pay capital gains tax.
In case, in the Joint Development Agreement, arrangement between the landowner and developer is such that developer has to bear certain portion of capital gains tax, then only developer will be liable for the payment of capital gains tax which is to be borne by the landowner or else the landowner has to bear the capital gains tax.
Now, the question arises when the incidence of capital gains tax arises?# The point where the capital gains are deemed to accrue will purely depend on the terms of Joint Development Agreement. Where the agreement is of such nature that possession is given in part performance of a contract, the liability of capital gains tax will arise on the handling over of such possession to the builder.
# If the possession is not transferred but deferred until the construction is completed, the liability to capital gains tax will arise in the year in which the developer completes the construction.
# Where the landowner and builder execute joint development agreement, if the consideration is receivable in built-up area to be constructed and handed over by the builder to the landowner, it is advisable to avoid the applicability of section 53A of the Transfer of Property Act. This can be achieved by mentioning in the agreement that license is granted to the builder to enter the premises and construct the building. The possession is retained by the landowner, which will be handed over as and when the built-up area is constructed and delivered. By this stipulation, the transfer will take place only in the year in which the built-up area is received and not before.
In the case of In re Jasbir Singh Sarkaria, 164 TAXMAN 108 (AAR- New Delhi) , it has been held that-
1) Where the agreement for transfer of immovable property by itself does not provide for immediate transfer of possession, the date of entering into the agreement cannot be considered to be the date of transfer within the meaning of sub-clause (v) of section 2(47) of the Income-tax Act.
2) To attract sub-clause (v) of section 2(47), it is not necessary that the entire sale consideration upto the last installment should be received by the owner.
3) In the case, having regard to the terms of two agreements and the irrevocable GPA executed pursuant to the agreement, the execution of GPA shall be regarded as the transaction involving the allowing of the possession of land to be taken in part performance of the contract and therefore, the transfer within the meaning of section 2(47)(v) must be deemed to have taken place on the date of execution of such GPA.
4) Once it is held that the transaction of the nature referred to in sub-clause (v) of section 2(47) had taken place on a particular date, the actual date of taking physical possession need not be probed into. It is enough if the transferee has by virtue of that transaction a right to enter upon and exercise the acts of possession effectively.
In case, the Joint Development Agreement between the Landowner and Developer breaks down and the project is not completed, then whether Landowner is liable to pay capital gains tax?
(i). If the developer is liable for the breaking down of the joint development agreement, then either the landowner will get compensation from the developer for the breach of contract or developer have to do specific performance as per the terms of the Joint Development Agreement, in both cases landowner will acquire. And, for charging what landowner has acquired from the developer under capital gains tax, it should be first comes under the definition of capital asset
In the case of CIT v. Vijay Flexible Containers  186 ITR 691 (Bom.), the assessee a firm entered into an agreement with a person to purchase the property at a particular rate. The assessee also paid a sum of Rs. 17,500 as earnest money. As the vendor failed to perform his part of the contract, the assessee was constrained to file a suit for specific performance of the agreement for sale, or in the alternative, for damages for its breach. Consent terms were arrived at in the suit and a decree was passed in favour of the assessee for the sum of Rs. 1,17,500 and interest. The question arose whether that amount received by the assessee was a capital asset.
A Division Bench of the Bombay High Court held that under the agreement to purchase the property, the assessee had acquired the right to have the immovable property conveyed to him and under the law, he was entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. The assessee could have also assigned that right. Hence, what he acquired under the said agreement for sale was therefore property within the meaning of the Income-tax Act, 1961, and consequently a capital asset. The Court further held that his giving up of the right to claim specific performance by conveyance to him of the immovable property was a relinquishment of the capital asset and therefore there was a transfer of a capital asset within the meaning of the Income-tax Act.
(ii). In a Joint Development Agreement, when the project starts, the Developer pays a consideration to the Landowner for starting the project. Even if the project is not completed because of breakdown of Joint Development Agreement, then whether the consideration paid by the Developer at the beginning of project will be treated as capital asset for Landowner?
In the case of K.R. Srinath v. Asst. CIT, 141 Taxman 268 (Mad.), Where the assessee initially paid advance under an agreement for the purchase of a property, reserving right to specific performance of the agreement, and later received consideration under another agreement under which the earlier agreement was cancelled and the vendor was allowed to sell the property to any person at any price, there was a relinquishment of right by the assessee which amounted to ‘transfer’, and the resulting gain was assessable as capital gains. Since the assessee had paid a sum for acquiring the right to acquire the sale deed, it could not be said that there was no cost of acquisition so as to take the view that there could be no assessment to capital gains.
Hence, even if the Joint Development Agreement between the Landowner and Developer breaks down, if the landowner has acquired due to Joint Development Agreement, then what landowner has acquired will come under the definition of capital asset and Income Tax department can levy capital gains tax on that capital asset.
The author can be reached at: AashishSrivastava@legalserviceindia.com / Print This Article
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