Capital Gains Tax & Joint Development Agreement

A project proposal made in partial fulfilment of the course Taxation Laws I

SUBMITTED BY:

Sandhi Grewal

Roll No.-1557

B.A. LL.B. (Hons.)

SUBMITTED TO:

Dr. G.P. Pandey

Faculty of Taxation Laws

AUGUST 2019

CHANAKYA NATIONAL LAW UNIVERSITY, MITHAPUR PATNA,

I hereby declare that the work reported in the B.A. LL.B (Hons.) Project
Report entitled ‘Capital Gains Tax & Joint Development Agreement’
submitted at Chanakya National Law University, Patna is an authentic record
of my work carried out under the supervision of Dr. G.P. Pandey. I have not
submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my Project Report.

Sandhi Grewal

Roll no: 1557

B.A.LL.B(Hons.)

7th Semester

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 ACKNOWLEDGEMENT

I would like to thank my faculty Dr. G.P. Pandey, whose assignment of such
relevant topic made me work towards knowing the subject with a greater
interest and enthusiasm and moreover he guided me throughout the project. I
owe the present accomplishment of my project to my friends, who helped me
immensely with sources of research materials throughout the project and
without whom I couldn’t have completed it in the present way. I would also like
to extend my gratitude to my parents and all those unseen hands which helped
me out at every stage of my project.

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 Table of contents

Declaration page

Acknowledgement

1. Introduction

2. Direct tax perspective

3. Cases

4. Conclusion

Bibliography

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 1. INTRODUCTION

In a Joint Development Agreement, land owner contributes his land and enters into an
arrangement with the developer to develop and construct a real estate project at the
developer’s cost.The key feature of JDA is that the land owner contributes land and
developer undertakes the responsibility of obtaining approvals, property development,
launching and marketing the project with his financial resource.

The land owner may get consideration in the form of either

 lump sum consideration or

The scope of Capital Gains in Joint Development Agreement is a vast one and is made with
an eye on the tax consequences of the transaction.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.

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.1

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
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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.

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.2

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, [2007]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.

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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.

AIMS AND OBJECTIVES

1. To know about do property developers pay capital gain tax.

2. To know how does a joint development agreement work.

3. To know about do property developers pay capital gains tax?

HYPOTHESIS

Giving of possession for purposes of development under an unregistered joint development

RESEARCH METHODOLOGY

The researcher will be using doctrinal method of research for this research work.

Sources of data

Primary source: Income Tax Act, 1961

Secondary source: Books, journals, articles, internet (websites).

Limitation and scope of the study

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Owing to the large number of topics that could be included in this project, the scope of this
research paper is exceedingly vast. But, due to lack of time, etc., this research work is wholly
based on doctrinal method of research. This research work does not rely on non-doctrinal or
empirical research.

2. DIRECT TAX PERSPECTIVE

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.

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.3

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

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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.

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 lead to even more confusion and uncertainty, considering the fact that the projects under
JDA run for an average 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 judgement in the case of “CIT v. Balbir Singh Maini”Civil
Appeal No. 15619 of 2017.4

The Hon’ble Apex Court in the said case have 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, have 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

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ibid

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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.5

Therefore, the principal ratio which emerged out of the above judgement 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 did not give rise to capital gains.

Legal Position since AY 2018-19:

The Finance Act 2017 has 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

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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.]6

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Ibid

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 3. CASES

1. re Jasbir Singh Sarkaria, [2007]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.7

2. CIT v. Vijay Flexible Containers [1990] 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

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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.8

3.K.R. Srinath v. Asst. CIT,[2004] 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.9

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 4. CONCLUSION

The recent amendments in the legislative provisions concerning the taxability of the income
arising in a Joint Development Agreement (JDA), by way of insertion of a new subsection
(5A) in section 45 of the Income Tax Act. 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, and 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 and
earnest perspective.

The SC has reiterated that for a transaction to be regarded as a ‘transfer’ under Section
2(47)(v) of the IT Act, all the conditions of Section 53A of TOPA should be satisfied and
possession of the property should be obtained by the transferee in part performance of the
contract. It also observed that only real income should be brought to tax and not notional
income.

We have discussed here the taxability of income earned from a JDA in the light of the SC
decision. It is pertinent to note that there could be several other forms of JDAs, which may
raise several other issues regarding taxation of income accruing or arising there from,
depending on the terms and conditions of such joint development agreement.

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 BIBLIOGRAPHY

Income Tax Act, 1961

Websites

https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

https://indiankanoon.org/doc/1598968/

https://indiankanoon.org/doc/1270365/

https://indiankanoon.org/doc/205317/

https://indiankanoon.org/doc/2171/

https://taxguru.in/income-tax/joint-development-agreements-jdas-income-tax-perspective.html

http://www.legalserviceindia.com/article/l305-Capital-Gains-Tax-&-Joint-Development-
Agreement.html

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