Capital Gains Arising out of Joint Development Agreements- Section 45(5A) of the Income Tax Act
Joint Development Agreements (JDA) is a quite emerging practice in the real estate sector in which the land owner enters into an agreement with a builder/ developer for the development of his land and selling the flats/ plots etc. after development. Land Owners prefer JDA because they do not have the time or expertise to develop the land and market the property on their own. On the other hand, the builder/ developer is benefitted because of JDA as he need not block his entire capital on investment in land for initiating any project.
JDAs are generally entered into either Area Sharing Model or the Revenue Sharing Model. The developer gets a share in the land and in consideration of such share in the land, he gives the landowner a share in the super built-up area of the project. This article will throw light on the provisions of taxability of JDA according to section 45(5A) of the Income Tax Act along with recent amendments made by Finance Act, 2023.
Position prior to the introduction of Section 45(5A)
To begin with, it is very clear that the land owner is liable for capital gains tax for the transfer of any land as a capital asset under JDA with any builder/ developer. Section 45 provides the basis of chargeability under the head of “Capital Gains” read with Section 2(47) which defines the term “transfer”.
Section 2(47) defines the term “Transfer”. The term “Transfer” includes not only a transaction of sale, exchange, or relinquishment of any capital asset rather the scope of the term “transfer” is quite wider. The scope of the term “Transfer” can be understood from the reading of the clause (v) and (vi) to Section 2(47) of the Income Tax Act as below:
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“Clause (v): any transaction allowing possession of any immovable property to be taken or retained in part performance of a contract under Section 53A of Transfer of Property Act.
Clause (vi): any transaction which has the effect of transferring or enabling enjoyment of any immovable property.” |
The real estate transactions involving a JDA will certainly fall under the purview of the above clauses (v) & (vi). Thus, the term “transfer” will include any agreement for joint development entered between the land owner and the builder/ developer. Now the question arises about the taxability of JDAs under the head “Capital Gains”.
Refer to Section 45 of the Income Tax Act, the taxability under the head “Capital Gains” arises in the year in which the transfer of capital assets takes place (with certain exceptions). Therefore, the liability for capital gains tax arises in the hands of the land owner in the year in which he enters into a joint development agreement. This view was affirmed by judicial fora in various judgments.
This legal position was troubling the land owners as the transfer happens on the date of entering into the JDA itself, necessitating the land owners to discharge tax liability in the year of transfer even in the absence of receipt of any consideration, thereby resulting in undue financial stress and hardship for them. The prevailing law obliged the land owner to discharge the tax liability before the completion of the project and the actual receipt of consideration. Considering this, the Government introduced Section 45(5A) in the Income Tax Act to give relief to land owners entering into JDAs.
Section 45(5A) of the Income Tax Act
We have discussed the tax implications of JDAs before the introduction of section 45(5A) of the Income Tax Act. With a view to removing undue hardship to land owners, Finance Act 2017 inserted sub-section (5A) to Section 45 of the Income Tax Act w.e.f. 1st April 2018 (A.Y. 2018-19). Let’s have a reading of Section 45(5A):
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“(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: |
Thus, according to Section 45(5A), the capital gains would arise in the hands of the land owner in the year in which the completion certificate is issued by the authority on completion of the project or part of the project, as the case may be. Section 45(5A) can be summarized below:
- Section 45(5A) is applicable to individuals/ HUF landowners
- Applicable where the capital asset subject to transfer under the JDA is land or building or both
- Applicable only when there is a ‘Specified Agreement’. Specified Agreement means a registered agreement in which the land owner (individual or HUF) allows the builder/ developer to develop a real estate project on land or building, 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.
- In the case of JDAs, the liability for capital gains tax arises in the year in which the project is completed/ partially completed. However, according to the proviso to section 45(5A), where the land owner transfers his share in the project before the date of issuance of the completion certificate, the capital gains shall be deemed to be the income of the year in which he transfers his share in the project.
Amendment in Section 45(5A) by Finance Act 2023
Presently, Section 45(5A) of the Income Tax Act provides that capital gain shall arise in the hands of an individual/ HUF on the transfer of land or building or both, under a specified agreement (JDA) and shall be chargeable to income tax in the year in which the certificate of completion for the whole/ part of the project is issued by the competent authority.
For computing the capital gains, the full value of consideration is taken as the stamp duty value of the share in the project, as increased by the consideration received in cash. From the aforementioned categoric definition of the full value of consideration, incorrect inference has been drawn that consideration received in forms other than cash shall not form part of the full value of consideration for computing the capital gains which is not in line with the intent of the law as provided under Section 194-IC of the Act (Deduction at source on payments made under specified agreements).
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Therefore, Section 45(5A) has been amended by the Finance Act, 2023 so as to provide that the full value of consideration shall be taken as the stamp duty value of his share as increased by any consideration received in cash or by a cheque or draft or by any other mode. This amendment will take effect from 01-04-2024 i.e. AY 2024-25 and onwards.
Disclaimer: The above article is meant only for educational purposes and does not carry any persuasive value. Therefore, the readers are advised to act in consultation with any professional before applying the information contained in this article. Taxwink is not responsible for any loss or damage caused to any person on account of any information contained in this article.
About Author: The article is contributed by CA Naveen Goyal who is a qualified Chartered Accountant with an experience of over 16 years in the field of Direct & Indirect Taxes. He is a prolific writer with a zeal to share knowledge on various issues pertaining to taxation laws in India. He can be reached at: support@taxwink.com
