Question & Answer

Prem Lata Bansal, Sr. Advocate

Q. In Joint Development Agreement entered into by the owner of the land with the builder, when the transfer of land takes place and when the owner is liable to tax?

A. When the owner of the land enters into an agreement with a developer for the purpose of developing the land, the terms of the contract would indicate when the transfer would take place. Where the owners retains any right in the constructed area that may come-up in the future, it would not be a case of a transfer taking place at the time of the execution of the agreement. Merely because de facto possession of the land is made over for the purpose of making a construction thereon it would not imply that possession is made over for the enjoyment of the property. It would be in de facto possession under the de jure possession of the owner and only for the purpose of undertaking the construction at the land in question.

The issue requires interpretation and reconciliation of section 2(47)(v), section 45 of the Income Tax Act and section 53A of the transfer of Property Act.

Section 2(47)(v) of the Act provides as follows:-

“47 ‘transfer’, in relation to a capital asset, includes – ….

 (v) 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….”

Section 45 makes the profit or gains arising from the transfer a capital asset, chargeable to tax.

On a plain reading of the provision, it is evident that the transfer would have taken place within the meaning of such provision if such transfer had been made over pursuant to an agreement in such regard, notwithstanding the documentation thereof not being completed. In particular, it is only the kind of possession that is protected u/s 53A of the TPA which is to be regarded as transfer and mere handing over of possession of an immovable property for any other purpose may not fall within the scope of the word “transfer” in section 2(47)(v) of the Act.

Thus in the cases of JDA, till such time that the construction came-up and the constructed area was made over to the owner of the land, it cannot be said that possession of the balance land, in the sense that the expression carried in section 2(47)(v), had been made over by the owner to the developer. The right of the developer to retain possession and protect such possession u/s 53A of the TPA can never had arisen prior to the construction being completed and the apportionment effected. In terms of Section 45(1) of the Act, the expression “chargeable to income tax” under the head “capital gain” operated on “any profit or gains arising from the transfer of a capital asset”. There can be no tax payable unless there any profit or gain that has been arisen. The judgement of Calcutta High Court in the case of PCIT v. Infinity Infotech Parks Ltd. (2018) 407 ITR 137 (Cal) is a complete answer to the present query.

Now sub-section (5A) is inserted in section 45 by the Finance Act 2017 w.e.f. 01.04.2018 which starts with non-obstante clause and states as under:-

“(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:”

This provision states that the capital gain chargeable to tax arises in the year in which certificate of completion for the whole or part of the project is issued by the competent authority. Thus now there is no controversy as to when capital gain arises. However, this provision applies to individual and HUF only.

Hyderabad Tribunal in the case of Adi Narayana Reddy Kummeta v. ACIT (2018) 91 360 (Hyd-Trib) have held that section 45(5A) being substantive in nature, cannot be applied to development agreement entered into prior to 01.04.2018, in which section 2(47)(v) would apply.