Sub-section (5A) was
inserted in section 45 of the Income-tax Act (the Act) with effect from 01.04.2018,
i.e., from the assessment year 2018-19. According to section 45(5A) of Income Tax Act, 1961, 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.
Legislative
intent for introduction of Section 45(5A)
The Memorandum explaining the
provisions of Finance Bill, 2017 states as under with respect to the
introduction of Section 45(5A):
“With a view to minimise the genuine hardship which the owner of land may
face in paying capital gains tax in the year of transfer, it is proposed to
insert a new sub-section (5A) in section 45 so as to provide that in case of an
assessee being individual or Hindu undivided family, who enters into a
specified agreement for development of a project, 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.”
Text of Section 45(5A)
(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 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 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 Government for the purpose of
payment of stamp duty in respect of an immovable property being land or
building or both.’.
To Whom the Provisions of Section 45(5A)
is Applicable
The provisions of section 45(5A) under
collaboration agreement will be applicable only in case the land owner is an
Individual or a HUF.
Provisions of section 45(5A) shall not
apply where the assesse transfers his share in project on or before the
date of issue of the said certificate.
The Section
45(5A) shall not apply where the assessee transfers his share in the project on
or before the date of issue of 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 the sub-section, shall apply for the purpose of determination of full value
of consideration received or accruing as a result of such transfer.
KEY NOTE
The Section 45(5A) would not have
any impact on the tax liability arising from JDAs entered into by individuals
and HUFs in respect of immovable property held as stock-in-trade.
Taxability of Capital gain [Section
45(5A)]
Where the Individual/ HUF entering into specified agreement
for development of project
(a) Where the Individual/ HUF transferring his share in the
project on or after the date of issue of completion certificate
Where
the capital gain arises to the assesse, being an individual of HUF, from the
transfer of capital asset, being land or building or both, under a specified
agreement, the capital gain 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.
(b) Where the
Individual/ HUF transferring his share in the project on or before the date of
issue of completion certificate
The capital gains shall be deemed to be the income of the previous year
in which such transfer takes place.
KEY NOTE
For the purpose of section 48, the Stamp Duty
Value(SDV) of his share, on the date of issue of said certificate, as increased
by the consideration received in cash, if any, shall be deemed to be the full
value of consideration.
“Specified agreement”
The term
“specified agreement” is defined to mean 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
[Explanation (ii) to Section 45(5A).
What is Joint Development
Agreement (Specified agreement)?
In layman terms,
assume that Mr. ‘A’ own a residential land and builder approach him to construct
flats on his land. This arrangement is beneficial for both the parties. The
reason being Mr. ‘A’ as a landowner will unlock the value of his land without
any additional investment of Single Rupee. From builder’s perspective, he need
not invest money to buy land. He can use the same money to construct the
property. Therefore, for both the parties the capital requirement is minimal.
They enter into a Joint Development Agreement wherein landowner pool his land
and builder bear the cost of construction to complete the project.
In a Joint
Development Agreement (JDA), a landowner
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 developer undertakes
the responsibility for the development of property, obtaining approvals, launching,
and marketing the project with
his financial resource. The land owner may get consideration in the form of
either :
(a) Lump
sum consideration; or
(b) Percentage
of sales revenue, or
(c) A
certain percentage of the newly constructed project on the said piece of land
This depends on the terms and conditions, mutually agreed upon by the parties. In this manner, a JDA helps to pool the resources of both the developer as well as the landowner together. After earmarking a certain portion to the landowner, the remaining area is sold off by the developer directly.
Taxability of Joint
Development Agreement from the point of view of Land Owner
Land owners liable to capital gains only when the builder
completes the construction and gets the completion certificate.
As per the new section
45(5A), capital gains to the land owner arise only after construction of the
property is completed and the completion certificate is obtained
from the competent authority by the builder/developer.
Taxability
of Joint Development Agreement from the point of view of Builder/ Developer
In case of developer, the nature
of income would be business income. The property would constitute stock in
trade for him. Overall, his income comprises of sale proceeds he gets from the
buyers of the developed land and the cost would involve the expenditure
incurred on development of the property.
Capital gains earned by the owner in a JDA will be taxed only in the year
in which Certificate
of Completion for the project (i.e. new property) is issued
Capital gains earned by the owner in a JDA
will be taxed only in the year in which Certificate of
Completion for the project (i.e. new property) is issued by
the competent authority. It is clarified that even if completion certificate is
issued for part of the project, it will be sufficient to trigger the tax. In
this situation also, the owner would not receive cash. But then he will have to
generate cash by selling the new property.
What will be the full value of
consideration in the hands of the land owner
The
full value of consideration in the hands of the land owner will be stamp duty
value of the portion that the land owner gets after completion of construction.
If the builder pays the
land owner any excess amount in cash other than giving him his share of the
building after construction then the said amount as received by the land owner
in excess of his share of building will be added to the Full value of consideration.
Summary of the Full Value of consideration (FVC) as
follows:
FVC (in the
hands of the land owner) = Stamp duty value of land owner’s portion +
consideration received in cash (if any).
Taxation will not be the same if the
land owner before the completion of construction by the builder sells his
portion to some other person
The provisions of sub-section (5A)
shall not apply where the land owner transfers his share in the project on or
before the date of issue of certificate of completion, and capital gains shall
arise to the land owner as per the other provisions as applicable under the act
and capital gains shall be deemed to be the income of the previous year in
which such transfer takes place.
Cost of acquisition of the share in the project being land of
Building or both [Section 49(7)]
Where the capital gain
arises from the transfer of a capital asset, being share in the project, in the
form of land or building or both, referred to in sub-section (5A) of section 45, not being the capital asset referred to in the
proviso to the said sub-section, the cost of acquisition of such asset (i.e. acquisition of the share in the project being land or building or both, in the hands of the land owner), shall be the amount which
is deemed as full value of consideration in that sub-section 5A of Section 45.
Cost of construction of the land
owner’s portion that the owner buys after construction of the complete
structure
In a collaboration agreement, if after
reconstruction the owner buys a portion of the property and pays the builder
for the cost of construction on his portion of the property then the payment
given by the owner to the builder for the owner’s portion is construction of a
new residential house which is eligible for exemption under section 54 or 54F
depending on the nature of capital asset sold as per the terms of agreement.
If the owner of the property sells his
portion of the property that he acquired after the collaboration agreement
within three years of acquisition, then the exemption taken by the owner in respect
of the construction of property will be withdrawn in the year of sale of his
portion and the income will be treated as short term capital gain in the year
of sale.
On what date will the stamp duty value
be considered for calculating full value of consideration (FVC)?
For the purpose of calculating FVC,
stamp duty value as on the date when completion certificate is obtained will be
considered.
Provisions Illustrated [Section 45(5A)]
S. No.
|
Particulars
|
Amount (in Rs.)
|
(i)
|
Mr. ‘X’ purchased a residential plot on 01.01.2000 for
|
50,00,000
|
(ii)
|
FMV of plot as on 01.04.2001 is
|
65,00,000
|
(iii)
|
ABC Builders enters into a development agreement with Mr. ‘X’ on
01.05.2017 on the following terms and conditions,
(a)
Mr. ‘X’ will hand over the possession of plot to
alpha builders on 01.05.2017.
(b)
ABC Builders will pay a cheque of 60,00,000 to
Mr. ‘X’ on 01.05.2017.
(c)
ABC Builders will construct 10 residential units
on the plot of land and will give 6 units to Mr. ‘X’. The 10 units will be
completed by 30.06.2019 and on that date 6 units will be handed over to Mr. ‘X’
(d)
The stamp duty value of plot as on 01.05.2017 is
2 crore.
(e)
The stamp duty value of each flat on 30.06.2019
is 45,00,000.4
|
Case
1: The project completion certificate is
issued by the authority on 30.06.2019. 6 units are handed over to Mr. ‘X’ on
30.06.2019.
Case 2: The
project completion certificate is issued by the authority on 30.04.2020 and on
that date the stamp duty value of each flat is Rs. 50,00,000. 6 units are
handed over to Mr. ‘X’ on 30.04.2020.
Analysis of Example:
·
There is a ‘transfer’ on 01.05.2017 in the hands of
Mr. ‘X’ since he has given possession of residential plot pursuant to
development agreement.
·
However as per section 45(5A) introduced by Finance
Act 2017, the capital gains shall not be taxable in the previous year
31.03.2018 but shall be taxable in the previous year in which the certificate
of completion is received from competent authority.
·
Section 45(5A) is applicable since the assesse is
an Individual.
·
The holding period of residential plot shall be
taken from 01.01.2000 to 30.04.2017 i.e. Long Term.
·
As per section 55, the COA of plot is Rs. 50,00,000
or FMV as on 01.04.2001, whichever is higher. Therefore, COA of plot is Rs. 65,00,000
·
Sale Consideration= SDV on the date of issue of
completion certificate of his share plus consideration received in cash.
Solution : Capital gain shall be worked out as
follows:-
|
|||
Case 1: Assessment Year 2020-21
|
|||
S. No.
|
Particulars
|
Working
|
Amount
(in Rs.)
|
(i)
|
Sale Consideration
Stamp Duty Value (SDV) of 6 flats on 30.06.2019 + Cash received |
(45,00,000 X 6 + 60,00,000)
|
3,30,00,000
|
(ii)
|
Less: Indexed COA
|
65,00,000
X272
100
|
1,76,80,000
|
(iii)
|
Long Term Capital Gain
|
1,53,20,000
|
|
Case 1: Assessment Year 2021-22
(i)
|
Sale Consideration
Stamp Duty Value (SDV) of 6 flats on 30.04.2020 + Cash |
(50,00,000 X 6 + 60,00,000)
|
3,60,00,000
|
(ii)
|
Less: Indexed COA
|
65,00,000 X 272
100
|
1,76,80,000
|
(iii)
|
Long Term Capital Gain
|
1,83,20,000
|
Liability
to Deduct TDS under Section 194 IC
If the property owner receives any monetary
consideration under the JDA, the payer will have to deduct tax at source @ 10%.
There is no TDS on paying consideration by way of share in the new property.
Section 194-IC was inserted by
the Finance Act, 2017 with effect from 01.04.2017 to deduct TDS on monetary
consideration. According to section 194-IC, if under a joint development agreement,
any developer pays any amount to the land owner in addition to the share in the
project, then such builder shall deduct TDS @ 10 % on such payment.
This section overrides the provisions contained in
section 194-IA of the Act, which provides for deduction of TDS @ 1 % on
transfer of immovable property where consideration exceeds Rs 50 Lakhs.
Provisions
of Section 194-IC in Brief :
v There is a TDS applicable on
collaboration agreements @ 10% with effect from Assessment year 2018-19.
(Section 194IA with 1% TDS is not applicable in this case).
v Under this section 194IC, the builder has to deduct
tax @ 10% on payment of any amount in cash to the land owner for buying his
share of property under a collaboration agreement.
v TDS will be deducted only on the amount paid in
cash/cheque by the builder to the land owner and the value or stamp duty value
of the land owner’s portion will not be added for the purpose of calculating
TDS.
v TDS will be deducted on the entire amount paid in
cash/cheque and not on the amount any capital gains that may arise to the land
owner.
GST
Applicability to Joint Development Agreement
As per Notification No. 4/2018 – Central Tax (Rate) dated : 25.01.2018,
the GST is applicable only on the Landowner and developer transaction.
So When a developer enters into a
development agreement with a Landowner, GST would become payable by the
Landowner when the developer transfers possession or the rights in the
constructed complex, building or civil structure, to the Landowner by entering
into a conveyance deed or allotment letter.
Hence, when the Landowner receives a constructed property
from the Developer in exchange for providing land, the Landowner would become
liable for payment of GST. The GST rate applicable on such a
transaction would be 18%.
Disclaimer: The contents of this document are solely for
informational purpose. It does not constitute professional advice or a formal
recommendation. While due care has been taken in preparing this document, the
existence of mistakes and omissions herein is not ruled out. Neither the author
nor its affiliates accepts any liabilities for any loss or damage of any kind
arising out of any inaccurate or incomplete information in this document nor
for any actions taken in reliance thereon. No part of this document should be
distributed or copied (except for personal, non-commercial use).
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