Tax issues in case of joint development arrangement
Understanding tax implications in joint development arrangements for landowners and developers, including capital gains treatment, ownership transfer, and judicial perspectives on year of transfer.
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Presentation Transcript
Tax issues in case of joint development arrangement For land owners For developers
Tax issues for land owners Capital asset or business asset. Date of transfer of ownership of asset. Value of sale consideration. Whether rural agricultural land exempt from tax. Whether long term capital asset or short term capital asset. Revenue recognition in case of business asset.
Capital asset or business asset When land can be said to be in the nature of business asset for land owner. Tax treatment in case of conversion of capital asset into business asset Section 45(2). Significant factors for land to be business asset for land owner Intention behind investment Frequency and volume of transactions Normal business of the assessee Sharing risk and reward with the developer. Accounting treatment in the books of account. Plotting or obtaining CLU of land not the sole criteria.
Year of transfer of land Capital gain is attracted in the year of transfer of land. Advance received not separately taxable. Receipt of payment from the developer not to determine the year of taxability. Year of transfer in terms of provision of section 2(47). Transfer in terms of section 53A of transfer of Property Act. The essence is that there should be transfer of ownership in asset Form of legal transfer not the sole criteria Judicial view.
Transfer in terms of section 53A of transfer of Property Act Mandatory conditions- Registered agreement Handing over physical possession Part payment of sale consideration Transferee willing to perform his part of obligation Whether mere handing over of physical possession is enough. Substance over form Transfer of ownership right. Not mere physical possession but effective contract in the nature of ownership rights in the essence.
Judicial view regarding year of transfer Chaturbhuj Dwarka Das Kapadia v/s CIT 260 ITR 491(Bom.) High court observed that if the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of contract would be relevant to decide the year of chargeability.
Charanjeet Singh Atwal v/s CIT, Ludhiana 378 ITR 244 (P&H) To put it differently, ownership is strictly a legal concept and possession is both a legal and a non-legal or pre- legal concept. The test for determining whether any person is in possession of anything is to see whether it is under his general control. He should be actually holding, using and enjoying it, without interference on the part of others. It would have to be ascertained in each case independently whether a transferee has been delivered possession in furtherance of the contract in order to fall under Section 53A of the 1882 Act and thus amenable to tax by virtue of Section 2(47)(v) read with Section 45 of the Act.
Deeming provision of transfer under section 45(5A) Applicable in the following situations- I. II. III. Land owner is an individual or HUF. Land is held as capital asset. Joint development agreement entered with the developer is registered agreement. Part or full sale consideration is received by land owner in kind. Capital gains to be chargeable to tax in the year in which certificate of completion is issued. Stamp duty value of the share of land owner on the date of issue of certificate of completion shall be treated as sale consideration for calculating capital gains as increased by monetary consideration if any. IV. V. VI.
Construction of floors on plot of land Such kind of arrangement is very common. In such cases ownership of land/house is not transferred to developer. Developer practically acts in the capacity as contractor. Sale value/stamp duty of floor retained by developer to be the cost of construction for the floors developed for land owner along with monetary consideration if any. Land owner can claim deduction under section 54/54F as entire sale consideration of floor retained by developer is invested in construction of floors for land owner.
Determination of sale consideration Sale consideration to include any advance payment/earnest money/security deposit received. Determination of sale consideration when it is percentage of sale proceeds receivable from the customers. Determination of sale consideration when land owner receives certain percentage of built up area. Whether provision of section 50D can be applied. In a situation when land owner shares revenue as percentage of built up area with the developer, whether it can be said that the nature of land becomes business asset for land owner.
Revenue recognition by land owner in case of land being business asset Definition of transfer under section 2(47) not applicable. Revenue to be recognized as per AS 9 on Revenue Recognition . Transfer of significant risk and reward of ownership significant criteria In case land owner acting as joint venture partner of developer, whether revenue may be recognized in the same manner as by the developer.
CIT v/s Balbir Singh Maini & ORS 157 DTR(SC) 273, dt. 04.10.2017 Capital gains- Accrual/ Transfer Transfer of land to developers under joint development agreement- Since the JDA among the housing society and the developers fell through for want of necessary permissions and was never registered, no transfer can be said to have taken place thereunder within the meaning of sub-clause (v) of section 2(47); further, the owner having delivered only the possession of land to the developer for the specific purpose to develop the property under the agreement and at no stage purported to transfer rights akin to ownership to the developer, sub-clause (vi) of section 2(47) is also not attracted to the impugned transaction; that apart, the assessees (members of the housing society) did not acquire any rights to receive the stipulated consideration under the JDA and, therefore, no profits or gains arose to them from the transfer of a capital asset so as to attract section 45 and 48.
Principal CIT v/s Infinity Infotech Parks Ltd. 174 DTR (Cal) 270 Transfer development agreement Assessee handing over possession of land to developer for carrying out development agreement within 61 percent of land and built up area was to be given to the developer and 39 percent built up area along with land was to be retained by assessee, no transfer resulting in chargeable capital gains took place. of land to developer under
Tax issues for developers Developers is to adopt PCM method as per guidance note on accounting for real estate transaction (revised 2012) issued by ICAI Significant factors for applying PCM All critical approvals are obtained. Completion of atleast 25 percent of the construction and development. Atleast 25 percent of the area is secured by sale agreements. Atleast 10 percent of sale revenue as per sale agreements is realized.
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