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from India Tax & Regulatory Services
Tribunal, in the case of a Joint Development Agreement, holds that capital gains taxable in the year of receipt of possession of the constructed area, in the absence of any construction and any willingness to perform by the
developer in year of agreement
4 March 2021
In brief
Recently, the Bangalore bench of the Income-tax Appellate Tribunal1 (Tribunal) held that transfer in case of a Joint Development Agreement (JDA) shall be taxable in the year of hand over of possession of the constructed area, as per sections 2(47) and 45 of the Income-tax Act, 1961 (the Act), and not in the year of execution of the JDA. The Tribunal observed that there was no willingness to perform the obligations in the absence of
commencement of construction activity. Additionally, plan approval or municipal authority sanction was not obtained. The provisions of section 50C of the Act are not applicable to a case where there is no registration of the property in transfer.
In detail
Facts
• The taxpayer, an individual, entered into a JDA with a developer for the development and construction of residential flats and commercial space on the taxpayer’s land for 21.94% share in the constructed area in assessment year (AY) 2004-05.
• The taxpayer had initially offered income to tax as capital gains as and when he received his share of built- up area in AY 2012-13. The consideration was computed as a formula of square feet received multiplied with the cost of construction per square foot of the constructed area.
• The tax officer (TO) disregarded the submissions of the taxpayer and enhanced the consideration by adopting the guideline value issued by the Government of Karnataka.
• Bef ore the Tribunal, the taxpayer, while disputing the TO’s, claim also raised additional grounds contending that the transfer of capital asset under section 2(47) of the Act occurred in the year of entering into the JDA i.e. AY 2004-05, and not in the year in which he received possession of the constructed area i.e. AY 2012- 13.
Issues before the Tribunal
• Are capital gains taxable in the year in which the JDA is entered into or in the year in which the constructed share of the taxpayer/ landowner has been handed over to the taxpayer?
• Is section 50C of the Act applicable in case of transfer of property not subject to registration?
1 ITA No. 988/Bang/2018
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Taxpayer’s contentions
• The transaction of taking over the possession of super built-up area per se cannot be regarded as transfer as per section 45 read with section 2(47) of the Act.
• The date of transfer stands crystallised on the date of entering into the JDA coupled with a General Power of Attorney. In AY 2012-13, the taxpayer had only acknowledged the possession of the commercial space f or the transfer that had materialised on the date of the JDA.
• The exceptions provided under section 45(1) of the Act with regard to the year of transfer and year of taxability are exhaustive and do not call for any interference in this case.
• The JDA states that the landlord shall not revoke the rights so granted till the completion of development and sale of built-up area. The act of the taxpayer and the developer, can beyond any doubt of uncertainty, be concluded as a contract within the meaning of section 53A of the Transfer of Property Act, 1882 (TOPA).
The willingness to perform the contract was established since the structure was completed, and there were no encumbrances to disrupt the terms of the JDA. Accordingly, transfer took place in the year of entering the JDA, and the income for AY 2012-13 ought to be deleted.
• The transf er value for the purpose of capital gains shall be the built -up cost of the asset (INR1,500 per square f eet) and not the stamp duty value of the capital asset (INR 2,200 per square feet). The taxpayer only received the constructed property as per the requirement of the JDA in the said year.
Revenue’s contentions
• The conditions stipulated in section 2(47)(v) of the Act (i.e. 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 ref erred to in section 53A of TOPA) were not complied with in AY 2005-06, but were satisfied in AY 2012-13.
• The consideration for transfer should be based on the guidance value (INR 2,200 per square feet) as per section 50C of the Act.
Tribunal’s ruling
• Although it was initially held by various courts that the capital gains are to be assessed in the year in which the JDA has been entered into between the land owner and the developer, considering the fact that in many cases, the JDA was not acted upon by the developer, different views have been expressed regarding the year of assessability, based on the facts and circumstance of each case.
• The Tribunal held that ‘willing to perform’ for the purpose of section 53A of the TOPA is vital.
• On reading the terms of the JDA, the Tribunal observed the following in relation to AY 2005-06:
─ No building plan was approved or produced by the developer. To enable the execution of the JDA, the plan must be approved by the competent authority.
─ There was no movement towards constructing the scheduled property.
─ The sanctions from the City Municipal Council were obtained subsequently.
─ The developer had not incurred any cost of construction.
• Accordingly, in AY 2005-06, the developer/ transferee has neither performed nor was willing to perform his part of its obligations as stipulated in the JDA.
• Further, the Tribunal noted that the clauses of the JDA provide that the taxpayer is only permitted to provide a license to the developer to develop the schedule property and that the legal ownership of the property remains with the taxpayer.
• It held that the developer was not willing to perform his part of obligations as stipulated in the JDA in AY 2005-06 within the meaning as expressed in section 53A of the TOPA. As the contractual obligation of the developer was not met in AY 2005-06, it does not invoke section 2(47)(v) of the Act. Therefore,
consideration has been rightly brought into taxation in AY 2012-13.
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• The Tribunal also held that section 50C of the Act is applicable only when there is actual registration of property on transfer. In this case, the taxpayer’s share of constructed area is not the subject matter of any registration. The taxpayer has only received his share of constructed property, and hence, the provisions of section 50C of the Act cannot be invoked.
The takeaways
• The case relates to AY 2012-13, which was before the introduction of section 45(5A) in the Finance Act, 2017, wherein it is explicitly stated that the year of chargeability in the case of JDA is the year in which the certif icate of completion for the whole or part of the project is issued by the competent authority. Section 45(5A) of the Act cannot be read retrospectively.
• The Tribunal has emphasised that to invoke section 2(47) of the Act, all ingredients of section 53A of TOPA need to be satisfied. ‘Willing to perform’ is vital for determining the point of taxation. Subsequent completion of the project without encumbrances is not a satisfactory test to determine the willingness to perform at the point of execution of JDA, and such willingness has to be determined based on the facts of the case.
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