Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.
Joint Development Agreements (JDA) are prevalent in India as they are beneficial both for the owner and the developer. The owner gets a better built house and the developer gets his remuneration either in the form of a part of the building or money. Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.
Thus, land is contributed by the land owner and the cost of development and construction is incurred by the developer. The land owner may get consideration in the form of either lump sum consideration or percentage of sales revenue or certain percentage of constructed area in the project, depending upon the terms and conditions agreed upon between them. In this manner, the resources and efforts of land owner and developer are pooled together so as to bring out the maximum productive result. However, as is the case with any business deal, there are various ifs and buts attached to a JDA as well. Real estate development is subject to approvals from various government authorities, owing to which the consideration under a JDA is also dependent of these approvals. With things still not in the clear, the owner is expected to assess the tax liability and pay it. Is that fair, when the owner is not even sure, whether the deal will go through or fall apart?
Transfer of capital assets
Necessarily, there is a transfer of capital asset under the JDA and there should be a capital gain tax on the same, but various tax questions creep into the mind of the owner as to when to pay the tax? Would mere signing of a JDA lead to taxability in the hands of the owner? Is registration of the JDA is necessary for triggering the taxability? What if the consideration is not final at the time of signing the JDA and is actually dependent on an event/approval? Am I liable to pay tax on accrual basis or only when the consideration is received? There have been contradictory rulings on this matter till now and the income tax law was amended in this year’s Budget, which provides for taxation of such gains on completion of the project under certain circumstances. Till then, Indian tax authorities aggressively took the view that capital gains arise on signing of the development agreement and when the owner gives possession of the property to the developer.
Even the apex court of India has recently dealt with this matter and taken a favourable view. It laid down the law after considering the facts of the case and holding that the answer to these questions depends on two aspects:
Part performance of an unregistered agreement by the owner, by giving possession of the property for the limited purpose of development, would not amount to a transfer, and hence did not give rise to capital gains. Meaning thereby that where the owner continues to be the owner of the property throughout the development of the property, and did not seek to transfer rights similar to ownership to the developer, there was no transfer giving rise to capital gains.
As per income tax law, the income is liable to tax on accrual of receipt, whichever is earlier. But if the right of the owners to receive consideration is dependent on receipt of the necessary approvals and permissions for development of the property, the income can at best be called hypothetical income and hence cannot be taxed on accrual principle. This is an important aspect since these permissions need not necessarily come in and may lead to a situation where the JDA falls through. Accordingly, it becomes all the more important to agree to the terms of the JDA after a thorough analysis. The law on taxability arising on signing of a JDA is now clear and the court ruling makes it easier for the owners to assess their tax liability.
The writer is partner, Nangia & Co LLP