23.1 Real estate projects happen in various manners. One of the usual manner is where Land owner and Builder / Developer come together to develop real estate property. Typically it is referred to as Joint Development Agreement (JDA). In a JDA, the owner of immovable property (land or building or both) provides “Development Rights” (DRs) to the developer. For these DRs, the owner is paid consideration by way of cash or share in the new immovable property or a combination.
The property is not transferred / sold. Ownership remains with the owner. The Developer develops new property on the existing property. Ownership of existing property may be transferred when the new property is developed.
Under the current provisions, capital gains tax is triggered in the hands of land owner at the time when the possession of existing property is handed over for development. This creates difficulty for the owner of the property as consideration would not have been realised when possession is given. Consideration will be received when the new property is ultimately sold.
23.2 Therefore, in order to minimise the hardships faced by owner of immovable property, Finance Bill provides for the following:
23.2.1 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.
23.2.2 Sale consideration will be taken as the stamp duty value of owner’s share in the project on the date of Certificate of Completion. Any monetary consideration received on transfer will also be included in sale consideration.
23.2.3 If however the owner transfers his share in the project on or before the date of issue of Certificate of Completion, Capital gains will be taxed in the year of transfer of the project. This could trigger even in transfer of a part of the project.
23.3 The owner will acquire share in the new property against the old property. The new property is the consideration for old property. Cost of share in the new property will be the sales consideration considered for transfer of old property (see para 23.2.2).
23.4 TDS – 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.
23.5 This section is applicable to individuals and HUFs only. Thus for other persons, existing provisions continue to apply, i.e., in case of other persons, capital gain tax is payable when the land is handed over for development to the builder.
23.6 There can be some technical difficulties. A person can hold property as “Capital asset” or “Stock in trade”. Sale of capital asset gives rise to Capital gain / loss. Tax rate is lower for Capital gain. But if the person holds the property as stock in trade, sale generates business income / loss. Tax rate is higher.
If the land owner enters into a JDA, it means he is converting the Capital asset (immovable property) into Stock in trade. When a person enters into a JDA, it means he is going to undertake business with his immovable property. This conversion happens just before he hands over the possession.
If the property is stock in trade, then whether this relief will be available or not, is debatable.