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Discussion > Income Tax > Tax queries >

Land development agreement and capital gain tax

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student

[ Scorecard : 44]
Posted On 10 December 2011 at 12:35 Report Abuse

Dear Members,

Let me present the situation

Mr X owns a land on which he has constructed a building in which he conducted his business. Mr X has entered into a Land Development agreement with some construction company to construct apartments in the place by demolishing the old building. In return he gets half of the flats to be constructed and some cash also.

Now the question is whether the amount received in cash is taxable or not? If it is taxable, in which head? whether Business income or Capital Gains? Will there be any change in the answer if he has stopped the business before some months ago before he has entered into the contract?

If it is subject to tax, when it is actually taxed? I mean whether in the year it is received or in the year of completion of construction and upon getting of the flats.

For the flats he is getting, will there be any tax. If yes, how we have to compute the taxation?


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CA LALIT WADHWA
FRESHER

[ Scorecard : 105]
Posted On 10 December 2011 at 13:10

yes taxable as capital gain...

fair value of flats taken as sale considration plus cash less cost of acqisition subject to indexation...smiley





Giridhar S Karandikar
Team Lead

[ Scorecard : 2829]
Posted On 12 December 2011 at 17:54

Please note that for the purpose of Capital Gain,  thare should be an element of transfer  as per section 2(47) of the IT act.  Transfer takes place if there is sale, extinguishment, relinquishment of rights.

In the present case,  X has parted only with the part of the land for which he has received cash & for the remaining he has being allotted flats.  So the CG tax would arise only in case of the part of the land for which cash has being received, as he has extinguished his rights from that part.  For the part for which he has received flats, there would be no CG tax as he has not extinguished his rights but has the ownership of the flats.

So the capital gains would be taxable in the A.Y. relevant to F.Y. in which the transfer took place & subjected to CG tax accordingly by applying indexation benefit.



Total thanks : 1 times



gnanagurusasmy
ca

[ Scorecard : 54]
Posted On 13 December 2011 at 09:34

question : whether the amount received in cash is taxable or not?

A: Yes.

If it is taxable, in which head? whether Business income or Capital Gains?

A: Capital Gain

Will there be any change in the answer if he has stopped the business before some months ago before he has entered into the contract?

A: No.

If it is subject to tax, when it is actually taxed? I mean whether in the year it is received or in the year of completion of construction and upon getting of the flats.

A: You have to refer to the develoment agreement to conclude when Mr X relinquish his right.

For the flats he is getting, will there be any tax. If yes, how we have to compute the taxation?

A: The fair value of the Flats, Mr X is getting from the Developer sholud be treated as consideration received for the sale of Land and Capital gain should be calculated as mentioned in the reply given by LALIT WADHWA

 




Giridhar S Karandikar
Team Lead

[ Scorecard : 2829]
Posted On 13 December 2011 at 13:59

Mr Gnanagurusasmy & Mr Wadhwa, can you please explain in detail as to how the Capital Gains tax wouls arise in case of the flats MR X is getting from the builder.  According to me he has not relinquished his rights in case of the part of the land for which he is getting the flats as he will be staying in that part of the land.  In case of cash received definitely he will have to pay CG tax.

Please also provide me with the suitable case law in case of CG tax for flats allotted.




gnanagurusasmy
ca

[ Scorecard : 54]
Posted On 13 December 2011 at 18:43

Case law on the identical issue is furnished below:

 

2010-TIOL-266-ITAT-HYD

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' HYDERABAD

ITA No.6/Hyd/2010
Assessment Year : 2005-06

DY DIRECTOR OF INCOME TAX
(INTERNATIONAL TAXATION), HYDERABADVsSHRI G RAGHURAM
INCOME TAX OFFICER
WARD-6 (3), HYDERABAD Vs SMT PRAMEELA DEVI, (GPA)
INCOME TAX OFFICER WARD-6 (3), HYDERABADVsSMT PRAMEELA DEVI, (GPA)
INCOME TAX OFFICER WARD-6 (3), HYDERABADVs SMT G MADHURIKIRAN
INCOME TAX OFFICERWARD-6 (3), HYDERABADVs SMT G MADHURIKIRAN
DY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION), HYDERABADVs SHRI G RAGHURAM

 

Income Tax - Sections 2 (47), 48 - Whether for the purpose of calculating capital gains in a case where the land is devolved to the developer the market value of land is to be taken as sale consideration or the value of superstructure received in lieu of land.

 

The AO  took the view that there is transfer in this case, as per the provisions of section 2(47) and capital gain is chargeable and for that purpose the market value, superstructure is to be taken as sale consideration - CIT(A) directed the AO to tax the income from the amenities under the head income from other sources and also allowed depreciation and other expenses - for the purpose of capital gain the CIT(A) directed the AO to consider the market value of land, as on the date of transfer, as sale consideration – Matter went to the Tribunal.

 

After hearing both the parties the Bench has held that

 

10. The next common grounds in ITA Nos.6, 7 & 69/Hyd/2010 is regarding determining of the sales consideration u/s 48. The learned counsel for the assessee submitted that this issue is covered in his favour by the order of this Tribunal dt.9-6-2006in the case of Smt.Shanta Vidyasagar Annam, Hyderabad in ITA No.885/Hyd/2003 for the assessment year 1997-98. We have carefully gone through this decision and this order is relating to the whether there is a transfer u/s 2(47) (vi) of the I.T.Act or not on transfer, in which possession was handed over in the process of exchange of 40% of the constructed area of the building, which is to be constructed in future, which enables the developer to enjoy 60% of the undivided share of land. In our considered opinion, this decision will not come to the rescue of the assessee. In our opinion, the consideration for the transfer of capital asset is what the transferer receives in lieu of the assets he parts with and therefore the very asset transferred or parted with and full value of consideration cannot be construed as having a reference to the market value of asset transferred and the said expression only means that full value of the asset received by the transferer in exchange for the capital asset transferred by him. Since the development agreement specifies that certain part of constructed area shall be surrendered to the owner by the builder on the completion of the contract and the value of the constructed area to be transferred to the assessee to be considered as consideration received and as such full value of consideration in the case of not by applying the ratio of the order of the Delhi Bench of the Tribunal in the case of M/s Vasavi Pratap Chand Vs. DCIT (89 ITD 73) (Del.) is the only the cost of construction of proposed building to the extent of which were falls to the assessee in the ultimately constructed area and not the market value of such share of constructed area which may be after the completion of the construction. In view of this, we do not find any infirmity in the order of the assessing officer on this issue as he has followed the order of the Tribunal in the case of M/s Vasavi Pratrap Chand Vs. DCIT (supra). Accordingly, this ground taken by the Revenue is allowed.

11. The assessee relied on the judgement of Madras High Court in the case of M/s T.V. Sundaram Iyengar & Sons Ltd. Vs. CIT Madras (37 ITR 26) wherein it was held as follows:

As on the facts there was nothing to show that the price was to be of any future time, the price of the assets transferred to company C became payable forthwith, viz., in the accounting year, the assessees obtained the right to receive the price in the accounting year and the capital gains in respect of the sale of those assets arose in that year: what the parties did subsequent to that year did not have any bearing on the liability of the assessees to tax in respect of that year. There was, therefore, material to support the assessments made on the assessees.

12. In our opinion, the above judgement supports the view taken by us rather than the assessee.

13. Since the issues involved in the other appeals are identical, applying the same reasoning herein above, those appeals are also allowed.



Total thanks : 2 times



CA Anand Sarda
Working

[ Scorecard : 1515]
Posted On 27 November 2012 at 19:42

Hi Guys,

The case is still not concluded. 

I am not clear with the following points. 

1) Sale Consideration = a) fair value of the flats received from the builder in lieu of the land parted with ? or b) the fair value of the land portion parted with??

2) taxable year = a) construction start year (april 2009) or  b) construction completed year (ex May 2010) or c) sale of the flats received from developer ( july 2012)??

If you can help me with this, it will be of great help.

thanks




AVADHESH DAHIMA
Sr Tax Counsels

[ Scorecard : 25]
Posted On 08 July 2013 at 16:48

   

The Assessee Entered into a Development Agreement cum Irrevocable GPA in  F.Y.2007-2008 in respect of 1100Sqyd land owned by him with a Builder.

As per the terms of Dev. Agmt. The owner was entilted to 51% share in the Development share of Construction. Now the Flats are nearing Ready and the Occupancy Certificate has not yet been issued. In view of the above it is requested of you to kindly clarify the liability of Capital Gain tax as per I T Act.

The owner acquired the land before 1981.



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