Investors who have invested on site/land have many options. One is to retain and wait for good capital appreciation. Another option is to construct a building. For construction owner has to arrange for the finance and look after the construction activity. Apart from obtaining required approvals.
One more option left is enter in to joint development agreement with a builder. The key feature of JDA is that the land owner contributes land and developer undertakes the responsibility of obtaining approvals, property development, launching and marketing the project with his financial resource.
The land owner expects much higher consideration in return land given up for development to builder. Normally, consideration is discharged in the form of upfront payment, sharing of gross revenue, sharing of constructed area or a combination of all three.
Usually, cost of land constitutes a substantial part of the cost of a project whether residential or commercial, and as such this expense is saved for the builder. The funds of the builder do not get blocked. This is also fast mode of development of property.
The builder and the owner of the site develop the site on a joint venture basis. The site owner usually gets between a 25 to 40 percent share in built up area, and the balance goes to the builder. The exact percentage depends on the terms of JD agreement.
The site owner has to execute an irrevocable general power of attorney (GPA) in favour of the builder. The GPA should be registered on a stamp paper of appropriate value with the registrar in order to be legally binding on both the parties.
The stamp duty payable for of GPA and JDA is 1 per cent each on guidance value of property or 15 lakhs whichever is higher plus additional duty and surcharge of guidance value of property (in Karnataka). This may vary from State to State.
In case of breach in the performance of either parties JDA contains a penalty clause which is drafted at the time entering to JDA, same time GPA will revoke.
The owner needs to take sufficient care till the project gets completed and hand over to him, once project plan is approved with the competent authority the owner should get an allocation agreement recording the constructed area which comprises of his share and area available to developer share. Same time the deed of declaration is executed to record the constructed area this deed comprise of area constructed for site owner under JDA.
INCOME TAX IMPLICATION ON JDA
– In the hands of land owner
Capital Gain or Business Income?
As per section of 45(1) on transfer of capital asset gain/loss will be assessed under capital gains head in the year in which the asset transferred.
As per section 45(2) if a capital asset is converted into stock-in-trade, the capital gain is taxable in the year such stock is sold, and the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of the transfer. Thus capital gain gets computed by taxability is postponed to the year of sale of such converted capital asset i.e., stock-in -trade.
In the case Sathappa Textilers P. Ltd. v. CIT, 263 ITR 371 (Mad.) assessee claimed that by passing the resolution it had converted land into stock in- trade and therefore, there was business income Court held resolution was not genuine and it was only capital gain. Conversion is often attempted to be disregarded by the income tax department.
Timing of taxation of JDA
Whether capital gain taxable at the time land given for development or on receipt of share of built up are on land given up (developer share)?
The right to develop the property granted to a developer as provided in the development agreement does not constitute a contract to a transfer of any immovable property as between the owner and the developer, to attract the provisions of Section 53-A of the Transfer of Property Act, 1882 between them. The developer only nominates the prospective buyers. The developer enters the property only for the purposes of development of the property and not as a purchaser/ transferee.
The GPA given to a developer is only to enter into agreements with the prospective buyers for and on behalf of the owner and not for executing the sale deeds. There will be a restrictive clause in the GPA to this effect.
If the agreement of development enables the passing of domain and control of the immovable property by grant of an irrevocable authority or licence, then even the date of agreement of development will constitute the date of transfer of the capital asset. – Chaturbhuj Dwarkadas Kapaidia vs. CIT (2003) 260 IT R 491 (Bom.).
Where as In the case of CIT v. Smt. Radha Bai, 272 ITR 264(Del) it was held that though possession had been given to the developer along with right to start the booking of various flats and to receive sale price etc. from prospective buyers, land owners/assessee continued to be the owner of the land till development and receipts were not in the nature of business income from joint business venture with developer.
Hence drafting of an effective JDA plays vital roll under Income Tax Act, 1961.
– In the hands of Developer
As we know AS 7 and Guidance Note on Accounting for Real Estate Transactions (Revised 2012) will be applicable on construction contract to compute income from construction business.
ADVANTAGES OF JDA
1. Initial investment on land/site is not required
2. Stamp duty Stamp duty on multiple transfer of land.
3. Fast mode of development of property, working capital requirement restricted towards approval and construction.
4. Secured loan can be obtained by pledging land which is obtained under JDA.
5. Investor/landlord will be benefitted with competent consideration
DISADVANTAGES OF JDA
1. Land lord has to wait till construction gets over, by the time real estate may under downward this may adversely affect.
2. Amendments (retrospective) in Tax laws may impact on landlord/builder.
3. Prospective buyers have to take substantial care while they purchase flats/apartments constructed under JDA.
Regards
Bhanu Prakash M
Email: bhanu.prakash.m@icia.org
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