Accounting treatment for JDA

Great question! Let me break down the accounting treatment in JDA (Joint Development Agreement) for both the developer and the landowner, based on your scenario:

1. Developer’s Books:

• Background:
  The landowner transfers development rights to the developer in exchange for 4 flats out of 10 built.

  • Stamp duty value of land (at JDA time in 2018): ₹1.2 crore

  • Each flat sells for ₹30 lakh after construction (2022)

  • Developer retains 6 flats for sale, owner gets 4 flats

  • Clearance certificate issued in April 2023 but handover of flats in Aug 2022

How to account for Development Cost and Closing Work-in-Progress:

• Development Cost includes:

  • Cost of land (can be valued at stamp duty value or as agreed)

  • Construction costs incurred

  • Other related expenses (legal, marketing, approvals)

• Valuation of Land in Developer Books:
  Developer recognizes land at stamp duty value (₹1.2 cr) as cost of land (since developer did not pay cash but got development rights).

• Closing Work-in-Progress (WIP):

  • Till the time the project is completed (handover of flats to owner and buyers), the developer records the construction cost and expenses under WIP.

  • After handover (Aug 2022), the developer can reduce WIP for the flats given to the owner and record inventory for the flats intended for sale.

• Accounting Entries (Conceptual):

  • Debit: Construction WIP / Building under development

  • Debit: Land (stamp duty value)

  • Credit: Various liabilities/cash for construction expenses

• At Handover (Aug 2022):

  • Transfer cost of 4 flats (owner's share) from WIP to a liability (Contractual obligation to owner).

  • The balance 6 flats remain as inventory (for sale).

• Clearance Certificate in April 2023:

  • Usually, the clearance certificate is a regulatory completion document. The developer’s revenue recognition depends on when control is transferred (handover of flats).

  • Clearance certificate issuance does not delay cost recognition but affects statutory closure.

2. Owner’s Books:

a) When will capital gains arise?

• Capital gains tax is triggered on transfer of capital asset.

• In JDA, the landowner transfers land development rights in 2018 (agreement date). The "transfer" happens when the developer obtains rights, i.e., at the time of agreement (2018) or when control passes.

• However, in many practical cases, the capital gains are considered on handover of flats (since the consideration is in kind).

• The clearance certificate is not mandatory for capital gains event. So, capital gains liability generally arises on transfer date (agreement or possession), not after clearance certificate.

b) What will be the sale consideration?

• If the owner retains flats for self-use:

  • Sale consideration for capital gains is the stamp duty value of the land (₹1.2 cr), as per the JDA agreement or valuation at transfer date.

  • The flats themselves are not "sold" but received as consideration.

• If the owner sells the flats to a third party for ₹30 lakh each:

  • The sale of flats by the owner is a separate transaction.

  • Sale consideration will be the actual sale price received (₹30 lakh per flat) for those flats.

  • This sale may trigger a fresh capital gains tax for the owner on the gains arising from selling the flats.

Summary Table: