Joint Development Agreement : Tax Implication

A friend entered into JDA with builder in 2018.
Original land bought in 1970 and house constructed there on.

The salient features of the agreement was that the builder was to demolish old house on the land and construct 4 floors and in addition pay the owner 10lacs.
In lieu, builder will get top floor.

In 2020 whole building was completed and builder exercised his right to sell the top floor. However, on paper the floor was sold directly by friend (owner) to buyer at Rs.10 lacs which is also the Stamp duty value and circle rate. The actual sale amount was higher and the builder pocketed the amount above Rs.10 lacs. What would be my friend's tax implication on this transaction?

Later, in 2021 owner sold 1st floor for 40 lacs.. what would be tax implication for this transaction and the tax implication when he sells his other two floors also?

Hey Anil, here’s a detailed breakdown of the tax implications on your friend’s transactions under the Joint Development Agreement (JDA) scenario:

Background Summary:

Land bought in 1970, old house constructed.
Builder demolishes old house, constructs 4 floors.
Builder gets top floor + pays Rs. 10 lakhs to owner.
Owner “sells” the top floor on paper at Rs. 10 lakhs (stamp duty value), but builder pockets the excess amount.
Owner sells 1st floor later for Rs. 40 lakhs.
Owner still holds 2 more floors to sell.

Tax Implications on Each Transaction

1. Top Floor Sale (Builder’s floor) – Sold by Owner on Paper at Rs. 10 lakhs

Since builder got the top floor in exchange for development and payment of Rs. 10 lakhs to the owner, the fair market value (FMV) of that top floor is actually higher than Rs. 10 lakhs (as builder pocketed excess sale proceeds).
The owner has transferred an asset (top floor) for inadequate consideration (only Rs. 10 lakhs shown) — so the difference between FMV and Rs. 10 lakhs is considered as “Income from Other Sources” or “Capital Gains” under Income Tax depending on facts.
Income Tax department may treat the excess amount as income in the hands of the owner since he is the registered seller.
If FMV > cost of acquisition (which is low as land was bought in 1970), then capital gains tax will apply on the difference (considering indexation for long-term capital gains).
The actual sale amount received by builder is not in owner’s hands directly, so owner must prove that Rs. 10 lakh is actual consideration; otherwise, tax authorities may assess higher income.

2. Sale of 1st Floor for Rs. 40 lakhs in 2021

Owner sells 1st floor directly for Rs. 40 lakhs. This is a capital asset transfer.
Since the land/building is a long-term capital asset (held since 1970, >24 months), long-term capital gains (LTCG) tax applies.
Cost of acquisition for this floor will be proportional to original cost of land/building, adjusted for indexation.
The entire sale proceeds minus indexed cost will be LTCG.
LTCG is taxable at 20% plus applicable surcharge and cess.
Owner can claim exemption if capital gains are reinvested as per Section 54/54EC/54F (subject to conditions).

3. Sale of Other Two Floors in Future

Same principles apply as above.
Sale price minus indexed cost = LTCG taxable at 20%.
Owner should maintain proper cost records and construction costs, if any, to reduce gains.
Exemptions under Sections 54, 54F, 54EC may be planned to save tax.

Additional Points:

Income from development activity:
The agreement with builder may also be seen as a business activity. If the activity is construed as business, income can be taxed as business income (higher tax rates) instead of capital gains. This depends on frequency, intention, and nature of transactions.
Stamp Duty value / Circle rate:
If sale price is below circle rate, income tax authorities may adopt higher circle rate as deemed consideration.
TDS:
Buyer deducts TDS @ 1% under Section 194IA for property transactions exceeding Rs. 50 lakhs.

Suggestion for Your Friend:

Consult a tax expert to maintain documentation of cost, construction, and transaction details.
File returns disclosing correct sales consideration and capital gains.
Plan exemptions and investments to save LTCG tax.