Tax calculations in case for development agreement

Tax queries 430 views 3 replies

Ritesh

Manager

25 Points Joined August 2014

Dear Members,

I have a situation. Mr X owns a NA land (Puchased in Oct 2013). Mr. X is proceeding for development agreement with Mr. Y ( and his development Firm). Estimated time for completion of construction will be 12-15 months since inception of construction. In return Mr. X gets 40% of the flats to be constructed. Also for assurity of deal Mr. X gets some cash money as deposit, which he needs to return to Mr. Y at the end of contract. Now the questions are

1. What type of tax liability do Mr. X has?

2. Is Mr. X liable to pay tax now (when he enters development agreement and POA with Mr. Y) or when he gets pssession back of 40% constructed space or when Mr. X sells this 40% space to earn profit?

3. In the mean time of during construction, Mr. Y plans to sell off his 60% ( as under construction) share to generate fund to complete construction. Due to this if the answer of question 1 and 2 changes, what will it be?

4. If the tax implication under short term capital gain arises, then is ther any way that Mr. X should alter agreement in a way that it dont looks as direct capital gain case?

5. What care should be taken while drafting agreement and POA?

Replies (3)

Mihir

Wealth Manager

5293 Points Joined December 2008

Depends on the terms and conditions of the DA. If the land belongs to Mr. X, then tax liability will arise when Mr. X sells those 40% flats alloted to him.

Ritesh

Manager

25 Points Joined August 2014

Thanks Mihir, for quick response. I was reading other threads on this forum with similar question. Its very confusing.

The DA terms says that "Mr. Y is appointed as land developer and POA will be given. Mr. Y should take all permissions, sanctions, procure certificates, commense and complete construction of residential building. Mr. Y will be responsible to pay stamp duty for said deal. Mr. X gives permission to sell Mr. Y share (60%)of flats and form society to which Mr. X will tranfer land after selling all flats."

In the above case, do you still think that tax liability for Mr. X will be only after he sells his share (40%) of flats? Kindly reply

Mihir

Wealth Manager

5293 Points Joined December 2008

Mr. Y is only the developer and not the owner. Mr. X is the owner of the land and will give PoA to Mr. Y to convert the land into NA land, and construct a building. Mr. Y shall be able to sell 60% flats and recover the cost plus profits, and for Mr. X, he will sell 40% flats and recover the cost plus profits. After all the flats are sold off, Mr. X, will have to transfer the land in favor of the society. So Mr. X will incur capital gain when he sells the flats and earns a profit.