Development agreement

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sanjay (Querist)
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30 October 2013 "A" have agricultural land of 3 acr. in urbane area. he enter into development agreement with "B" builder in sep 2011 for construction of flats which will share between them in 40:60 percent of which 40 percent buildup area wil be of "A"and 60 percent area wil be of "B". "B"builder have rights to sale his 60% area. what will be the tax lability of "A"land owner. he has not paid any tax till oct 2013. market value of land in 2011 is Rs 1 cr.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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30 October 2013 The liability of Capital Gains in a joint development agreement shall dependent upon terms of the development agreement. Capital Gains will arise in the year of handling over the possession to the developer and not when the assessee was handed over the possession of the constructed flats as per section 53A of the Transfer of Property Act, 1882.

Thus, if the consideration is receivable in built-up area to be constructed and handed over by the builder to the landowner, it is advisable to avoid the applicability of section 53A of the Transfer of Property Act by mentioning in the agreement that license is granted to the builder to enter the premises and construct the building. The possession is retained by the landowner, which will be handed over as and when the built-up area is constructed and delivered. By this stipulation, the transfer will take place only in the year in which the built-up area is received and not before.

If your agreement provides for construction by way of license to enter the premise and construct the building then the capital gains shall arise in the year in which the built-up area is received by A. However, if the agreement provides for handover of the land at an earlier date, then capital gains shall apply at that instant itself.

With regards to computation of capital gains, the consideration in this case shall 40% of the construction cost.

With regards to claim for exemption for capital gains under 54F you may refer to f CIT v. Smt. K.G. Rukminiamma 196 Taxman 87 (Kar.)

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