Tax liability in case of joint development agreement

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Akhil Sharma

Service

141 Points Posted on 26 August 2011

The assessee is the owner of a piece of land. He enters into a Joint Development Agreement with a Builder to construct a residential apartment with 10 flats. The agreed ratio is 50:50. Hence, the land owner will be getting 50% of the flats i.e. 5 flats. The owner bought the land 6 years ago. There is no cash element in the whole of the transaction. The land owner has not sold any of the flats in his share. Let us assume the cost of land is Rs.20 lakhs and the market value of the flats is Rs.15 lakhs per flat.

Questions:

1) Is there any capital gain arising out of this transaction?

2) Is there specific rules to be applied here as the assessee is not in receipt of any money and it will be unfair to ask him to pay taxes. However, assessee agrees to pay taxes at the time of selling the flats.

Please give your inputs with reference to the relevant sections, provisions to make it clear.

Thanks!

Replies (2)

Rajagopalakrishnan R

PARTNER

1434 Points Posted on 26 August 2011

This is a case of exchange of capital asset - i.e 50% of the flats at its market value in lieu of 50% of the undivided(?) share in the plot of land. This transaction is clearly covered by section 45 and is taxable as capital gains.

Calculation of gains can be done as below.

Cost of 50% of the land

Indexed to 2011-12 (or year in which the completed flats are handed over). However, note that if an irrevocable POA is executed in favour of the builder and the possession of the plot of land is handed over, then this falls under 58A of the Trf of property act and the date of incidence of the capital gains would be the date on which such constructive possession is handed over to the builder.

market value of 5 flats would be the sale consideration

capital gains would be the difference.

There is no question of fairness as the exchanged asset is much higher in MV as compared to the original asset. if the assessee wants some cash flow, he should have negotiated for 4 flats and MV of one flat in cash so that he can pay the capital gains tax comfortably.

In any case who said Income tax act was fair. Ha ha ;-))