• LTCG calculation for joint venture development project

My parents own a vacant piece of land in pune and have now entered into a joint venture development agreement with a builder in 2021. They are getting 1900 sqft as their share as per the 41:59 ratio. However it fits 2 complete apartments of 800 sq ft each and 300 sqft is left over. 
There are two parts of this question. One from perspective to how to structure this transaction to minimise and calculate capitals gains and another to calculate and minimize the stamp duty value of the development agreement and put the same into words in agreement.

1) From an ease of tax filing and capital gains tax assessment perspective: 
A)Should they take fixed lumpsum payment in lieu of this excess 300 sq ft as per today's market/ ready recknor rate from builder or
B)Should they take a lumpsum payment in lieu of this excess 300 sq ft as per 2023 ( year of project completion) market/ ready recknor rate from builder, whatever thay may be and mention same in agreement? 
C)Should they enter into a tripartite agreement with the builder and whoever purchases the complete apartment of which this 300 sq ft would be part of as and when the building construction starts/ends? 

Questions:
How would capital gains be calculated in 3 cases? In which case would they be lower? 
Will Short term capital gains be applicable in case 2 or 3? 

2) In the development agreement that we are going to prepare and register with the govt, should we mention 
A). that they are getting 1600 sqft and a fixed lumpsum amount X. (without mentioning anything about 300 sqft or the 41:59 ratio).

B). that they are getting 1900 sqft as per 41:59 ratio, of which 300 sqft are getting as lumpsum payment 
at a later date as per the ready recknor rate applicable when the project completes in year 2023. 

C). should they mention in the development agreement that our share is 1900 sqft and 
rest 300 sqft will be sold off as part of another complete flat in conjunction with builder as and when a buyer appears after the project starts? 

Questions:
How would stamp duty value of the development agreement be calculated in 3 cases?
Any probable pitfalls in the listed options?
Which case would keep the development agreement simplified and also make calculation of the Capital gains "minimum" and easy.
Asked 9 days ago in Taxation

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7 Answers

1. it is advisable to stick to in the DA or JV as to what is actually agreed between the parties

2. if a 41:59 ratio is agreed with 1900 sq.ft. coming to your share then mention that specifically. no need to separate the 1600 and 300 sq.ft as done by you in your query. the DA/JV must reflect the actual and true intention of the parties. what is important is that you should get in total 1900 sqft, now whether that much area is allotted to you in the form of 2 flats or 3 flats or whatever it is, would not matter. 

3. once the DA/JV is executed and registered with the agreed area sharing ratio recorded in it, the builder would then have to submit building plans through his architect to the municipal corporation for sanction. Once the building plans are sanctioned, the parties can agree upon their respective flats in the new building to be constructed which would go to their share as per the area sharing ratio agreed in the DA and thereafter the parties can enter into a supplementary agreement to record the exact flats in the new building which will go to them

4. in my view the capital gains arise when the property is sold or transferred. By entering into a DA you are not selling your property. You are merely giving a license to the builder to enter on your land and do construction. 

5. when the flats are ready the builder will have to register permanent accommodation agreement with the land owners to confer title on the owners. the flats would be of the area corresponding to the area agreed to be allotted to the owners. at that point of time the flats will have to be valued and the capital gains calculated accordingly. so instead of money you will get flats. now whether or not you are entitled to capital gains tax exemption is something which requires legal research. as per the prevalent law if capital gains from sale of property are invested to purchase a residential house then the capital gains are not charged to tax. however in this case instead of money the owner gets new flats. so whether he would get exemption from CGT is something which is not clear and requires extensive legal research

6. when the new flats are allotted under the PAAA to be registered in your favour by the builder, the stamp duty will be calculated on the market value of the new flats then prevailing (it is simple that you would definitely not know today what would be the market value of the flats in 2023 when the building is complete, also you need to factor in what happens when the construction is not complete within agreed period and you are allotted flats beyond 2023). however again since full duty would have been paid on the DA, it is to be seen whether the PAAA would attract any stamp duty if at all. 

Yusuf Rampurawala
Advocate, Mumbai
6500 Answers
55 Consultations

5.0 on 5.0

Higher the compensation and monetary payment higher will be the capital gains tax.

 

Prashant Nayak
Advocate, Mumbai
24476 Answers
52 Consultations

4.4 on 5.0

In JDA, the share of consideration with the landowner might be either of the following ways:

Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the sale consideration of the project as and when the collections from the customers are made.

Non Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the built up area with the landowner.

The taxability of JDA in the hands of the developer is under business income and in the hands of the landowner it is under capital gain

Capital Gains arise on “transfer” of a capital asset. As per Section 2(47) of the Income Tax Act 1961, the word “transfer” amongst other things includes:

“any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to insection 53Aof the Transfer of Property Act, 1882 (4 of 1882)”

Section 50D of the Income Tax Act, 1961, says,

“Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

It was decided in 

Dwarka Das Kapadia v. CIT [2003]/180CTR (Bom.)107/260 ITR 491(Bom)/[2003]:

Bombay HC held that if the contract, read as whole, indicates passing of or transferring of complete control over the property in favour of developer, then the date of contract would be relevant to decide the year of chargeability. Thus the essence of Section 2(47) (v) may be considered, when there is transfer of complete control over the asset by the owner to the developer.

It was observed thus  in 

M/s. Binjusaria Properties Pvt. Ltd. Hyderabad versus Asstt. Commissioner of Income-tax:

As on date there was no developmental activity on the land which is subject matter of development agreement – The process of construction has not been even initiated and no approval for the construction of the building is obtained – Thus, the sale consideration in the form of developed area has not been received – Mere receipt of refundable deposit cannot be termed as receipt of consideration – the AO calculated the capital gain on the entire land, even though the assessee has retained 38% share to itself.

In

. General Glass Co. Ltd. Vs DCIT 108 TTJ 854 (Mumbai):

Where payment of balance consideration within stipulated time is essence of the agreement of sale and such payments are not made in time by the transferee, such a contract does not confer any

right on the transferee as envisaged under Section 53A of the Transfer of Property Act and provisions of Section 2(47)(v) cannot be applied in such a situation.

The above are governing factors to decide about the involvement of provisions  of law in respect of LTCG.

Your other issues can be solved by going through the mutually agreed conditions of the JDA entered wit  the developer. 

T Kalaiselvan
Advocate, Vellore
74484 Answers
1226 Consultations

5.0 on 5.0

Best of luck

Prashant Nayak
Advocate, Mumbai
24476 Answers
52 Consultations

4.4 on 5.0

has the builder got the approved building plans?

how are you so sure that there will be 2 flats each of 800 sq.ft. and there will be a balance area of 300 sq.ft.? do you have the approved building plans before you?

as stated before you have categorically state in the DA that you are entitled to 1900 sq.ft.

how that 1900 sq.ft. is allotted is not relevant then

that 1900 can be spread across 2 or 3 or whatever number of flats

just keep it plain and simple that in all you must be allotted 1900 sq.ft. carpet 

as simple as that...why you want to complicate? its surprising that you are discussing such crucial things through an open platform and asking lawyers here to prepare a suitable clause....it does not work like that...you need to engage one competent lawyer who would hand hold you all through out ...you cannot be taking varying opinions from different lawyers on a public platform...however in case of doubt you can always post your queries here only for clarification...but specific drafting of the DA clauses to safeguard your interest has to be done by a dedicated competent lawyer

 

the stamp duty on the DA is calculated as applicable on a deed of conveyance or sale deed. 

in a sale deed, the stamp duty is levied on the higher of the market value or agreed value 

in a DA it is agreed that owners will get a specified % of area in the new building alongwith some money consideration. in such cases the stamp duty is computed on the market value of the property of which development rights are granted by owner to builder

the DA has to be lodged with the collector of stamps for adjudication who will assess the exact stamp duty payable on the DA as per law

Yusuf Rampurawala
Advocate, Mumbai
6500 Answers
55 Consultations

5.0 on 5.0

1.  If the agreement states that you would be getting 1900 sq. ft then what is your question about the 300 sq.ft, it also auto automatically belongs to you.

2.  Stamp duty may not be attracted towards the  refundable security deposit. 

 The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the sale consideration of the project as and when the collections from the customers are made.

It is a non monetary consideration. 

T Kalaiselvan
Advocate, Vellore
74484 Answers
1226 Consultations

5.0 on 5.0

Capital Gains arise on “transfer” of a capital asset. As per Section 2(47) of the Income Tax Act 1961, the word “transfer” amongst other things includes:

“any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to insection 53Aof the Transfer of Property Act, 1882 (4 of 1882)”

Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

T Kalaiselvan
Advocate, Vellore
74484 Answers
1226 Consultations

5.0 on 5.0

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