Time of taxation of Joint Development agreements
According to the law of Income tax in India there are three very critical limbs of taxing a person. :-
i. There should be income deemed to accrue or arise in India.
ii. There should be an assessable person.
iii. It should be taxed in the correct assessment year.
Often the first two limbs are deeply studied and the third limb is neglected due to tax neutrality effect since tax rates don’t substantially change over intervening years. However in cases where the flow of Income is in several years from one transaction the third limb gains substantial importance.
The taxability of joint development agreements has been a major area of litigations for several years in Income Tax. The department has always tried to tax the transaction at the full consideration in the very first year of transaction. Herein under we would try to decipher the various modalities involved in such transactions and when is the correct time for taxation for such a vexed issue.
During a transaction which involves such joint development agreements there are several dates which one comes across and on each such event the possibility of taxation arises. Below are the key event dates which generally transpire in such agreements. Thereafter we would try to analyse each such trigger point to determine the exact date on which the taxable event is triggered -
a. The land owners issue a mere power of attorney in the name of the developer which entrusts them to appear before various development authorities to get the maps etc cleared.
b. Subsequently would be a date in which the land developer hands over the actual possession of the land to the developer in order to undertake construction activities. Such handing over might be symbolic or actual.
c. The next crucial dates which arise is when the consideration is paid by the developer to the land owner. These dates might be several or a single date as stipulated between the parties.
d. Fourth crucial date in such transactions is when the land owner issues a power of attorney in the developers name in order to execute registries on behalf of the land owners.
e. The last stage of the transaction is when the developed units are handed over to the final customers i.e. possession given to them.
“Transfer” is defined in Sec 2(47) of the Income Tax Act, 1961 which has been directly linked to Sec 53A of the Transfer of Property Act, 1882. In terms of Sec 53A mere registry of the property is not deemed to be the only way to establish that the property has been transferred. The essence of Sec 53A is that the owner should relinquish the rights of enjoyment of the property and those should be vested with the buyer. Therefore in order to establish the same it is a prerequisite that the pith and substance of the entire contract (as a whole) is to be understood to safely assume when the substantial relinquishment of rights have occurred.
Currently, across India all the above dates have acted as a trigger point for the department to claim the occurrence of a taxable event and sought to tax the land owners. However as per our understanding based on the various judicial pronouncements of the various High Courts we believe the following to be the correct proposition of the law:-
a. The issuance of a mere power of attorney in the name of the builder in order to seek various regulatory approvals does not amount to transfer since it’s only a symbolic gesture on part of the land owner in order to facilitate the builder.
b. The handing over of the physical possession of the land (symbolic or actual) also does not determine the date on which such transfer can be said to have been undertaken under Income Tax Act.
c. The payment of consideration also does not tantamount to the taxable event being occurred and the said transaction be subjected to capital gain in that year.
d. Again in insolation the triggering of this event also does not tantamount to transfer within the provisions of Sec 53A of the Transfer of Property Act, 1882 and hence does not invoke the provisions of capital gains.
Therefore the moot question which arises is when does an assesse pay tax on such transfers. The answer according to us is that once all the limbs i.e. from “a” to “d” happen; does the provisions of Sec 53A of the transfer of property act get attracted and the owner becomes liable for capital gains tax. In isolation none of the events trigger a taxable event however upon being met cumulatively they do trigger the provisions of Sec 2(47) of the Income Tax Act, 1961.
Hence the drafting of the Joint Development Agreements which are entered between the land owners and the developers would play a very crucial role in determining the year in which such taxability arises.