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Incidence of tax on development agreement

QUESTION: I have a property in a suburb of Chennai in about three grounds (7,200 sq. ft.). There is a demand from a developer who is prepared to construct four flats for me on the part to be retained by me in the property on surrender of 50 per cent of the right over the property in favour of his nominees. The plan is to construct eight flats on demolition of the existing property. Since I will be only converting the land into property, I should imagine that tax liability should arise only when I sell any of the flats which I will be getting on conversion. I am getting conflicting advice on the point.

ANSWER: There is a taxable event when the reader surrenders 50 per cent of the land to the developer, the consideration for which is the value of the superstructure put up on his part retained by him so that liability would not wait till the constructed portion is sold. Since the developer usually gets a power of attorney, a transfer with liability for capital gains may be inferred on such grant of power of attorney, subject to other relevant facts, because of the provision deeming transfer even on possession pursuant to an agreement of sale. Development agreement is treated as an agreement for sale.

In view of the departmental practice with some precedents favouring liability without having to wait for completion of development project, one may have to face the tax earlier, though there is no cash flow as in the reader's case consequent on the development agreement. If and when any of the flats, which the reader would get, is sold, there is a second-round liability on sale of flat. The sale price will be split up between the proportionate interest in land and the proportionate superstructure relating to the flat. Capital gains on part attributable to the interest in land, which continues in the reader's hands, will be ascertained after deducting proportionate indexed cost from the consideration for the land part. In respect of the part relating to superstructure, the proportionate value adopted for liability under the development agreement will be the cost in working out the capital gains. Land and superstructure would be treated as two different assets.

The reader should consult professional opinion, if he wants to avoid the consequences of interest and penalty on any delay in complying with the law relating to payment of advance tax and filing return in time. He may sometimes be able to mitigate his liability by availing himself of some rerolling benefits available in law.

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