Capital Gains vis-à-vis development agreements
|
While the landowner gets a portion of the built up area as the consideration, the cost of construction to the builder attributable to that portion of the built up area should be taken as the consideration for the undivided share of land transferred.
|
ONE IMPORTANT aspect that needs to be verified in any development agreement executed between the landowner and the builder is the mode in which the consideration is being received by the land-owner. The components of consideration helps in determination of the amount with reference to which the capital gains is required to be computed.
In development agreement, it is more common that the components of consideration are in the form of money or money's worth. The landowner, in lieu of transfer of undivided share of land may receive consideration partly in cash and partly in kind or wholly in kind. Accordingly, where the landowner gets a portion of the built up area as the consideration, the cost of construction to the builder attributable to that portion of the built up area should be taken as the consideration for the undivided share of land transferred.
For example, if the landowner and the builder agree that out of the entire built up area to be constructed, 40 per cent would be given to the landowner and 60 per cent shall be to the builder, the landowner must transfer 60 per cent of the undivided share in the land to the builder. The landowner ultimately retains 40 per cent of the undivided share in the land to effectively enjoy his share of the built up area.
Determination of consideration
There is an element of capital gains involved in these types of transactions as the landowner transfers 60 per cent of the undivided share of land to the builder or his assignees. How the consideration shall be determined for tax purpose in the hands of the landowner is the question that needs to be addressed. The consideration for such transfer shall be equal to the cost incurred by the builder for construction of 40 per cent built up area.
Evidence required
If a certificate evidencing the cost of construction can be obtained from the builder based on his books of account, it should be more than enough for the landowner to substantiate the consideration for transfer of 60 per cent. Even during the course of assessment of the landowner, such certificate can be relied as valid evidence. On the other hand, where the builder is not agreeing to furnish such certificate, the cost of construction may be estimated on a reasonable and fair basis.
Such an estimate shall always be made keeping in mind the nature of materials to be used, quality of construction, description, specification of the structure, amenities and fittings that are forming part of the superstructure. In case the landlord foresees such a situation, where certificate could not be obtained, it is advisable that the estimated amount of cost of construction may be incorporated in the development agreement itself. Such a clause in the agreement would help the landlord to produce it as evidence at the time of his assessment.
Year of chargeability
As per the Income-tax Law, mere entering of an agreement for development of the property between the landowner and the builder/assignees cannot be construed to be a transfer for the levy of capital gains tax.
The transfer of an immovable property is complete only when the deed of conveyance is executed and registered. There was also case where the builder agrees to identify the prospective flat buyers over a period of time and the landowner agrees to sell the proportionate undivided share of land to such person being identified by the builder and realise the sale consideration from them directly.
If the builder has already paid any advance to the landowner, the same is apportioned progressively as and when the amounts are realised from the buyers. The liability to capital gains tax in such cases arises in the hands of the landowner in the year in which respective sale deeds are executed and registered. Where these transactions are spread over for more than one year, the liability to capital gains tax also shall be spread over to respective years on the basis of execution and registration of the sale deeds.
(The author is a Chennai-based practising Chartered Accountant) Feedback to
page
Send this article to Friends by
E-Mail
Property Plus — Chennai
