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Digisign development agreement

let's analyze a recent change made in budget 2017 with respect to a very specific transaction which is known as a joint development agreement you may have heard of this term in recent times as it has become very popular now what's a Jady Jady a is essentially an agreement between two persons the owner of a land and a developer under the JTA the owner of the land heads over the land to the developer for the purpose of development in return the developer develops the property and gives back the land along with the houses that he has built on the land in a typical transaction the owner of the land should pay the developer for the construction in cash however in a JD it does not work this way so what are the benefits which are available under a JD let's assume that four houses are built on this piece of land the owner of the land gets to keep two of those houses and the developer retains the balance two houses as payment for the development now what are the issues which can arise in such a transaction the first issue is the year in which the capital gains tax would be attractive as you can see there are a lot of options you may pause the video and take a look at these options earlier it would be taxed in the year in which the land was transferred to the developer but with the introduction of the new provision section 45 5b the capital gains in case of an individual or a nature shall be chargeable in the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority this in effect pushes tax ability from the year of transfer of the land to the year of completion and the issue of the certificate for the completion this may prove to be beneficial from the owners point of view as the taxability has now gone postponed now the second issue which can arise is what would be the amount of sale consideration on which the capital gains tax must be computed as per Section 45 5a the tax will be computed on the stamp duty value on the date of the certificate plus any monetary consideration received in addition to the houses that the owner receives from the developer now let's see a simple case study and understand how these provisions come into effect now in the given case mr. X purchased a residential plot on one one 1998 four B's 50 lakhs the fair market value of the plot on one for 2001 is rupees 65 lakhs alpha Builders enters into a development agreement with mr. X on 1-5 2017 which is P by 17 18 on the following terms and conditions mr. X will hand over the position of the plot to alpha Builders on 1 5 2007 T alpha Builders will pay a check of rupees 60 lakhs to mr. X the same day 10 residential units will be constructed and 6 will be handed over to mr. X on 36 2019 in other words 4 will be retained by the developer as payment the stamp duty values are also given to you the stamp duty value of the plot on 1 5 2017 that is the date of transfer of the plot is 2 stamp duty value of each flat on 36 2019 is rupees 45 max I hope you remember that there are 10 flats which will be constructed and the stability value of each flat is 45 lakhs on 36 2019 the project completion certificate is issued by the competent authority on 36 2019 and on the same day the six units are handed over now let's see the elements that we need to pick from this question while calculating the capital gains firstly the year of tax ability the year of tax ability would be P by 1920 the year in which the project completion certificate is issued the second thing is the sale consideration the sale consideration is twofold here stamp duty value of each flat is 45 lakhs multiplied by six flats that he receives in addition he's also received a consideration of 60 lakhs in the form of check both of these will be considered as the full value of consideration or FEC in short thirdly the cost of acquisition if you see the first line of the problem the cost of acquisition is 50 lengths but the fair market value on one foot 2001 is 65 lakhs since the property has been purchased before 1 for 2001 mr. X has an option to choose between the two and he would obviously opt for the higher of the two which is 65 lakhs as the cost of acquisition now using this let's compute the capital gains the full value of consideration would be the stamp duty value on the date of issue of certificate which will be 45 lakhs multiplied by six flats plus the monetary consideration received to the extent of 60 lakhs if you total it up you would get three hundred and thirty lakhs mr. X can take the cost of acquisition as the fair market value on one for 2001 which is 65 lakhs and index it once computed the long-term capital gain tax would have to be paid on the gain of 1 crore 53 lakhs 20,000 I hope the provision of section 45 5 a is understood by this illustration now let's consider in the same illustration instead of mr. X the SSE was a company then in such a situation 45 5 they would not come into effect the old provisions would still be applicable and the taxability would be in py 2017-18 itself that is the year in which the land is transferred to the developer now the full value of consideration would be the stamp duty value of the plot on the date of transfer which is 2 crore the cost of acquisition can still be taken as 65 lakhs and can be indexed as well if you notice the long term capital gain in this case is much lower than in the previous case so this provision may not really prove to be beneficial as it may result in a higher tax to be paid by the individual but the benefit of this change is that the taxability gets pushed to the year of completion but remember the change is applicable only to an individual or any TF now there can be another issue in this now mr. X has third a long-term capital gain can he now reinvest the long-term capital gain and claim the eligible exemptions under these sections yes it is possible but subject to the conditions being fulfilled as per those sections for example section 54 F requires the sse to purchase a house property within 2 years from the date of transfer and construct a host property within 3 years from the date of transfer now the date of transfer would still be the date of transfer of the land so mr. X would need to reinvest within two or three years as the case may be from 1-5 2017 which may not be possible if he does not get the land back along with the property within two or three years so although these changes have resulted in some sort of a positive effect for the taxpayer it may still result in higher tax being paid by the SSA due to these changes