Section 45(5A)
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By K. K. Ramani (Advocate)

  1. The taxation of stakeholders in development of land or building carried out through the builders, commonly referred to as ‘Joint development’, has been mired in varied legal views leaving the landowners as well as the builders in a state of uncertainty as to their tax liability. The incidence being very high, the projections going awry, severely impacts the financial viability of the project when sufficient headway has already been made. The conflicting judicial pronouncements and the growing number of amendments from time to time create further complexity and demand a settled, stable and fair tax regime in the interest of an orderly growth of real estate sector.

    1. In joint development projects, the landowner who is generally not equipped with necessary expertise and resources to carry out the development himself, grants development rights over the land to some builder authorizing him to construct the building thereon, incur all cost, share the constructed space in agreed proportion and deal with the space falling to his share as his ownership property which he can dispose of as such. From the angle of income taxation, the landowner, as a transferor of development rights derive income by way of capital gains and the builder, carrying out the construction as business activity, derives profit from business.

    1. So far as the landowner is concerned, he is faced with the question as to whether transfer of development rights is a transfer within the meaning of the Act? Whether it results in capital gains and if so, when does it arise and how it is to be computed? It is to address such issues and to relieve the taxpayers from the hardship caused by certain decisions, that the legislature by the Finance Act, 2017 inserted sub-section (5A) to section 45.

  1. Section 45 (5A) reads as under:

Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or

building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by “any consideration received in cash or by a cheque or draft or by any other mode” shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset:

Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of the said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub- section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.”

Explanation.—For the purposes of this sub-section, the expression—

  1. “competent authority” means the authority empowered to approve the building plan by or under any law for the time being in force;

  2. “specified agreement” means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;

  3. “stamp duty value” means the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.

    1. Dissecting the section, the position that emerges is-

      1. The provision is restricted to the landowners being individuals and H.U.Fs. It does not apply to other entities.

      1. It applies to computation of capital gain derived from transfer of land or building or both under registered specified agreement which has the characteristics of a joint development agreement in which the owner transfers land or building or both to another person allowing another person to develop a real estate project on such land or building for consideration.

      2. The consideration for transfer is given in terms of a share in the developed land or constructed building or both, with or without monetary consideration. In case the transfer is wholly for cash, the provision has no application.

      1. After the transfer of capital asset as per Section 2(47)(v) of Income Tax Act the gain becomes chargeable in the previous year in which the Completion Certificate ( “CC” ) in respect of the whole or part of the project is issued by the competent authorities and is accordingly, assessable in the relevant assessment year on the basis of market value computed in accordance with stamp duty value of incoming asset and not the value of capital asset transferred.

      1. In case the landowner transfers his share before the issue of completion certificate this sub-section does not apply. In other words, the capital gain in such cases is assessable as per normal provisions of the Act as if Section 45 (5A) does not exist on the statute.

      1. The full value of consideration for computation of capital gains will be the Stamp Duty Value of the incoming asset on the date of issue of completion certificate.

      1. Where the capital gain arises from the transfer of an incoming capital asset, being share in the project, in the form of land or building or both received by the assessee after the issue of completion certificates from the developer, the cost of acquisition of such asset, shall be the amount which is deemed to be full value of consideration in sub-section 45(5A) of Income Tax Act. The provision is applicable w.e.f 01.04.2018 that is, in respect of AY 2018-19 onwards.

  1. The provision attempts to resolve controversies

The provision has set at rest the controversies in respect of certain areas involving uncertainties leading to litigation. A brief mention of whether and to what extent, the provision has effectively achieved the object, is made hereinafter.

  1. Development Agreements involves transfer

The position of transfer of development rights about small lands is peculiar in the sense that the owner grants the right to develop while retaining the legal title over the land in question. Whether such right to develop Land and/or Building amounts to transfer within the meaning of law was a question which stood resolved by recourse to clause (v) of S. 2(47) which makes any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in S. 53A of the Transfer Of Property Act,1882 as a Transfer under the Income Tax Act. By giving extended meaning to the term ‘possession’, the AAR in Jasbir Singh Sarkaria brought the transaction of execution of Power of Attorney within the purview of the clause. The determination of transfer of immovable property has become a question of fact to be determined in each case on the basis of facts of the peculiar case.

Section 45 (5A) being a special provision for computation of gain from such transfers puts a seal of approval to the view that transfer of development right is a transfer of capital asset attracting capital gains and also prescribes the event of taxability to be applied uniformly in cases of specified development agreements.

  1. Year in which the Gain is chargeable

Prior to insertion of this section a big controversy prevailed, as to when the transfer takes place if a joint development agreement is executed between the owners and developer. Normally it is the event of transfer of capital asset that determines the date on which the capital gain arises and the relevant assessment year in which the transaction is subjected to tax. There were many controversies as to the event of transfer in such transactions. Is it when the development agreement is executed? Is it when the possession or Power of Attorney is given to the developer or any other event ? There were varying decisions from various judicial authorities in this respect.

Mention here may be made of the Bombay High Court decision in Chaturbhuj Dwarkadas Kapadia vs. CIT (2003) 260 ITR 491 and also the decision of AAR

in Jasbir Singh Sarkaria (2007) 294 ITR 196. Although the penultimate answer in these cases was different, the basic test adopted was the event of passing of control over the property in favour of developer. In Chaturbhuj Kapadia’s case such event was held to be transaction of execution of development agreement and accordingly, transfer was held to have taken place in the previous year of entering into the agreement. In Sarkaria’s case, such event was held to be the execution of General Power of Attorney. The determination of date of transfer was, therefore, based on facts and no uniform view was taken.

The approach of adopting the date of handing over possession as the date of transfer in a development agreement resulted in hardship to the owners of land as the liability to pay capital gain tax gets triggered much before the receipt of actual consideration. Section 45 (5A), as stated in CBDT Circular 2/2018, takes care of such hardship and treats the gain taxable in the previous year in which the CC is issued by the competent authorities and consequently assessable in that assessment year. The provision not only avoids the uncertainty but also goes a long way in relieving the hardship in genuine cases. The object of minimizing the hardship explains why the agreements under which entire consideration is paid in cash have been kept outside the purview of this section.

  1. Determination of the Fair Value of consideration

The determination of fair value of consideration in such cases was always a contentious issue. In view of uncertainty as to when the capital gain arises, not only the manner of determining the value of consideration but also the valuation date was an uncertain issue. Whether the consideration should be the market value or any other value and whether it should be the value as on the date when the transfer took place or when the consideration was actually received and whether the provisions of S. 50C apply, were the moot issues.

Section 45 (5A) has provided a definite answer to the above questions by laying down that the consideration will be the stamp duty value and such value will be the value as on the date when CC is issued. Such stamp duty value will be increased by monetary consideration, if any. It, therefore, makes it incumbent on the landowner to hold the asset till the date of issue of CC in case he desires to be governed by this provision as this provision will not be applicable to him if he ceases to hold the asset on the date of the issue of Completion Certificate.

Since under the scheme of capital gain taxation, the gain arises as per section 45(1) on transfer of the asset and is chargeable in the year of transfer, the legislature has, by implication, enacted a fiction under which the capital gains

become chargeable on the date of issue of completion certificate and not on the date of transfer.

  1. Issues arising from the provision

The provision although designed to avoid uncertainties may lead to certain issues in implementation. Divergent opinions are available as to interpretation of the provision. An attempt is made below to discuss few issues which are vital in nature and may need clarification.

  1. Applicability of the provision

The Finance act prescribed that the provision will be effective from 1st April, 2018 and will be applicable in relation to AY 2018-19. A question may arise whether it will apply in relation to the agreements executed prior to 1st April, 2017. There will be cases where the development agreements were executed, say in 2015, but the CC was issued on or after 1st April, 2017. Whether the date of coming into force, as prescribed in the Act is applicable in relation to the execution of agreement or issue of completion certificate? This issue needs to be clarified by CBDT.

There is a view that the provision will have no application if the Development Agreements were executed prior to 01.04.2017, even if the CC was issued on or after 01.04.2017. The view is based on the reasoning that this being a substantive provision cannot have retrospective application and, applying the provision to such cases will amount to applying the law retrospectively. The view finds support from the decision of the Hyderabad Tribunal in Adinarayana Reddy Kummeta vs ACIT (2018) 91 360 wherein it has been held that the section being a substantive provision, cannot be applied to development agreements entered into during the year 2008-09.

There is contrary view according to which the provision, although effective from 01.04.2017 (Assessment Year 2018-19) will apply retrospectively being curative in nature as it seeks to minimize the hardship of the landowner. Reliance is placed on the SC decision in Allied Motors (p) Ltd. vs CIT 224 ITR 677 followed by the court in CIT vs Alom Extrusions Ltd 319 ITR 306 wherein deletion of second proviso to Sec. 43B by the Finance Act 2003, although effective from 01.04.2004, was held to be effective retrospectively from1988 as it was enacted for removing the hardships faced by the employers in depositing the PF amount within the financial year. In case of S.45(5A), the object has been clearly stated as minimizing the hardship which makes it curative and on the analogy of the SC decision, can be treated as retrospective in nature.

There is another angle to consider the issue. Whether application of Sec.45(5A) to the gain arising from the agreements entered into prior to 01.04.2017 has retrospective application of law, if the completion certificate is obtained in the FY 2017-18 relevant to the AY 2018-19 and thereafter. The section is applicable in respect of gains assessable in A.Y. 2018-19 onwards by virtue of the CC having been obtained in the FY 2017-18 onward. For this, the agreement has to be of the nature of ‘specified agreement’ which has certain attributes. One such attribute is the transfer of land or building or both allowing the transferee to develop the land. Once, therefore, the CC is obtained on or after 01.04.2017, in respect of the building, the development of which was in accordance with an agreement having attributes of ‘specified agreement’, the requirements of the section are complied with, irrespective of the date of entering into the agreement. What is required is existence of a registered agreement having the attributes of a ‘specified agreement’, irrespective of when it was entered into. The applicability of the provision is in relation to the year of chargeability and not in relation to the timing of various stages in the process of development.

There appears to be a reasonable force in both viewpoints- (i) treating it as having retrospective application and (ii) not giving weight to the time of entering into the agreement so long as the registered agreement is of the nature of specified agreement and completion certificate is issued in A.Y. 2018-19 or thereafter.

  1. Determination of Cost of Acquisition

The provision is silent about the manner of determining the cost of acquisition of the transferred capital asset. The issue is relevant to indexation which is done upto the year of transfer. The basic question, therefore, is whether for this purpose, the year of transfer will be as per the general law i.e. the year in which possession is given. In that case the indexation will be upto the year of possession. The other view is that by providing that the capital gain will be chargeable to tax in the year in which CC is issued for the incoming asset. If this view finds favour, indexation will be upto that year.

The former view will result in two different years in relation to which the cost and the sale consideration will be determined which will not be in accordance with the scheme of capital gains taxation. Cost of acquisition and the fair value of consideration are the two ingredients for computation of capital gain and under all provisions, including S. 45(2) are determined on the same point of time. If a project is going to take say five years for completion, it will be anomalous if the cost is determined five years before the year in which the gain is brought to tax and the fair value of consideration is determined.

  1. Transfer of land held as business asset or agricultural land

Where the land to be transferred under the ‘specified agreement’ is held as an asset of the business and not as a capital asset within the meaning of in the Act, an issue arises as to whether the provisions of s. 45(5A) will be applicable.

Capital gain arises from transfer of capital assets. ‘Capital assets’ as defined in section 2(14) of the Act excludes any stock-in-trade, consumable stores or raw material held for the purpose of business or profession. If, therefore, the land or building under transfer is the stock in trade of any person engaged in real estate business and the same is transferred by such person for development, the transaction will be outside the purview of this provision. The same will be the case when the transfer is of agriculture land which also is excluded from the meaning of ‘capital asset’.

  1. Transfer of part of the development potential

In certain cases, the landowner decides not to transfer the entire development potential but retains a portion of it which he gets constructed for his own benefit through a contractor who also acquires balance development potential under a different agreement by paying monetary consideration only. Even when that portion is got constructed by the same person to whom the balance potential is transferred. The same person acts as a contractor rendering construction services to the owner in respect of part of FSI and for another part he acquires Development Potential by paying monetary consideration. Question may arise whether in such cases, Sec.45(5A) will apply?

Since developer purchases part of FSI for monetary consideration and for another part he acts as a contractor only. Both the events will be outside the purview of sec. 45(5A).

  1. Issue of CC for part of the project

As per the provision, as drafted, the gain becomes assessable when CC for the whole or part of the project is issued by the competent authority. It recognizes part completion certificate without specifying the different outcome of such certificate. On a literal reading it can be interpreted that even a part completion certificate will trigger the taxability of the entire project and the gain from entire share in property will become taxable.

Such an interpretation will be against the cannon of equity and fairness which demands that in case of CC for part of the project, only the gain attributable to the completed part will be subjected to tax. Any other view may not be sustainable.

  1. Owners transferring their share before CC

For various reasons, certain owners may not be able to hold the asset till the issue of CC. An issue may arise whether they be denied the benefits of S. 45(5A) ?

The answer is clearly provided in the Proviso to the section under which when the owner transfers his share before the issue of CC, the transfer of his share will take place in the year when the share is transferred and not the year in which CC is issued. Section 45 (5A) will have no application in such cases which will be governed by the normal provisions for determination of the year of assessment and fair value of consideration.

  1. Section 45 (5A) and TDS

Simultaneously with the introduction of section 45 (5A), the legislature enacted a separate provision for deduction of tax from payments under the specified agreement referred to in that section. There is a general provision contained in S.194IA in respect of TDS on payments on transfer of any immovable property. Special provision in respect of payments under specified agreements was made by enacting section 194IC effective from 01.04.2017.

    1. The person responsible for paying to a resident any sum by way of consideration under the “agreement referred to in section 45(5A)” is required to deduct an amount equal to 10% of such sum. The obligation to deduct tax under this section is only in respect of consideration paid in money to a resident.

    2. “Agreement referred to in sub-section (5A) of section 45” implies a joint development agreement with the attributes of a specified agreement under which there is area- sharing, with or without consideration in cash. In other words if the entire consideration is payable in cash only, such agreement will not be ‘specified agreement’ and section 194IC will have no application. In such a case, TDS obligation will be under section 194IA at the rate of 1% of the sum paid.

    3. The issue whether the expression “referred to in sub-section (5A) of section 45” relates to agreements executed on or after 01.04.2017 only or all the agreements with the attributes of specified agreement irrespective

of the date when these were executed, will remain. A discussion made in Part A of para 4 may be referred to?

    1. The TDS provision applies to payments under the agreement referred to in S 45(5A) ie the specified agreement. Such agreement being between individual/H.U.F and the developer only, the TDS obligation will arise only when payment is made to individuals/H.U.Fs. Further, under the provision, the payee should be a resident which is not a condition in the specified agreement u/s 45 (5A). Payment to non-residents is governed by

S. 195 only.

  1. ‘Cost of acquisition’ and 2023 amendment of Sec.55

As Section 45 (5A) does not provide for any method of determining the ‘cost of acquisition’ under specified agreements. The same is governed by the normal provisions of the Income Tax Act. Section 55governs cost of acquisition of certain intangible assets viz. goodwill, trade mark or brand name and certain rights including tenancy rights, stage carriage permits and loom hours. These assets/rights are either self- generated or do not have any ascertainable cost. Where there is no actual cost, the cost of intangible assets/rights is deemed to be ‘nil’.

    1. Finance Act 2023 while retaining the mention of these assets/rights, followed them by an omnibus provision extending the adoption of deemed ‘nil’ cost to all other assets of similar nature. The expression “goodwill of a business or profession, or a trademark, or brand name associated with a business or profession” is now followed by the expression “or any other intangible asset” and the expression mentioning rights, including tenancy rights, stage carriage permits, or loom hours is immediately followed by “or any other rights”.

    1. The amendment is of a sweeping nature and in the absence of any meaning given to ‘intangible assets,’ is susceptible to different interpretations as to the nature of any particular asset. There is an apprehension in the real estate sector that this omnibus provision will upset the projections of tax liability as the FSI may be treated as intangible asset with zero deemed cost by the Assessing Officers.

    1. In our view the apprehension is not well founded for the following reasons:-

  1. FSI is just the other expression of land, being the quotient of floor area to the area of land. Transfer of 10000 sq.ft land with 30,000 FSI can be expressed as transfer of 10000 sq.ft. land or, of 30,000 FSI. It is not an independent asset but just an expression of the tangible asset viz. the land.

  1. So is the case if the transfer is taken to be of development rights. Transfer of these rights is virtually the transfer of land, if these rights are fully taken out there will be hardly any value of the land. When Section 45 s(5A) is read with Explanation (ii), it becomes clear that transfer of land or building and allowing a builder to develop a real estate project have been treated at par.

  1. That the transfer of FSI/Development rights are no different from the transfer of land has been recognized under Maharashtra Stamps Act by providing for the same stamp duty on development agreements as leviable on transfer of land.

  1. That the general words “any other intangible asset” and “any other right” following the specific assets take colour from the specific assets and under the doctrine of ‘ejusdem generis’ are to fall in the same class in which the specific assets are. FSI cannot be taken to be an asset falling within the same class as goodwill which is an independent asset whereas FSI derives its value from holding of land.

  1. To conclude

S. 45 (5A) is a welcome provision which provides for certainty and fairness in taxation of landowners under the joint development projects. It is, however, strange that it has application only when the owner is individual or H.U.F. The problem faced by every assessee is the same irrespective of status under the Act and, what was appreciated as hardship to individual/H.U.F is also a hardship faced by other assesses. There being no ostensible reason for different treatment to persons with different status, the equity and fairness demand that the provision be extended to all assesses who enter into such joint development projects.

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