Tax Treatment of Breakdown of Joint Development Agreement

CS Deepak Pratap Singh

Real Estate and infrastructure sector is the growth engine for the development of the economy of the company. The Real Estate business is one of the most profitable business in India. This sector has contributed a lot to the exchequer and generates huge employment and wealth. The government of India has also taken various steps to improve condition and business environment in this sector. The Government recently promulgated The Real Estate (Regulation and Development) Bill, 2016 to curb malpractices in the real estate sector by real estate developers.

The Real Estate business requires huge investment, high skills, efforts and time. Since Real Estate Assets are generally not completed within a period of one year and revenue will be generated over years and a large span of time.

The Real Estate Developers are generally looking for perspective investors to finance their projects or the generally collaborate with other parties for investment. The other parties participating in real estate development will contribute through finance or through kind i.e. by parting with land with them to the developer for development.

When two different person come together for joint development or putting their resources together for harnessing the expertise of different agencies. For development of real estate, model of joint development arrangement has emerged as a popular model, wherein land owner and developer combine their resources together and efforts.

A Joint Development Arrangement in which land owner put his contribution as land and participate in joint development arrangement at the cost of developer. The land owner will contribute and give land to the developer and the developer will develop the real estate on his own cost. The land owner in this case get consideration either lump sum or percentage of sales revenue or certain percentage of constructed area in the project depending upon terms and conditions of Joint Development Agreement.

In this way, the resources and efforts of land owner and developer are pooled together so as to bring out the maximum productive result.

There are various types of Joint Development Agreements or Arrangements depending upon terms and conditions agreed by the parties to the agreement. The treatments of these types of agreements or arrangements are different in the Income Tax Act, 1961. The treatment will depend on the terms and conditions of the agreement or arrangements.

In this article we shall discuss tax liabilities in case of breakdown of Joint Development Agreements or Arrangements in the hand of land owner as well as developer.

In some cases a Joint Development Arrangement, breaks down due to dispute between the parties before completion of the project or before project reaches a reasonable stage. In some cases the Joint Development Arrangement breaks down at such stage on which some taxes has been paid by the both parties by performing their parts.

Now Section 2(47) of the Income Tax Act, 1961 dealing with transfer of assets provides that ,in case of a Joint Development Arrangement , when possession of the land and General Power of Attorney has been handed over by the Landowner to the Developer ,this transaction will be deemed as “transfer”.

However in case of breaks down of Joint Development Arrangement , it cannot be interpreted that all the conditions required to be fulfilled for “transfer “ u/s 2(47)(v) have been complied with and in such a case there cannot be any “transfer” of land on which owner may be liable to pay Capital Gain tax.

Now breaking down of Joint Development Arrangement implies that  the parties are not ready to perform their part of acts and the provisions of Section 53A of Transfer of Property Act, 1882  are not fulfilled and therefore provisions of Section 2(47)(v) of the Income Tax Act, 1961 do not apply.

Let us consider a case General Glass Co. (P.) Ltd.V Dy.CIT(2007) 108TTJ 0854/(2007) Mumbai ITAT the Tribunal has held that when transferee had failed to make payment of balance sale consideration, it can be constitute that transferee was not willing to perform his obligation under the contract and having failed to keep the time schedule of payment of balance sale consideration as per agreement for sale, no transfer within the meaning of Section 2(47)(v) of the Income Tax Act, 1961 read with provisions of Section 53A of the Transfer of Property Act, 1882 could be said to have taken place.

Now in above case if the landowner has already recognized transfer of land and has filed income tax return , offering Capital Gain tax on transfer of land and after Joint Development Agreement has been breaks down and ownership of land again return to the landowner , two situations arises;

One option is that the landowner will revise his return filed earlier ,since breakdown indicates that there was no transfer of land to the developer and request for refund of Capital Gain tax paid to the exchequer; or
Treat the returned land as repurchase and in such case the sale consideration already paid in case of “transfer” as earlier recognized shall be treated as Cost of Acquisition of the land.
Note: in some cases after breakdown of the Joint Development Arrangement, the land owner receives some compensation, now the treatments of this compensation in the hand of land owner become an issue. If the compensation is received as liquidation damages, then it is treated as Capital Receipt and not taxable. It was decided in case of Ram Nath Exports Limited v CIT (2010) 151 Delhi it was held that liquidated damages linked with profit making apparatus are in nature of Capital receipt.

There may be a case in which the landowner has to pay some compensation to the developer after breakdown of Joint Development Arrangement to claim his land. In this case also question arise about taxability of payment of compensation, whether it will be treated as cost of improvement of the land and be included in the cost of land or otherwise. Now in this case the landowner has to prove that the compensation has been paid and the same has enhanced the value of the land and same be added in the value of the land.