Joint Development Agreement
A joint development agreement (JDA) between two or more companies is a legal agreement defining terms of a project designed to jointly promote or develop a product or service and enjoy the benefits accruing in the process and later on.
The JDA has to be registered by paying the appropriate stamp value and also an irrevocable General Power of Attorney (POA) has to be executed in favour of the developer by the owner.
Important points for a JDA:
- There should be contract for consideration;
- It should be in writing;
- It should be signed by the transferor;
- It should pertain to the transfer of immovable property;
- The transferee should have taken possession of property;
- Lastly, transferee should be ready and willing to perform the contract.
Now, there will certainly be a question in the mind of the reader whether this is a capital gain or a business income?
Since there is a capital asset (land) being transferred, it will attract capital gains.
The following are the Tax Implications of JDA:
In the hands of the Owner
- Since there is a transfer of a capital asset, as per sec 45(1) of the income tax act, 1961 capital gains are attracted and the assessment will take place in the year in which such transfer took place.
- As per Sec 45(2), capital asset converted to stock in trade will attract taxes, in the year in which such stock is sold, at the fair market value of the asset as on date of such conversion.
- Timing of taxation
- Whether capital gain taxable at the time land given for development or on receipt of share of built up are on land given up (developer share)?
- The point of taxation will be the date on which the domain and control of the immovable property is passed on to the buyer.
In the hands of the Developer
- AS 7, Construction Contracts shall apply here since the developer enters into an agreement for the project construction. The incomes earned by the developer will be assessed as business income since he is constructing for the purpose of sale
- Tax liability will arise when he sells the flats and gets the consideration from the buyers. The mere entering into a JDA will be treated as a builder's contract and no tax will be attracted till the flats are constructed and actual sale is affected.
- At, B C Shetty & Co, the following assistance will be provided to you:
What we Offer?
At, B C Shetty & Co, the following assistance will be provided to you:
Pre-JDA Service (before entering into a JDA)
- Preparation of JDA with the help of a lawyer, and insertion of tax beneficial clauses
- Assistance in studying the agreement and advising on its aptness
Post – JDA Services (after entering into a JDA)
- Tax compliances in the year of agreement to avoid penal consequences
- Tax compliances in the subsequent years
- Advisory services relating to renting of the property.
Case Study for Joint Development agreement
Mr. David, who owned a land entered into a Joint Development (JD) agreement with a builder in the Financial Year 2006-07. As per the terms of JD David would provide the land for construction of apartment and in return he would get certain number of flats. As per the agreement David would get the possession of property in 2010.
Based on their agreement David filed income tax return in FY 2010-11, by declaring the capital gain and paid the tax.
Subsequently David received a notice from the Income Tax Department.
The notice stated that he has to declare the income in FY 2006-07 since the date of transfer should be the date of agreement with builder.
David was uncertain on the notice and hence approached our capital gains team for professional and expert advice.
In reply to the above notice our team made a representation before the Income Tax authorities and asserted that since the actual transfer of property was in the year 2010, the payment of taxes should also be in the same year. The same was rejected by the Department.
We then filed an appeal with income tax tribunal by stating that the transfer was not complete at the time of agreement because transferee was not identified during that time. Hence there was no capital gains arose in the hands of David.
This contention of the assessee was partially accepted by the Appellant Authorities.