{"id":7985,"date":"2020-06-27T09:57:28","date_gmt":"2020-06-27T04:27:28","guid":{"rendered":"https:\/\/itatonline.org\/articles_new\/?p=7985"},"modified":"2020-06-27T09:57:28","modified_gmt":"2020-06-27T04:27:28","slug":"deferment-of-tax-issues-arising-in-the-context-of-section-455a-of-the-income-tax-act-1961","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/deferment-of-tax-issues-arising-in-the-context-of-section-455a-of-the-income-tax-act-1961\/","title":{"rendered":"Deferment Of Tax – Issues Arising In The Context Of Section 45(5A) Of The Income-tax Act, 1961"},"content":{"rendered":"

\"Advocate-Ranu-Jain\"The taxability of capital gains arising from Joint Development Agreements (JDAs) has been a subject matter of ongoing controversy. Section 45(5A) was inserted in the Income-tax Act, 1961 to incorporate special provisions for the taxability of these agreements. Advocate Rano Jain, a former Member of the ITAT, has explained the nuances of the entire law on the topic in a succinct and clear manner <\/strong><\/p>\n

INTRODUCTION<\/u><\/strong><\/p>\n

One of the main components of one’s income for Income Tax purposes is ‘Capital gains’. On transfer of a capital asset what a person earns or loses is assessed under this head. Chargeability and other related provisions of capital gains are contained in Part E of Chapter IV of the Income Tax Act. The term ‘transfer’ is defined under section 2(47) of the Act. Generally, on transfer of a capital asset, after deducting the cost at which the asset was acquired out of the sale consideration received, what results is the amount of capital gain\/loss. This computation is subject to various other provisions as provided under the Act. However, one thing is very clear that the capital gain arises at the instance of transfer of the capital asset.<\/p>\n

<\/p>\n

\n However, a deviation from this general rule was provided by the Finance Act, 2017, by inserting a new sub section (5A) to section 45, with effect from 01.04.2018, i.e. Assessment Year 2018-19. This provision defers the point of taxability from the point of transfer, in cases of Joint Development Agreements (JDAs), which are referred to in the provision as ‘specified agreements’.<\/p>\n

\n LEGISLATIVE ENCOMPASS<\/u><\/strong><\/p>\n

\n Section 4 of the Income-tax Act is the charging section by which income of a person is charged in respect of total income of the previous year, unless any other situation has been provided by any provision of this Act. Total income is the aggregate amount of income of an assessee from whatever source derived and as arises, accrues or is received in the previous year as is computed under the relevant provisions of the Act. Income includes capital gains arising on transfer of a capital asset. Section 45 deals with capital gains. Sub-section (1) of section 45 of the Act originally provides for the charging to tax the capital gains. According to this sub-section, any profits or gains arising from transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head ‘Capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. By virtue of this provision capital gain has been treated as income of the previous year in which the transfer is taken place.<\/u><\/strong><\/p>\n

\n The provisions of sub section (5A) introduced as above, reads as under:<\/p>\n

\n “(5A) 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 the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset:<\/em><\/p>\n

\n 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.<\/em><\/p>\n

\n Explanation<\/em><\/strong>.-For the purposes of this sub-section, the expression-<\/em><\/p>\n

\n (i) “competent authority” means the authority empowered to approve the building plan by or under any law for the time being in force;<\/em><\/p>\n

\n (ii) “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;<\/em><\/p>\n

\n (iii) “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.”<\/em><\/p>\n

\n The provision starts with a non obstante clause and is applicable only to individuals and HUFs. In case an owner of land, building or both, transfers such an asset through the JDA, the capital gain arising out of such transfer is provided to be taxable not at the time of transfer, but at the time of issue of completion certificate with respect to such asset. It is quite understandable that in most of the cases the completion certificate will be issued after the date of transfer of asset only. Though there may be a few stray instances in which the time of transfer may succeed the time of issue of completion certificate. In this manner, the provision defers the incidence of tax from the incidence of transfer. Since, in general, the Income Tax Act visualises situations of straight transfers, apart from a few provisions like 45(2).  All the other provisions of the Act, relating to computation of ‘capital gains’ are in sync with each other. However, this deferment of taxability arising out of emergence of this new provision will certainly pose certain difficulties.<\/p>\n

\n Before discussing the said difficulties, one should understand the legislative intent behind the act of bringing such a provision under the Act.<\/p>\n

\n The Memorandum explaining the provisions of Finance Bill, 2017 states as under with respect to the introduction of Sec. 45(5A):<\/p>\n

\n “With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, 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.<\/em>”<\/p>\n

\n In this modern era of complicated joint development agreements with respect to immovable properties, it has become very common to transfer the property to a developer by entering into JDA, on completion of the development, the agreed portion of the developed property together with or without the additional consideration is given back to the owner. In these types of real estate projects which many a times would be very large projects, there is always a time lag between the date of transfer and date of realisation of sale consideration. In such a situation if the transferor is required to pay taxes at the time of transfer, he may have to face many difficulties, on account of cash crunch, having not received the sale consideration as yet and mainly on account of complication in taking the value of the property in kind to be taken as sale consideration, the property which is not yet received by him. In order to remove this hardship, this provision has come under the statute.<\/p>\n

\n In this write up, an attempt has been made to analyse the various issues which are likely to arise, out of such deferment of taxability.<\/p>\n

\n DATE OF TRANSFER IS FROZEN<\/u><\/strong><\/p>\n

\n The term ‘transfer’ has been defined under section 2(47) of the Act. As section 45(5A) deals only with the capital assets being in the nature of land or building. For this the definition of transfer as provided under section 2(47) includes any sale, exchange or relinquishment of the asset, or the extinguishment of any rights therein. It may also include transfers in the nature of any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882.<\/p>\n

\n As the transfer is so well defined under the Act and no diversion is provided even under section 45(5A), the date of transfer has been made rigid by the instance of transfer as per this provision. Only the instance of taxability has been deferred by it. There is a very less likelihood for the date of transfer and taxability to coincide in cases of Joint Development Agreements.<\/p>\n

\n Another such instance under the Act is section 45(2), where also the date of transfer is deferred. In that section a situation is envisaged, where a capital asset is converted into stock in trade, capital gain is though taken to have arisen on the date of such conversion, the taxability arises only at the time of sale of the stock, which came into existence on conversion of the capital asset. The intention is clearly to tax the person at the time the consideration is realised, as on the date of conversion only the nature of asset changes from investment to inventory and nothing actually realises on that day. The similar intention is there in section 45(5A), as on the date of transfer nothing would have actually realised. However, it is to be borne in mind that in such a situation the property actually gets transferred on a date preceding the chargeability of tax. <\/u><\/strong><\/p>\n

\n PERIOD OF HOL<\/u><\/strong>DING<\/u><\/strong> <\/u><\/strong><\/p>\n

\n As is well known that the taxability of capital gains depends upon a number of factors, out of which one of the most important is the period of holding. In very general terms the time lag between the acquisition and transfer of asset is taken as the period of holding and that period predicts whether the capital gain arising is short term or long term.<\/p>\n

\n At the time of amendment in section 2(24) in the definition of the term ‘income’, by inserting clause (xiia) providing for fair market value of the inventory as on the date of its conversion to be treated as income, a simultaneous amendment was brought into section 2(42A), by inserting clause (ba) to Explanation-1, which provided for determining the period of holding to be reckoned from the date of its conversion into the capital asset. This amendment was introduced by Finance Act, 2018, w.e.f. 01.04.2019 to introduce the taxability of capital gains in a situation where the stock is converted into investment, almost as a converse of section 45(2). In this situation though the taxability is not deferred, still specific provision was inserted to clarify that the period of holding for the purpose of determining whether the gain is long term or short term, is to be taken from the date of its conversion.<\/p>\n

\n In case of section 45(5A), though the provision calls for deferment of tax from the date of actual transfer, still no such specific provision is provided to clarify how the period of holding is to be computed. In such a situation normal provisions of the Act will prevail.<\/p>\n

\n The substantive part of section 2(42A) giving the meaning of the term ‘short term capital asset’ reads as under:<\/p>\n

\n "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six <\/strong>months immediately preceding the date of its transfer<\/strong>.”<\/em><\/p>\n

\n Further, in the third Proviso to section 2(42A), by Finance Act, 2017, w.e.f. 01.04.2018, it was inserted that in case of immovable property being land, building or both the period of holding for this purpose is taken to be 24 months immediately preceding the date of transfer.<\/p>\n

\n In the scenarios envisaged by section 45(5A), the transfer takes place at the time of transfer as defined under section 2(47), the tax may be imposed at a later date when the completion certificate is issued but even at that time for the purposes of capital gain, the period between the acquisition and transfer of property is to be computed. This may lead to certain weird situations. For example, an assessee transfers a property under JDA to the developer for development after only a period of six months of its acquisition, the completion certificate is issued, say, after five years of such transfer. The capital gain would be taxable after a period of more than five years from the acquisition, however only as short term capital gain, since the period of holding between acquisition and transfer is only six months. <\/p>\n

\n INDEXATION<\/u><\/strong><\/p>\n

\n Section 48 provides for the mode of computation of capital gains. The second Proviso to this section also provides for indexation of cost of acquisition in cases of transfer of long term capital asset. Clause (iii) of Explanation under this section defines the term ‘indexed cost of acquisition’ as under;<\/p>\n

\n “(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred<\/strong> bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001 , whichever is later;”<\/em><\/p>\n

\n The law is very clear that the indexation benefit will be given to the extent of cost inflation index till the year of transfer. Suppose a land or building which was acquired by an individual before 2001 and the same is transferred for development under a JDA to the developer as on 31st March 2019, the completion certificate is issued sometime in the April 2025. In such a case the long term capital gain arising to the assessee on transfer of asset will be chargeable to tax in the Assessment Year 2026-27, while, it appears that the indexed cost of acquisition will be computed by taking cost inflation index for the year 2020 only. Since the ‘transfer’ took place in the Financial Year 2019-20 only.<\/p>\n

\n Now we will try to get some benefit from the judicial pronouncement delivered in the context of 45(2). In these cases also the instance of tax is deferred. There is a judgement of the hon’ble Karnataka High Court, in the case of CIT Vs. Rudra Industrial Commercial Corporation.  IT Appeal No. 3119 of 2005, dt. 25.01.2011, where the issue was the allowability of benefit of indexation, in the case of sale of stock which was converted in stock from investment, as is envisaged in section 45(2) of the Act. The High Court, observed as under:<\/p>\n

\n “Explanation (iii) to s. 48 defines indexed cost of acquisition which means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later.  <\/em><\/p>\n

\n 12. A harmonious interpretation of these two provisions makes it clear as to how the capital gains is to be taken into consideration. First we have to find out what is the fair market value of the asset on the date of conversion, then to find out what is the market value of the property on the date of transfer. So, in order to compute the capital gains payable, it is the market value on the date of transfer that is relevant and in arriving at that market value the index cost of acquisition as prescribed on the date of transfer is to be taken into consideration and not the date of conversion. In the instant case, the index cost of acquisition was 223 on the date of transfer in the year ending 1993 and the index cost of acquisition on the date of conversion is 161. Therefore, the AO committed a serious error in taking 161 as the index. The appellate authorities have rightly interfered with the said assessment and have taken 223 as correct index cost of acquisition. Therefore, when the impugned order passed by the appellate authorities is in accordance with the aforesaid statutory provisions, the said substantial questions of law have to be answered in favour of the assessee and against the Revenue.” <\/em><\/p>\n

\n Following decisions were rendered by the ITAT, following the above judgement of the Karnataka High Court:<\/p>\n