Redevelopment has emerged as a significant trend in urban real estate, particularly for aging cooperative housing societies. This process involves a complex interplay of property rights, tax implications, and legal considerations. Through Joint Development Agreements (JDAs) or Redevelopment Agreements, property (flat) owners collaborate with developers to transform their existing properties into modern structures, typically receiving larger spaces or monetary compensation in return.         The developer demolishes the existing building and constructs a new one with increased built-up area. This process, while beneficial for property owners, raises several important tax and legal considerations. Let’s explore the key aspects through commonly asked questions.

Redevelopment has emerged as a significant trend in urban real estate, particularly for aging cooperative housing societies. This process involves a complex interplay of property rights, tax implications, and legal considerations. Through Joint Development Agreements (JDAs) or Redevelopment Agreements, property (flat) owners collaborate with developers to transform their existing properties into modern structures, typically receiving larger spaces or monetary compensation in return. The developer demolishes the existing building and constructs a new one with increased built-up area. This process, while beneficial for property owners, raises several important tax and legal considerations. Let’s explore the key aspects through commonly asked questions.

Q:1 What is Joint Development Agreement (‘JDA’ in short) ?
A:1 A Joint Development Agreement (JDA) is a legal contract between a Flat Owner / Land Owner and a developer where the landowner contributes land and receives either constructed units or a share of sale proceeds in return. The developer gets rights to construct and sell the remaining units, while handling all development aspects.

Q:2 What are the key legal documents involved?
A:2 Essential documents include:
• Development Agreement
• Power of Attorney
• Permanent Alternate Accommodation Agreement
• Consent letters from society members
• Municipal approvals and permissions

Q:3 What types of compensation/amounts are typically received by flat owners in a redevelopment project?
A:3 Flat owners typically receive the following amounts in a redevelopment project:
1. Primary Benefits:
• New flat with larger area in the redeveloped building
• Corpus fund/compensation for agreeing to redevelopment
• Additional area compensation (if any)
2. During Construction Period:
• Monthly rent for alternative accommodation
• Shifting allowance (for moving out and moving in)
• Temporary accommodation or rent compensation
3. Additional Benefits:
• Parking space allocation
• Amenity compensation
• Infrastructure and facilities upgrade benefits
• Society maintenance deposit
• Utility connection charges reimbursement
4. Other Possible Payments:
• Hardship compensation
• Delay compensation (if project extends beyond agreed timeline)
• Additional corpus for senior citizens (in some cases)
These amounts have different tax implications and need to be considered separately while computing total tax liability.

Q:4 Under which head of income are various amounts received in redevelopment taxed?
A:4 Here’s the tax treatment for different amounts received:
1. New Flat
• Head: Capital Gains
• Basis: Value of new flat + cash (if any) is considered sale consideration
• Section: 45(5A) for Individuals/HUFs
2. Monthly Rent Compensation
• Head: Income from Other Sources
• Nature: Regular compensation for temporary accommodation
• Taxable in year of receipt
3. Corpus Fund
• Generally considered Capital Receipt
• Not taxable if received as one-time payment for agreeing to redevelopment
• If recurring in nature, may be taxable under Other Sources
4. Shifting Allowance
• Head: Income from Other Sources
• For both moving out and moving in expenses
• Taxable in year of receipt
5. Delay Compensation
• Head: Income from Other Sources
• As per Section 56(2)(viii)
• Taxable in year of receipt
6. Additional Area Compensation
• Head: Capital Gains
• Part of consideration for transfer of development rights
• Taxed along with flat value
Remember: The exact tax treatment may vary based on how these amounts are structured in the development agreement.

Q:5 When do flat owners need to pay tax in a redevelopment project?
A:5 The timing of tax payment depends on who owns the flat:
1. For Individual/Family (HUF) owners (covered under Section 45(5A)):
• Tax needs to be paid in the year when building completion certificate is received
• Not when you sign the agreement or when construction starts
• But if you sell your rights before completion, tax is payable in the year of sale.

2. For Other owners (companies, firms etc.):
• Tax needs to be paid in the year when you sign the agreement and give possession for redevelopment
• Don’t need to wait for completion
3. For Additional Benefits (for all owners):
• Rent compensation, shifting allowance etc. – Tax payable in the year you receive these amounts
• Corpus fund usually not taxable
This makes it simpler for individual flat owners as they don’t have to pay tax until they get their new flat.

Q:6 Which sections govern the timing of taxability in redevelopment cases and how are they applied?
A:6 The key sections governing timing of taxability are:
1. Section 2(47) – “Transfer”:
• Sub-clause (v): Transfer in part performance of contract under Section 53A of Transfer of Property Act
• Sub-clause (vi): Enabling the enjoyment of immovable property
2. Section 45(1) – General Provision:
• Taxes capital gains in year of transfer
• Applies when any clause of Section 2(47) is triggered
3. Section 45(5A) – Special Provision:
• Overrides Section 45(1)
• Applies only to Individual/HUF
• Defers tax liability to year of completion certificate
• Requires registered agreement

Q:7 What are the tax implications for both parties in a Joint Development Agreement (JDA)?

A:7 In a Joint Development Agreement:
For Developer:
• Income is taxable under “Profits and gains of business or profession”
• Must deduct TDS at 10% under Section 194-IC when making payments to landowner / flat owner
• Income recognized as per project completion method

For Landowner / Flat Owners:
• Taxable under Capital Gains
• For individuals/HUFs, tax liability arises in the year of completion certificate (Section 45(5A))
• TDS at 10% is deducted by developer on monetary payments only

Q:8 How is the sale consideration determined for a flat owner in a redevelopment agreement?
A:8 For determining the sale consideration in case of flat owners:
Under Section 45(5A), for individuals and HUFs:
1. The full value of consideration = Stamp duty value of new flat (on date of completion certificate) + Any extra amount of compensation received
2. If the owner sells their share before completion certificate, normal provisions apply and actual sale value is considered

Key Points to Note:
• Stamp duty value is taken as on the date of completion certificate
• Any hardship compensation or rent received during construction is separately taxable as income
• Any temporary accommodation cost or rent paid by developer isn’t deducted from sale consideration

Q:9 Whether registration of Joint Development Agreement makes any difference ?
A:9 Yes, registration of JDA makes a significant difference. Here’s why:
Legal Impact (Based on Supreme Court in Balbir Singh Maini case):
• Unregistered JDA has no legal effect under Section 53A of Transfer Property Act
• After 2001 amendment, registration is mandatory for enforcing rights under Section 53A
Tax Impact:
1. For Registered JDA:
• Transfer under Section 2(47)(v) can be triggered
• Section 45(5A) benefits available for individuals/HUFs
• TDS provisions under 194-IC applicable
• Stamp duty value can be considered for valuation
2. For Unregistered JDA:
• No transfer under Section 2(47)(v)
• Section 45(5A) benefits not available
• Tax implications arise only on actual transfer
• May face challenges in claiming development rights
Why Registration Matters:
• Provides legal certainty and enforceability
• Enables access to beneficial tax provisions
• Protects rights of both parties
• Required for claiming tax benefits under Section 45(5A)
Therefore, registration is crucial for both legal protection and tax benefits in redevelopment projects.

Q:10 If I don’t register my redevelopment agreement, do I need to pay tax immediately at the timing of registration?
A:10 No, actually not registering your agreement means you pay tax later. Here’s how it works:
If Agreement is Registered:
• Individual flat owners pay tax when they get new flat
• Other owners might need to pay when they hand over property for redevelopment
If Agreement is Not Registered:
• You pay tax only when you actually get your new flat or money
• Just signing papers doesn’t mean you have to pay tax
• The Supreme Court has confirmed this in the Balbir Singh Maini [2017] (398 ITR 531) (SC)

Simple Rule: Without registration, no tax until you get something in hand – either your new flat or money.

Q:11 What did the Supreme Court decide about when transfer happens in redevelopment cases in Seshasayee Steels (P.) Ltd. vs. ACIT [2020] 421 ITR 46 (SC) case?

A:11 Timeline of Events:
1. 15.05.1998:
• Agreement to sell signed
• Builder got rights to advertise and sell
• Permission to start construction given
2. 27.11.1998:
• Power of Attorney (POA) given to builder
• Rights to execute sale agreements
• Authority to deal with government offices
3. Later:
• Original agreement conditions not followed
• Disputes arose between parties
4. 19.07.2003:
• ‘Memo of Compromise’ signed
• Settlement amount agreed
• Company’s rights fully extinguished
5. Assessment Year 2004-05:
• Company didn’t file return
• Tax officer discovered compromise deed
• Assessment reopened
• Ex-parte assessment order passed
Three main questions were considered:
1. Whether Section 2(47)(v) applies?
• Does ‘agreement to sell’ & power of attorney of 1998 trigger transfer?
• Was possession given under Section 53A of Transfer of Property Act?
2. Whether Section 2(47)(vi) applies?
• Did the agreement enable enjoyment of immovable property?
• Did the original agreement transfer effective property rights?
3. Whether ‘Memo of Compromise’ triggers transfer?
• Can compromise deed be considered as transfer?
• Which clause of Section 2(47) applies to compromise deed?
• What is the correct year of taxability?
These questions helped determine when exactly the ‘transfer’ happened for tax purposes – in 1998 with initial agreements or in 2003 with compromise deed.

A: The Supreme Court clarified three important points:
1. Just giving permission to build (license) is not a transfer:
• If you only allow developer to construct
• But keep your ownership rights
• This doesn’t count as transfer for tax purposes
2. About Transfer Rights:
• Transfer happens only when you actually give up your rights
• Signing agreement and giving power of attorney alone isn’t enough
• Your rights must be fully given up for tax to apply
3. When Tax Applies:
• Tax applies when you completely give up your rights
• In this case, it happened when final settlement was done through ‘deed of compromise’
• The payment received in final settlement was taxable
Simple point: Just letting someone build on your property isn’t enough for tax – you must actually give up your rights over the property for it to be considered a transfer.

Q:12 When and why was Section 45(5A) introduced in Income Tax Act?
A:12 Introduction and Purpose:
1. When Introduced:
• Through Finance Act, 2017
• Effective from April 1, 2018 (Assessment Year 2018-19)
2. Why Introduced: Practical Problems it addressed:
• Earlier, tax liability arose when JDA was signed (under Section 2(47)(v))
• But actual flats/consideration received much later after project completion
• Created hardship as tax had to be paid without receiving benefits
• Difficulty in determining Full Value of Consideration at agreement stage
3. Key Solution:
• For Individual and HUF taxpayers only
• Defers tax liability to year of completion certificate
• Value determined based on stamp duty value on completion date
• Provides relief from advance tax payment
• Aligns tax payment with actual receipt of benefits
Note: The section specifically addresses the timing mismatch between tax payment and receipt of benefits in redevelopment cases.

Q:13 Can I claim Section 54 deduction when I receive my new flat in redevelopment?

A:13 The situation needs careful analysis:
1. Section 54 Requirements:
• Sale proceeds must be invested in new residential house
• Investment within specified time limits
• Property must be residential
2. In Redevelopment:
• New flat is received against transfer of old flat rights
• It’s essentially an “exchange” transaction
• You’re not actually investing sale proceeds
Legal Position:
• No clear provisions in Section 45(5A) about Section 54
• Courts have taken different views
• General view: Not eligible as no reinvestment of proceeds

Q:14 Which judicial decisions favour taxpayers claiming Section 54 benefits in redevelopment cases?
A:14 Key Judgments Favouring Assessees:
1. Mrs. Aarti Sanjay Kadam v. ITO [2018] 172 ITD 362 (Mumbai):
• Capital gain taxable only when constructed area is received
• Time limit for 54/54F should start from receipt of new flat
2. CIT vs. Smt. Najoo Dara Deboo [2013] 218 Taxman 473 (All):
• Capital gains arise only when consideration is received
• Investment period should be counted from actual receipt
3. K. Radhika vs. DCIT [2012] 149 TTJ 736 (Hyd. ITAT):
• Mere development rights don’t constitute transfer
• Actual receipt determines timing for Section 54
Basic Principle Established:
• Section 54 benefit shouldn’t be denied just because it’s redevelopment
• Reasonable time should be given for investment
• Time limits should be counted from actual receipt
Note: These judgments support taxpayer’s right to claim Section 54 benefits in redevelopment cases.

Q:15 Does Section 45(5A) apply if I’m getting only money and no flat in redevelopment?

A:15 No, Section 45(5A) doesn’t apply if you’re getting only money. Here’s why:
The law specifically requires two conditions:
1. You must get a share in the developed property (like a flat), or
2. You must get both – property share plus some money
If you’re getting only money:
• It’s not a ‘specified agreement’ under Section 45(5A)
• Normal capital gains rules apply
• Tax will be payable in the year you receive money
Simple Rule: No property share = No Section 45(5A) benefit

Q:16 In redevelopment, how do we decide if my property gain is Long-term or Short-term?
A:16 The duration of property holding determines long-term or short-term status:

For Long-term Capital Gain:
• Must hold property for more than 24 months
• Period counted from original purchase date
• In redevelopment, two views exist:
1. Count till date of development agreement
2. Count till completion certificate date
For Short-term Capital Gain:
• If held for 24 months or less
• Higher tax rate applies
Simple Example: If you bought flat in Jan 2020 and:
• Signed redevelopment agreement in Mar 2022 (within 24 months) = Short term
• Signed agreement in Apr 2022 (after 24 months) = Long term
Tip: Try to complete 24 months before signing redevelopment agreement to get long-term benefits.
Note: For individuals under Section 45(5A), though tax is paid on completion, holding period is generally counted till agreement date.

[Source : Souvenir published on 27th National Convention of AIFTP 2024]

Posted on: December 24th, 2024