Best Practices & SOP for capital gains on Joint Development Agreements u/s 45(5A)

CBDT prescribes Best Practices and Standard Operating Procedure for Assessing Capital Gains on Joint Development Agreements (JD As) under Section 45(5A) of the Income Tax Act, 1961.

Joint Development Agreement (JDA) means a registered agreement in which a person owning land or building agrees to allow another person to develop a real estate project on such land or building, in consideration of a share in such project, whether with or without payment of part of the consideration in cash or by a cheque or draft or by any other mode.

If an individual or HUF enters into a JDA with a builder or joint developer, it shall be deemed that the capital asset is transferred during the year in which the certificate of completion for the whole or part of the project is issued by the competent authority

Before the introduction of Section 45(5A), a landowner entering into a JDA would be liable to pay capital gains tax in the year the agreement was signed, even though they had not yet received their share of the developed property or monetary consideration.

This created a genuine hardship, as taxpayers had a tax liability without the means to pay it. To address this, the Finance Bill, 2017, introduced Section 45(5A), which provides a specific framework for individuals and Hindu Undivided Families (HUFs) who transfer land or buildings under a specified agreement. Under this provision, capital gains are now chargeable to 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 (authority empowered to approve the building plan by or under any law for the time being in force). The full value of consideration is deemed to be the stamp duty value of the landowner’s share in the project on the date the completion certificate is issued, along with any monetary consideration received.

CBDT has issued an Office Memorandum titled as Best Practices and Standard Operating Procedure (SOP) for Assessing Capital Gains on Joint Development Agreements (JDAs) under Section 45(5A) of the Income Tax Act, 1961 (the Act).

The Investigation Division of CBDT had requested identification of the competent authority responsible for issuing occupancy-cum-completion certificates within each jurisdiction and collection of data for the last three financial years (FY 2021-22, 2022-23, and 2023-24). It was also requested obtaining details on the number of completion certificates issued during this period, reviewing the format in which such data is maintained by the competent authority, and assessing the feasibility of integrating this data with the Income Tax Department’s systems.

Pursuant to these instructions of CBDT, the Kolkata charge conducted the required investigation and submitted its report.

The office memorandum outlines the provisions of Section 45(5A) of the Act and SOP based on the successful practices adopted by the DGIT(Investigation) Kolkata for the identification of potential cases of undisclosed capital gains u/s 45(5A) arising from Joint Development Agreements (JDAs).  The method followed by the DGIT(In) Kolkata allowed them to proactively identify cases of noncompliance rather than relying on chance or third-party information.

In short, the methodology adopted by Kolkata Investigation Office to identify potential cases under Section 45(5A) were as under:

(a) Utilizing RERA/HIRA Websites: The first step involves accessing the websites of the Real Estate Regulatory Authority (RERA) or the Housing Industry Regulation Act (HIRA) for their respective states or any other relevant sources of information. These websites contain a wealth of information, including lists of registered and approved projects.

(b) Identifying Relevant Projects: The directorate identified approved projects under JDA where the landowners are individuals or HUFs. This is done by scrutinizing the project details and related documents ( e.g., IDA/Development Agreements) available on the regulatory websites.

(c) Cross-Referencing with Tax Returns: Once a potential case is identified, the next step is to download the copy of the tax return from the CPC 2.0 portal for the year in which the completion certificate was issued.

(d) Verifying Capital Gains Disclosure: The Schedule-CG (Capital Gains) in the tax return is then checked to ensure the landowner has disclosed the required capital gains as per the provisions of Section 45(5A).

(e) Issuing Summons: If the landowner has not disclosed the capital gains, a summon under Section 13 l(lA) of the Act is issued to seek their version and gather supporting documentary evidence.

The CBDT has advised all jurisdictions that the model implemented in the Kolkata can be adopted as a standard operating procedure on a PAN India level to effectively monitor and assess capital gains under Section 45(5A).

It has been clarified that if the required information is not available on the respective RERA websites, the Directorate may approach the concerned RERA or development authorities to obtain JDA-related details and take further action as appropriate.

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