Section 45(5A) of the Income Tax Act provides a special mechanism for taxing capital gains in the hands of individuals or HUFs who enter into registered Joint Development Agreements (JDAs) for the development of land or buildings. As per the provision, capital gains are chargeable to tax in the year in which the competent authority issues a certificate of completion for the whole or part of the project. The consideration for computing such capital gains is deemed to be the stamp duty value of the share of the developed property received by the landowner on the date of issue of such certificate. This section was introduced to ease the tax burden for landowners by aligning the timing of tax with actual realization of developed property, and it operates notwithstanding Section 50C, which generally applies where the sale consideration is less than the stamp duty value in direct transfers. Hence, where Section 45(5A) applies, Section 50C does not apply separately.
In cases involving small residential or commercial developments, particularly where local municipal laws do not require the issuance of a formal completion certificate, the position becomes more complex. Technically, if no completion certificate is issued, the triggering event under Section 45(5A) does not occur. This raises the issue of whether the tax gets deferred indefinitely or whether the transaction reverts to being taxed under the general provisions of Section 45. In such cases, tax authorities may argue that the transaction falls under Section 2(47)(v), which treats a transfer as having occurred when possession is handed over under a contract in the nature of part performance under Section 53A of the Transfer of Property Act. However, many JDAs include a specific clause stating that possession is being given to the developer solely for the limited purpose of construction and shall not be deemed to be possession for the purposes of Section 53A. Courts have recognized that limited possession which does not confer rights akin to ownership and does not permit transfer or enjoyment in terms of Section 53A does not constitute a transfer under Section 2(47)(v).
In such a case—where the JDA is registered, no completion certificate is required by law, and the agreement clearly states that possession is only for construction and not for part performance—it can be reasonably argued that no transfer under the Income Tax Act has occurred until the actual handover of the completed portion to the landowner. Therefore, the tax on capital gains may be deferred to that year, even though the triggering event under Section 45(5A) (completion certificate) does not technically occur. The logic here is that in the absence of a deemed transfer under Section 2(47), and in the absence of completion, there is no taxable event. This position, however, may need to be supported with adequate documentation and may carry litigation risk, especially in the absence of specific CBDT clarification.
As for unregistered JDAs, since Section 45(5A) explicitly applies only to registered development agreements, such transactions fall outside its scope. However, courts have held, particularly in the case of CIT v. Balbir Singh Maini (2017 (10) TMI 323 - SUPREME COURT), that an unregistered development agreement cannot be enforced under Section 53A, and hence no transfer is deemed to have occurred under Section 2(47)(v). Therefore, even in the case of an unregistered JDA, if possession is limited and does not give the developer any enforceable right under Section 53A, capital gains may not be triggered immediately. In effect, this puts both registered JDAs without completion certificates and unregistered JDAs with limited possession on a similar footing, provided the agreements are carefully drafted and implemented.
In conclusion, where the JDA is registered but no completion certificate is required or issued, and possession is clearly limited for construction purposes, it may be possible to defer the capital gains tax to the year in which the constructed property is actually received. A similar position may also be arguable in the case of unregistered JDAs, provided there is no effective transfer of rights. However, due to the interpretational complexity and absence of specific guidance in such cases, a conservative approach supported by legal opinion and proper documentation is advisable.
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