Income tax department probing evasion of capital gains tax on joint development agreements

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The Et reported that all landowners who had cut ‘joint development’ deals with builders are under the lens for skirting tax on capital gains.

The investigation wings of the Income Tax (I-T) department across the country have been told by the central direct tax body to collect information on agreements where individuals and Hindu Undivided Families (HUFs) had struck a deal with developers but may not have paid tax even after the buildings received ‘completion or occupation certificates’ (CC/OCs).

CC/OCs are typically issued by municipal authorities of states once the construction is complete and the projects are in a ready-to-move-in state.

tax on property owners

In a communique towards end-October, all director generals of I-T investigation wings in several cities were asked by the Central Board of Direct Taxes (CBDT) to fish out data on properties that were given CCs or OCs during the financial years 2020-21, 2021-22, and 2022-23, ET said.

“The CBDT is apprehensive of the fact that in many cases the eligible assessees have not paid the capital gains tax in the year of receipt of the completion certificate. The data collected by the tax department will have to be first filtered for identifying the joint development agreements (JDAs) executed by eligible assessees and have to be transmitted to their respective assessing officers for suitable action,” said Pradip Kapasi, founder of the Mumbai-based CA firm Pradip Kapasi & Co.

‘Timely Reminder’

“The communication by the board is a timely reminder for the taxpayers to ensure that the tax so deferred is paid in the year of receipt of completion certificate, failing which penal action may follow,” added Kapasi, whose firm specialises in real estate related matters among other things.

Land (or property) owners, signing JDAs with builders, are required under the law to pay tax on capital gains under Section 45(5A) of the I-T Act. The capital gain is the difference between the acquisition price of the land (after factoring in indexation benefit) and the consideration received from developers – which is typically a combination of cash and residential apartments or commercial space. The tax is 12.5% for long-term gains (where the landowner had acquired the property two or more years before signing the JDA), while the short-term rate could vary from 10 to 39% depending on the income slab an assessee belongs to.

Earlier, the tax was required to be paid soon after the execution of the agreement with the builder.

Since 2017, in a move to give relief to cash-starved assessees, the regulation was relaxed to allow payment of tax in the year CC/OC is received.

However, many landowners, having let out properties on lease and rent after the completion of the projects, have not paid tax.