Capital Gains Tax Liability in Construction of Multi Storied Building

Question: Mr. Landlord owns a plot of land measuring 5000 sq. feet at Jaipur. He intends to enter into an agreement with Mr. Developer on 1/3/2009. Salient features of the agreement are as under:

• Mr. Developer would construct a multi-storied building over said plot at his own cost.
• The proposed building would be equally shared by Mr. Landlord and Mr. Developer after construction and this would be deemed to be full compensation/remuneration for the costs incurred by Mr. Developer.
• Mr. Developer would pay the security deposit of Rs. 15 lakhs before starting the construction work to Mr. Landlord which shall be refunded on completion of construction, or alternatively, Mr. Landlord is free to give one flat in the proposed building towards repayment of security deposit.

What is the tax liability to Mr. Landlord arising out of this transaction including the point of time of taxation, concerned head of income and manner of computation? Suggest any alternative mode of agreement meeting with the inherent objectives of the intended agreement and at the same time avoiding discomforts of intended agreement.

Answer:

1. If it is just a service contract wherein the possession of land is not given to the builder, there is no transfer of capital asset as on 01/03/09. In such contract, the builder has only the right to enter the premises and construct the building. The possession of undivided share in land with constructed property is TRF only after completion of the building therefore capital gains tax shall be levied only after completion of the construction.
2. The cost of construction to the builder shall be deemed to be the sale consideration to the landowner, i.e., capital gains = cost of construction to the builder - cost of land is the capital gains for the landowner (with CII).
3. Refundable deposit shall not be liable to tax; however, if the same is adjusted against the consideration, then accordingly the same shall be considered for taxation.
4. If possession of land is given at the time of the entering into the agreement, capital gains would arise at that point itself and in that case determining the gains is the question as the consideration to be received is the completed complex, as the construction is not complete. How would one determine the cost of such property of that might take substantial time to complete (considering the escalation in prices and other factors) between the time of initiation and ending of construction work?
5. It is always better to make it clear in the agreement that the land along with the constructed area is TRF only on completion of the construction or the possession of the property should not be given on part performance of a contract to avoid capital gains tax before the completion of the construction. A GPA can be made wherein the complex shall be sold by the builder on behalf of the landowner, so that the capital gains shall arise only on sale of the complex in parts.