Joint venture Deal

Querist : Anonymous (Querist) 29 May 2011 This query is : Resolved
My father has a land on which a builder wants to build in JV partnership .

What precautions can we take in the legal agreement , so as to avoid trouble in future ?
He has brought a deal paper which is so tough to understand that even sanskrit pandits will have a tough time ( I mean to say that it is a very very difficult Hindi language)

please advice your best points to be included in the deal and safe ways to carry forward the deal ..

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A V Vishal (Expert) 29 May 2011
The developer is not a transferee/purchaser coming within the purview of Section 53-A of the Transfer of Property Act, 1882.
The developer does not buy any land or property from the owners.
The right to develop the property granted to a developer as provided in the development agreement does not constitute a contract to a transfer of any immovable property as between the owner and the developer, to attract the provisions of Section 53-A of the Transfer of Property Act, 1882 between them.
The developer only nominates the prospective buyers. The developer enters the property only for the purposes of development of the property and not as a purchaser/ transferee. The GPA given to a developer is only to enter into agreements with the prospective buyers for and on behalf of the owner and not for executing the sale deeds. There will be a restrictive clause in the GPA to this effect.
Only the prospective buyers are the purchasers/transferees in respect of the flats/ apartments purchased by them together with the corresponding shares of undivided interests, rights and titles in the land.
The prospective buyers of flats/apartments are never put into possession of them before the sale deeds are executed and registered in their favour and hence (i.e. there is no scope for invoking the provisions of Section 2(47)(v) read with Section 45 of the Income Tax Act, 1961 and the provisions of Section 53-A of the Transfer of Property Act, 1882).
It is only the developer who develops the land by the construction of flats/apartments together with common ways, infrastructure, amenities and facilities both for the owners of land as well as for the prospective buyers of flats/apartments and his profit margins are assessable as business income.

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The basic legal concepts, principles and practices in relation to the property development transactions in general and those covered by what is popularly known as "Joint Development Agreements (JDA)."

The tax incidence of the same is also discussed in detail.

Owner of land: A single owner or a group of co-owners own certain land.

Conversion: Such land may be agricultural in nature and they get `converted' by suitable orders of the competent statutory authorities for use for non-agricultural purposes i.e., for the development of sites, flats, apartments, townships etc.

Offer of developer: A property developer approaches the owners and offers the following:

a. To construct for the owners certain specified extent of built-up area of flats/apartments together with the right to use certain common areas, facilities and amenities. In addition, a specific amount may also be offered to the owner, by way of a refundable or a non-refundable advance.

b. In return for the same, the owner agrees to sell a specified share/percentage of undivided interest in the land to the prospective buyers nominated by the developer. The owner also grants exclusive rights of development of the land to the developer.

The developer is granted the rights to construct for himself certain extent of built-up area and own it. The developer is authorised and empowered to sell his share of the built-up area together with the corresponding shares of undivided interest in the land to the prospective buyers and appropriate to himself the entire sale proceeds as his own.

Acceptance and execution of development agreement: The aforesaid terms are accepted by the owners and the development agreements are entered into between them and the developers. Under these agreements the developer by himself does not purchase any immovable property from the owner and it is the prospective buyer who buys a specified share of the undivided interest in the land from the owner.

Therefore, these agreements between are purely contractual and commercial in nature and hence the provisions of Section 53-A of the Transfer of Property Act, 1882, has no application since the developer by himself is not a transferee or purchaser of any immovable property.

Popularly known as joint development: Even though it is only the developer who develops the property and constructs the buildings and the owner only receives his share of built-up area, the above arrangement is popularly known as "joint development."

Developer to nominate buyers: The developer is authorised to exclusively nominate the prospective buyers and enter into agreements with them, fixing the sale prices and considerations payable by them.

G.P.A to developer: A General Power of Attorney is given by the owner to the developer authorising and empowering him to carryout the following:

To represent the owner before appropriate statutory authorities and obtain necessary permission, approvals and clearances.

To enter into agreements for the sale with the prospective buyers of the developer's share of the built-up area together with corresponding undivided share and interest in the land.

To execute and register the deeds of absolute sale and conveyance in favour of prospective buyers in pursuance of the agreements entered into with them with a clear stipulation that this power will be exercised after the owner's share of construction is completed and handed over to the owner with occupancy rights (read next paragraph for further clarity).

No power given to developer to execute sale deeds and possession to prospective buyers before sale: The developer is not given any power to execute sale deeds in favour of the prospective buyers. Once the developer completes the construction of the specified built-up area of flats/apartments for the owner as per the agreed specifications and dimensions, and on handing over the same to the owner with `occupancy' rights (being granted by the competent statutory authorities), the sale deeds are executed by the owner himself in favour of the prospective buyers.

In the alternative, only at that stage the owner gives a separate General Power of Attorney to the developer to execute and register the sale deeds on behalf of the owner to and in favour of the prospective buyers.

At no stage before the actual sales are effected are the prospective buyers put in possession of the flats/ apartments sold to them.

Developer's right to entry is only licence, not possession: It will be specifically provided that the development and construction and such right of entry is only a licence coming within the purview of the provisions of Section 52 of the Indian Easements Act, 1882.

It will be clearly provided and recorded that the legal and physical possession of the property shall only be with the owner till the same or parts of it are sold to the prospective buyers. The developer is only permitted to enter the property for the purpose of development. Not being the purchaser or a transferee, the provisions of Section 53-A of the Transfer of Property Act, 1882, have no application to him and the aforesaid right of entry to the developer constitutes only a `licence' coming within the meaning of the term under the aforesaid Section 52 of the Indian Easements Act, 1882.

Separate agreements for flats/apartments: The developer enters into separate agreements with the prospective buyers for the construction and sale of flats/apartments to them fixing the consideration payable by them for the same. These agreements are entered into by the developer on his own and not as a G.P.A holder for the owner.

Registration of agreements-benefits available: The development agreements and agreements to sell entered into with the prospective buyers can be registered with the appropriate registration authorities of the State Government under the Registration Act, 1908.

They will get the benefit of entry into Book-I maintained in the Registrar's office. Such entry will ensure that there is a public notice to these documents and their contents.

Whenever any encumbrance certificates are obtained on the immovable property, there will be entries recording the execution of these documents. The General Power of Attorney given to a developer by the owner can also be registered in the same manner. When the fact of this GPA is recorded in the aforesaid registered agreements, there will be "public notice" to these GPAs also.

As the GPAs are given to the developer for `consideration', they will become irrevocable as such a move will be treated as creating an agency coupled with interest to come within the purview of the provisions of Section 202 of the Indian Contract Act, 1872.

There will be a suitable clause in the GPA to indicate that the same is irrevocable. The total cost of stamp duty and registration fee payable on these documents is very nominal in all the States.

Stamp duty

As per the provisions of the Indian Stamp Act,the stamp duty may vary according to state to state and is payable as stamp duty for an Agreement or Memorandum of an Agreement if it relates to giving authority or power to a promoter or developer by whatever name called, for construction or development of or sale or transfer (in any manner whatsoever) of any immovable property.

Taxation

In the hands of the owners, the chargeability to tax the gains made by them will be treated as follows:

a.Only as and when the flats or apartments constructed by the developer on the developer's share of the land is sold or transferred to the prospective buyers, capital gains can be taxed on the owners in the years in which such sale or transfer takes place.

The consideration for the sale of the developer's share of land will be equal to the cost of the flats or apartments built by the developer for the owners. On the occupancy of these flats or apartments being given to the owners after the completion of the construction of the same as per the specifications and dimensions mutually agreed to between the owners and the developer, the consideration to be given to the owners becomes fully discharged.

b.When the owners get more flats or apartments than what they can personally use and occupy, they effect sales of such additional flats or apartments. When such sales are made, the following position will emerge:

If the sales are made within three years from the date when occupancy was given to the owners, the further gains made by them on sale of the super built-up area will be treated as short-term capital gains and if the sale of the super built-up area is effected after a period of three years after taking possession, the gains will be treated as long-term capital gains.

However, it is to be noted that the consideration for the sale of undivided share of the land relating to the owners' share of apartments will be taxed as long-term capital gains only as the same were always held by the owners and transferred at any time to the developer or his nominees.

Where the owners retain one flat each out of the total number of apartments allotted to them towards their share, each of them will be entitled to claim exemption under Section 54F of the Income Tax Act on the cost of construction of such retained apartment, subject to other conditions under Section 54F being fulfilled by them.

Land and stock-in-trade

i. It is possible for the owners to treat their land as stock-in-trade of a business in property transactions carried on by the owners before they enter into development agreements with the developers. Such conversion of their capital assets (land) into stock-in-trade can be evidenced by suitable entries in the books of accounts of the owners supported by other contemporaneous documents executed like sworn affidavits etc.

It will only be a natural course of action to be adopted by the owners as the owners will invariably be left with such surplus flats/apartments as mentioned above and sales of the same have to be made on commercial basis only.

ii. The capital gains arising to the owners on the date of such conversion to stock-in-trade will get quantified at that stage itself but tax is levied only when sales or transfers of such stock-in-trade take place subsequently.

This is because in such cases only the provisions of Section 2(47)(iv) of the Income Tax Act, 1961, read with Section 45(2) come into operation and there is no scope for invoking provisions of Section 2(47)(v) and (vi) of the Income Tax Act, 1961, or any reference being made to Section 53-A of the Transfer of Property Act, 1882, through Section 2(47)(v).

The profits and gains arising out of such conversion into stock-in-trade will be governed by the provisions of Section 45(2). It should be clearly noted that subsequent sales or transfers will be of stock-in-trade only and provisions of Section 2(47) of the Income Tax Act, 1961, cannot be invoked for such subsequent sales or transfers of stock-in-trade.

Business income

iii. The profits and gains earned on subsequent sales effected by the owners of their surplus flats/apartments (other than what are kept for their own use) will be taxed as business income only.

In the normal course, these sales would have been made within a period of three years from the date of completion of the project and they would have been subjected to tax as "short-term capital gains" only and the tax incidence would have been the same on the owners.

It is to be noted that the above treatment of land of the owners as stock-in-trade will avoid all the risks and problems arising out of such interpretations that an agreement to sell by itself constitutes a `transfer' within the meaning of Section 2(47)(v) read with Section 45 of the Income Tax Act, 1961, as held by the Bombay High Court in the case of Charturbuj Dwarakadas Kapadia vs CIT (2003) 260 ITR 491 (Bom).

There will be no scope for invoking the provisions of Section 2(47)(v) and (vi) in such cases as they will be governed by the provisions of Section 2(47)(iv) read with Section 45(2) only.

Querist : Anonymous (Querist) 30 May 2011
Dear Sir ,
Thanks a Lot .

They want to strike a deal in a very difficult hindi language . what should we do ?