The Hindu Business Line : Draft property development agreements with care

If you have land or an old house in a good locality, but not the resources to develop it into flats, you can plan for a joint venture with a property developer.

You can enter into a property development agreement with a reputed developer. A nice looking agreement will be drafted; the developer will ask you for a power of attorney in his favour.

The developer will go about his job, getting the permits and licences from government authorities. The development agreement could be executed in one year and the handing over of possession or registration of undivided interest in favour of the purchasers could be in a subsequent year.

You will be under the impression that transfer of capital asset would be in the latter year and plan for it accordingly, but would be surprised to receive a notice from the Income-tax Department, citing Section 2(47)(v) and contending that transfer has taken place in the year of execution of the property development agreement itself.

You might have missed the bus for claiming exemption in respect of the capital gains by making an investment choice suitable to you. Many a taxpayer has been put to difficulties because of Section 2(47)(v), a sword of Damocles hanging over a taxpayer's head, and to be handled with utmost care and requiring proper planning.

Section 2(47)(v) was inserted into the Income-Tax Act, 1961 w.e.f. April 1, 1998.

This provision, which encompasses one of the modes of deemed `transfer', enjoins that the scope of expression `transfer' includes any transaction involving the allowing of the possession of any immovable property to be taken or retained in part-performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (TP Act).

Even arrangements confirming privileges of ownership, without transfer of title, could fall under Section 2(47)(v).

Prior to the insertion of this provision, it was successfully contended on behalf of the taxpayer that no transfer took place till execution of deed of conveyance.

In this backdrop, taxpayers used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, Section 2(47)(v) came to be placed in the Act.

(To be concluded)

(The author is a Salem-based chartered accountant. E-mail: hemraghu@gmail.com)

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