VIP Road Chartered Accountants Association

Drafting of Agreements, Stamp Duty etc.

Development Agreement

History and background relating to development agreement
Development agreements are a modern innovation. They are necessitated because availability of land is limited due to the peculiar geographical features of the city. In view of the never-ending demand, prices of land have shot up to astronomical heights. This has in turn influenced the pricing of flats. In order to circumvent the adverse effect of shortage of land on the cost of flats, a way has been found in the medium of what is called "development agreement".
How development agreements operate ?
The owner of a piece of land even with a structure standing thereon may decide to demolish the same and construct a new multistoreyed building thereon. If the existing FSI on the land does not permit such a high rise building, Transferable Development Rights (TDR) may be obtained from some other permitted locality for that purpose. The land owner may not by himself have the necessary financial resources or the required expertise. Therefore, a builder/developer steps into the scene to advance the finance, obtain various No Objection Certificates from Government Departments and construct the building. An agreement will be required to be entered into between the land owner and the developer. The terms of such an agreement will require the developer to construct the building in accordance with the plans approved by the Bombay Municipal Corporation and other authorities for which the developer will have to take the necessary action. For this purpose the owner will have to permit the developer to enter on the land to carry out the necessary construction activities after obtaining commencement certificate from the local authorities. The owner keeps possession of the land with him. After the construction is completed at the cost of the developer, the developer will be permitted to advertise for the sale of the flats and to receive the sale proceeds. The sale proceeds will be shared between the developer and the land owner at an agreed rate after the developer has deducted the cost of construction. As and when a co-operative society is formed by the flat owners the conveyance of land will be carried out by the land owner through the developer.
However, what is more common
now a days is that many times it happens that co-operative societies which have been formed quite some time ago are endowed with surplus land/FSI. As a result of Bombay Municipal Corporation passing D.P. Rules in 1991 w.e.f. 23-3-1991 additional FSI has been made available to the society. Such Co-op. Societies are being approached by developers to permit the developer to develop the property by constructing additional floors on the existing building of the society. The developer agrees to pay certain specified amount to the society for the use of Floor Space Index (FSI) and for the inconvenience being caused to the members of the society due to the construction activities. Wherever existing FSI available to the society is not adequate to construct the additional structure, the developer buys TDR from the market and loads it on the existing structure owned by the Society. The payment from the developer may be in the region of many lakhs or couple of crores depending upon the location of the society. The society itself cannot choose to receive the entire amount from the developer and distribute it as dividend among the members because there is a limit to payment of dividend to members of the society. The societies therefore permit the members through Annual General Meeting or special general body meeting to receive payments from the developer in proportion to the area of the flat occupied by each member.As the development / construction work will be carried out over more than one year, the developer agrees to pay the specified amounts in more than one year. In certain cases, the developer also agrees to provide for alternative accommodation to the flat owners in case the entire building is demolished and is re-built.
Taxation issues relating to a development agreement
Let us consider the tax issues relating to development agreements.Earlier a few years ago, Tax experts were of the view that development agreements do not lead to transfer and does not give rise to Capital Gains. They came to this conclusion based on following factors :—The land owner only gives licence to the developer to enter the land to carry on the activities on behalf of the owner. The agreement between the two is categorical that the ownership of the land continues to vest in the owner and is not passed on to the developer. However, the Income Tax Department has been taking the stand that development agreements are covered by Chapter XX-C and require to receive No Objection Certificate from the Appropriate Authority. This view has found support in Patna High Court decision in Ashish Mukerjee vs. UOI 222 ITR 168 (Pat). On the basis of this reasoning the department has been taking the view that development agreements involve transfer and give rise to income by way of capital gains.The correctness of the view, however, remains to be tested. An interesting point that can arise in the case of development agreements is that the owner of land has not paid any amount for acquiring the FSI. The owner of land became entitled to it due to D.P. Rules. Section 48 provides that income chargeable under the head Capital Gains shall be computed by deducting from the full value of the said consideration among other things, the cost of acquisition of the capital asset. Therefore, what is contemplated is an asset in the acquisition of which it is possible to envisage the cost. Originally none of the provisions pertaining to the said capital gain suggested that they include an asset in the acquisition of which no cost at all can be conceived. Accordingly, the Supreme Court held in CIT vs. B.S. Srinivasa Shetty 128 ITR 294 (SC) that goodwill generated in a newly commenced business cannot be described as an asset within the meaning of section 45 and therefore, its transfer is not subject to income tax under the head capital gain.Subsequent to the above judgement, section 55(2)(a) of the Income-tax Act, 1961 was amended from time to time to provided as under, "For the purposes of sections 48 and 49, "cost of acquisition", –
1. in relation to a capital asset, being goodwill of a business [or a trademark or brand name associated with a business] [or a right to manufacture, produce or process any article or thing,] tenancy rights, stage carriage permits or loom hours, —
  1. in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
  2. in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil;
The above section describes specifically certain items in respect of which capital gain can be computed by taking the cost of acquisition as "Nil".Items which are not mentioned in the section cannot be covered under the provisions of section 45/48. Accordingly, it maybe argued that the consideration paid by the developer in respect of the FSI is not taxable, as there was no cost of acquisition.As pointed out earlier, the D.P. Rules were promulgated in 23-3-1991. Therefore, taking a view that development agreement gives rise to income by way of Capital Gain if the Co-operative Housing Society itself receives the payment directly from the developer, it will be longterm Capital Gains as the period between the date of acquisition and date of transfer exceeds three years.However, the position may be different if the payment is received by members. Here the date of promulgation of D.P. Rules may not be relevant. The department in such cases has taken the view that period for computing the long-term/short-term is to be reckoned from the date of holding of the AGM (authorising the members to receive payment from the developer) to the date of transfer. If the said AGM was held, after a developer has approached the society and the transfer takes place immediately thereafter, the intervening period may not exceed three years and the amount will suffer tax as "Short-term Capital Gains."Sometimes there are peculiar tax implications arising out of development agreements due to the reason that the payments received by the owner from the developer are spread over more than one year.According to sec. 45(1), profit arising on transfer of a capital asset shall be deemed to be the income of the year in which transfer takes place. The important point is, therefore, to decide as to when the transfer took place.In this connection, attention is invited to the decision of Mumbai ITAT in Smt. Lalitha Ramaswamy vs. ITO 75 ITD 293 (Mum). In A.Y. 1989-90 the assessee agreed to sell her land and building to a builder and allowed demolition of the building on receiving part payment. The assessee gave general power of attorney to the builder to obtain various licenses and to advertise for the sale of flats. The Registration had not taken place in A.Y. 1989-90. She received balance payment in Assessment Year 1990-91. The Income Tax Appellant Tribunal (ITAT) observed that the assessee had completed all the formalities that were required to be completed so as to give full control of the property to the vendees. The power of attorney was also executed in favour of the vendees. It upheld the order of lower authorities in assessing the entire capital gains in A.Y. 1989-90 as assessee had handed over effective possession in that year. Thus, an assessee is required to pay the tax on amounts in the year in which he hands over possession of the property.It may be added that in so far as Mumbai is concerned recently the jurisdictional High Court has come out with a vital decision. In Chaturbuj Dwarkadas Kapadia vs. CIT 260 ITR 491 (Bom) it has held that the date of contract is the relevant date to decide the date of transfer u/s. 2(47)(v). The decision being of Jurisdictional High Court is likely to be followed by the Department.

Stamp duty on a development agreement
Stamp duty on development agreement between the owner of the property (land with or without existing building) and the developer with the intention to allow the developer to develop the property by constructing a new building thereon or extending the existing building is covered by Article 5(g-a) of Bombay Stamp Act, 1958. It also includes an Agreement between the owner of the property and the developer for sale or transfer of such property. Stamp duty payable is 1% of the market value of property. If the Power of Attorney is given to a developer to develop the property under Article 48(g) and is fully stamped as required under Article 48(g), then Development Agreement under Article 5(g-a) will require a stamp duty of Rs. 100/- only.Article 5(g-a) relating to stamp duty applicable to development rights is being reproduced as under :


*Description of Instrument*	*Proper stamp duty*

Article 5(g-a) When given to a promoter or developer by whatever name called for construction on, development of, or sale or transfer (in any manner whatsoever) of, any immovableproperty	Five rupees of every five hundred rupees or part thereof of the market value of the subject matter of the property. Provided that, in the provisions of section 32A shall, mutatis mutandis, apply to such an instrument of power of attorney as they apply to a conveyance under that section: Provided further that, when proper stamp duty is paid under clause (g-a) of Article 5 on an agreement, or records thereof or memorandum of an agreement executed between the same parties and in respect of the same property, the duty chargeable under this clause shall be rupees one hundred.

Construction Contracts

Definition of a "Contract"
The term contract has been defined by the Indian Contract Act as " an agreement enforceable by law is a Contract".
What is meant by a construction contract ?
Thus, a construction contract generally is referred to an agreement wherein a builder of land agrees with a contractor who undertakes to build a building for a consideration. A builder generally is a person who builds a structure on either his own land or any land wherein he has taken the rights from the owner of the land to build or construct a structure on the same, so that at the end of the building activity the building activity same can be sold at a profit.
Essentials of a typical construction contract
A construction contact deal with as to who would supply work, labour and materials. It would also specify the location of the land on which work is to be carried out. It would specify who is the owner of the land and would clarify that the contractor has merely a licence to carry out the construction work.
The most essential part further, would be the payment terms agreed between the builder and the contractor. It would also specify whether the contractor has any rights to sub contract certain portion of his work.
Various phases of a typical construction contract
The builder would state his requirements as to the structure desired along with the specifications
As per the desired specifications estimates and drawings would be required to be prepared
The construction of the structure as per pre defined specifications would commence
The contractor would receive the consideration payable to him on the satisfactory completion of the contract.
Stamp duty on a construction contract
Construction contracts are held to be Agreements and are to be stamped with stamp duty of Rs. 20/- under Article 5(h) of Bombay Stamp Act, 1958. Every agreement whatever its form in writing; i.e., whether a regularly drafted Agreement or in nature of letters or correspondence would fall under Article 5(h).

Sale agreement
Before we discuss as to what is an agreement for sale let us understand as to what the two terms ‘agreement’ and ‘sale’ refers to.

Definition of the terms ‘Agreement’ and ‘Sale’ AGREEMENT
As per section 2(e) of Indian Contract Act, "every promise and every set of promises forming the consideration for each other is an agreement".

SALE
Section 54 of Transfer of Property Act, 1882 defines sale as "Sale is a transfer of ownership in exchange for a price paid or promised or part paid or part promised". Therefore, in a sale there must be transfer of ownership for some consideration and the consideration would be the price paid or agreed to be paid or partly paid and partly promised.Agreement for sale of an immovable property wherein possession is being transferred either immediately or in future is deemed to be "Conveyance" for purpose of stamp duty though it is not a conveyance since it does not involve any transfer of property. For agreement for sale of a flat between the builder and flat purchaser, the flat may not be actually existing at the date of agreement for sale but for purpose of stamp duty such an agreement is treated as conveyance and stamp duty in such case is payable under Article 25 of the Bombay Stamp Act.

Usual clauses of a sale Agreement
1. Names of vendor/s and the purchaser/s, their ages and addresses
2. Recitals
3. Detailed description of the property
4. Payment clause
5. Title
6. Inspection of title
7. Pre-requisites
8. Period of completion of sale
9. Protection of the property by the vendor
10. Handing over of possession
11. Execution of deed of conveyance
12. Expenditure till the completion of sale
13. Notice for reservations.
14. Handing over of documents of title:
15. Default clause :
  i. In favour of the vendor ii. In favour of the purchaser
16. Legal fees and other miscellaneous expenditure
17. No objection certificate
18. Stamp duty and registration

Maharashtra Apartment Ownership Act, 1970
The stamp duty for residential premises in a building registered or deemed to be registered under provisions of Maharashtra Apartment Ownership Act, 1970, shall be governed by Article 25 of the Bombay Stamp Act, 1958. The stamp duty is chargeable on market value of apartment at the concessional rates as per Stamp Duty Act.Conclusion
The issues discussed in this article are complex. Moreover the concept of development agreements has not passed through the judicial scrutiny in any significant way. The laws relating to immovable properties have also been undergoing amendments from time to time. The person involved will, therefore, do well to make a reference to the relevant provisions of law and seek guidance of an expert with regard to legal position on the facts of that particular case.