Development
Agreement on
Area Sharing
Basis
Area Share
Owner
Developer
1. Nature of
transaction
i. Owner and Builder/Developer agree to develop the
Immovable Property for residential/ commercial/ mixed
use.
ii. Owner and Developer/ Builder agree to share the area
developed at a ratio as agreed upon. The area to be shared
would be identified post plan sanction and detailed by way
of an allocation agreement.
iii. General Power of Attorney to be executed in favour of the
Developers/Builders to do all acts, deeds and things for the
purpose of the development.
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iv. The Developer/ Builder is granted the right to enter the
Immovable Property as a “Licensee” as understood under
Section 52 of the Indian Easement Act, 1882 to commence
the construction activity. It is explicitly stated that the legal
title, domain, and control of the property continues to be
vested with the Owner till its transfer in favour of the
ultimate purchasers of apartments.
v. Developer given the right to mortgage the Developer’s
interest in the property for obtaining construction finance.
vi. Owner to deposit original title deeds with the Financing
Institution. The Financing Institution will give a letter of
sanction stating that the Owners share of interest is not
secured or charged.
vii. Clause on date of commencement, date of completion,
grace period to be given to the Developer, compensation to
Owners for delay subject to conditions force majeure to be
included.
viii. Compensation from prospective buyers to be
charged by both the Owner and Developer for delay
in receipt of installments to be standardized.
ix. Agreements on price parity i.e. review of minimum
price to be fixed periodically to be provided for in the
agreement.
x. Developer to be responsible for all matters relating to
construction including adherence to applicable laws,
specifications agreed to be provided, quality of
construction etc.
xi. Power to the Developer to enter into agreements
and collect advances from his/ their share of buyers
will be given. However, the power to execute
conveyance deeds in respect of their share will be
given only on the Developer handing over the
Owner’s share of super built up area in habitable
condition after joint inspection by both the parties.
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2. Issues arising out of Area Sharing
Development Agreement
i. Point of incidence of capital gain on the
land owner
Applicable on date of entering into the joint
development agreement, refer decisions below-
Charturbuj Dwarakadas Kapadia Vs CIT (2003) 260
ITR 491 (Bom)
JCIT (Asst)(Spl Range 6)Vs Dr T.K Dayalu (ITA No
3209 of 2005) dated 20-06-2011.
Karnataka High Court has in the case of CIT and
Others Vs H B Jairaj in ITA No 20 of 2005 C/W ITA
No 21 of 2005 dated 16.09.2011
CIT Vs Ved Prakash Rakhra (2012) 210 Taxman
605 Karnataka: (2013) 256 CTR (Karn) 285
Smt. Prameela Krishnan vs. Income Tax Officer,
Ward -1(2) Mysore vide judgement dated
18/11/2013 reported in [2014] 42 taxmann.com
185 Karnataka and (2014) 221 Taxmann 418(Kar)
Potla Nageswar Rao Vs DCIT IITA 245 of 2014
rendered on 9-4-2014 reported in (2014) 365 ITR
249 (AP), (2014) 269 CTR (Hyd) 325
Jasbir Singh Sarkaria (2007) 294ITR 196(AAR)
R Kalanidhi Vs ITO (2009) 314 ITR (AT) 266
(Chennai-ITAT)
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Applicable on date when builder commences construction
activity in carry out the Development.
Ranjith Reddy Vs Dy CIT (Hyd) Circle 6(1) in ITA Nos.
290,292,336/Hyd/2012/rendered on 7/6/13 reported in 144
ITD 461 (Hyd “A” Trib)
Fibars Infratech Pvt. Ltd vs. ITO Ward 1(2) Hyderabad (ITAT
Hyderabad), ITA. No. 477/Hyd/2013
ABVS Prakash Vs The Asst CIT Hyderabad Central Circle – 1 ITA
No 462/Hyd/2013
Binjusaria Properties (P) Ltd Vs ACIT (2014) 45 taxmann.com
115 (Hyd Trib) also reported in (2014) Tax Pub (DT) 2438(Hyd
“B” Trib)
Dilip Anand Vazirani Vs ITO (2015) 57 taxmann.com 142
CIT V/s Eastern Ceramics Ltd (2013) 54(I) ITCL 216 (Bom HC),
219 Taxmann.com 68/219 Taxmann 66 (Mag) (Bom)
At a point when Owner receives his share of super
built up area
CIT Vs Attam Prakash & Sons (Del HC) IT Reference Nos
250-251 0f 1988 – delivered on August 8, 2008-(2008)
175 Taxman 499 (Del)
CIT-I vs Naju Daru Deboo (2013) 38 taxmann.com
258(All), 218 Taxmann 473(All) rendered 16-9-2013
Refer wordings of Section 53A and 54 of theTransfer
of Property Act, 1882.
Observations in the case of Govind Saran Ganga Saran
v/s Commissioner of Sales Tax and Others (1985) 155
ITR 145 (SC)
Observations in the case of Ishikawajima – Harima
Heavy Industries Ltd. Vs Director of Income Tax,
Mumbai (2007) (SC) 288 ITR 408
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NOTE- To avoid incidence of capital gains at the stage of signing the
Development Agreement or at the point when the construction
activity commences, it is advisable for the Owners to convert the
immovable property into stock in trade either in the books of the
proprietary concern of the Owner or by introducing the said
immovable property into a partnership firm as capital contribution
• R Gopinath (HUF) v. ACIT (2010) 5 Taxmann.com ITA Nos. 29 & 30/
MDS/2008 rendered by the ITAT Chennai ‘A’ Bench on 24th July, 2009
also reported in 133 TTJ (Chennai) 595.
• Ramesh Abaji Walavalkar v. Addln CIT 150 TTJ 725 Mum Trib. (D
Bench)
• Vidyavihar Containers Ltd v. Dy. CIT (2011) 133 ITD 363 (Mum. Trib)
• DCIT vs Crest Hotels Ltd (2001) 78 ITD 231 (Chennai Bench).
• Fardeen Khan Vs ACIT 11(1) Mumbai- ITA No 1588/1589 of 2013 (ITAT
F Bench Mumbai) rendered on 25-2-2015.
ii. Consideration for the purpose of transfer-
Adopt estimated construction cost of Owner’s
share of super built up area plus non-
refundable deposit.
Adopt guideline value of the land to be
transferred to the Developer and/or his/its
nominees as per provisions of Section 50 D
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iii. Tax incidence on sale of Owner’s
share of apartments
In most cases-
• Long term for land
• Short term for super built up area
iv. Service Tax and VAT on
the Owner’s share of super
built up area
Refer Circular No. 12 dated 07/12/2009 issued by Commissioner of
Commercial Taxes
Refer Circular No. 151/2/2002-ST dated 10/02/2012 issued by CBE & C
under Section 65 (105) (zzq) of the Finance Act, 1994 relating to commercial
or industrial construction service.
Refer Circular No. 108/02/2009-ST dated 29/01/2009 on service tax leviable
on Builders and Developer prior to 01/07/2010 r/w the decision of Magus
Construction Pvt Ltd and Anr v. UOI and Anr (2008) 22 (I) ITPJ 343 or STR
2008 (II) STR 225 (Gou HC)
Opposite view –
• AAR- Ruling in Harikrishna Developers (2008) 10 STR 341 (AAR)
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v. Stamp duty under Article 5(f) of the Schedule
to the Karnataka Stamp Act, 1957 r/w Article
41 (ea) of the said Schedule. 2% of market
value of Owner’s super built up area or 2% of
the market value of land being transferred to
Developer or their nominees, whichever is
higher plus consideration by way of refundable
or non refundable deposit. Market Value taken
is the guideline value.
II. Development Agreement on
Revenue Sharing Basis
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1. Nature of agreement, arrangement-
i. Owner and Builder/Developer agree to develop the
Immovable Property for residential/ commercial/
mixed use.
ii. Owner and Builder/Developer agree to share the
revenue at a ratio as may be decided between the
parties.
iii. Various terms for sharing of revenue such as
‘distributable surplus’ etc will be detailed in the
agreement.
iv. Agreement will be styled keeping the dual ownership
concept in mind i.e., Owner will transfer undivided
right, title and interest in land and Developer will
transfer super built up area in favour of the ultimate
purchasers of the apartments.
v. Modality of sharing revenue such as opening and
operating of bank accounts, distribution of revenue
etc., will be detailed.
vi. Clause on date of commencement, date of completion,
grace period to be given to the Developer,
compensation to Owners for delay subject to
conditions force majeure etc is included.
vii. Compensation from prospective buyers to be charged
by both the Owner and Developer for delay in receipt
of installments to be standardized.
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viii. Agreement on pricing i.e. periodical fixation of
minimum price to be adopted for sale for a specified
period
ix. Developer to be responsible for all matters relating to
construction including the adherence to applicable
laws, specifications to be provided, quality of
construction etc.
x. General Power of Attorney will be given to the
Developer to enter into agreement and sell undivided
interest in land and Developer to transfer super built
up area in favour of the ultimate purchasers of the
apartments.
2. Issues arising out of Revenue
Sharing Agreement
i. Point of incidence of tax on the owners.
AS 9 r/w Section 145
ii. Point of incidence of tax on the
AS 7 r/w Section 145- Tax Accounting Standards
S N Builders and Developers Vs ACIT 4(1) Bangalore ITA No 487/Bang/2013 rendered
on 11-4-2014.
Prestige Estate Projects Ltd V DCIT ITA 218/Bang/2009 (ITAT Bangalore)
CIT Vs Rema Country Holdings Pvt Ltd ITA No 1041 and 1042/2006 order dated 29-9-
2011 (Kar HC)
iii. Applicability of Section 50 D
iv. Service Tax and VAT on the owner’s revenue share whether applicable?
v. Stamp duty under Article 5(f) of the Schedule to the Karnataka Stamp Act, 1957
r/w Article 41 (ea) of the Schedule.- 2% of market value of Owner’s super built up
area or 2% of the market value of land being transferred to Developer or their
nominees, whichever is higher plus consideration by way of refundable or non
refundable deposit. Market Value taken is the guideline value.
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Advantages
a) Postponement of tax for land owner.
b) No Service Tax and VAT on owner’s share
c) Provisions of Section 50 D not applicable on
date of entering into revenue sharing
agreement.
Disadvantages
a) Owners cannot hold on to their stock and have benefit
of increase in sale price
b) No recourse available to Owner if Developer delays
completion, except invoking specific performance and
claiming compensation
c) Developers could have an issue if Owner/s has/have
not paid his/their tax on his revenue share and
Department takes coercive steps to recover tax dues by
attaching the unsold apartments.
d) Owner could also be deemed to have entered into an
activity which could be construed "as an adventure in
the nature of trade" and therefore his revenue share
will be taxed as business income.
e) Department could take a contention that it is an AOP.
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CA ASHOK RAGHAVAN,
Bengaluru
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