Chartered Accountant

1. My father had purchased one lease hold plot admeasuring 4800 sq.ft from NIT in the year 1951, the lease of which is renewed after every 30 years and had constructed house on it which we had rented out to tenants and was a regular income tax payee. My father passed away two years before leaving behind my mother, myself and younger brother. Now the said property has been transferred in my mother’s name through will. Was it liable for capital gain tax at the time of inheritance?
2. Last year we have entered into a development agreement with a builder for construction of residential premises wherein the builder has agreed to construct six floor apartment  admeasuring approx 2100 sq.ft each in which we are retaining three floors. We have not taken any amount from him except a monthly rent which he pays after deducting TDS.
3. Now my query is that is my mother liable to pay capital gain tax for the above said transaction & secondly if she intend to sell one flat shall she be liable to pay capital gain tax, if yes how can she save the same?
4. Long time back, my father had also purchased shares of various companies which are now in De-mat form and now transferred in my mother’s name.  Now if we sell some of the shares is my mother liable for paying capital gain tax or income tax on that amount. [Sourabh-soujosh@gmail.com]

1. Sale of Shares:
   Any profit arising on sale of shares which are held for a period of more than 12 months is considered as Long Term Capital Gain (LTCG) & if the transaction of sale of such shares is covered by payment of securities transactions tax (STT), it would be totally exempt from tax u/s 10(38) of the Income Tax Act-1961. However, if the shares are sold within a period of 12 months then the profit would be treated as Short Term Capital Gain (STCG) & if the transaction of sale is covered by payment of securities transactions tax (STT), it would be taxable @ 15% u/s 111A. For considering the period of 12 months, the period of holding of your father would also be considered and if total holding period is of more than 12 months, then it would be considered as long term capital gain only
2. Transaction of Development agreement with Builder:

1. Inheritance of property by your mother through will, after the death of your father was not liable for any tax. However, subsequent transactions of sale/transfer by the mother would be liable for capital gain tax.
2. Capital gain liability arises whenever capital asset is transferred. It is irrespective of the fact whether consideration is received in cash or in Kind.
3. In your case, your mother has entered in to a development agreement with a builder whereby (i) construction would be done by the builder for 6 flats (ii) builder would be taking 3 flats against construction of entire building and (iii) your mother would be getting 3 flats.
4. In short, against transfer of certain share of land in favor of developer, your mother would be getting construction plus rent. (It appears that rent probably is compensatory amount incurred by the builder till the possession of constructed flat is handed over. If it is so, the amount would be nothing but the part of the sale consideration only in the hands of your mother).
5. Income tax liability need to be ascertained in two parts:
   i) First part would be of the transfer of land share and
   ii) second part would be subsequent sale of one of the constructed flat received by your mother from the builder
6. The taxation of such transactions is complicated affair. The most important mute question here is also the “Year of taxability” of the transactions. There are no set guidelines as to the date, Year of taxability, the manner of ascertainment of the capital gains in the hands of the owner in such cases (whether on completion of contract or on transfer of undivided interest to the Builder or prospective flat owners before the completion of construction). The capital gain tax liability arises in the year in which “transfer” took place.
7. Under the Income Tax Act-1961, 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” [Section 2(47)(v)]. Effectively, any transaction which allows possession to be taken over or retained in part-performance of the contract would come within the ambit of “Transfer”. So, if your mother have granted the possession to the developer not in the capacity of buyer but only in the capacity of developer, even then it may be treated as Transfer u/s 2(47)(v).
8. With above points in mind, two permissible option as to the year of taxability of such transaction could be
   a) the year in which the Development agreement is signed
   or
   b) the year in which the construction is completed and Flats are handed over by the builder.
9. If the Development agreement grants an unqualified, uninterrupted and irrevocable right of possession to the developer at the time of signing the documents, then capital gain shall be chargeable to tax in the year of executing Development Agreement itself (i.e., last year when the agreement is signed in your case).
10. If your Development agreement stipulates the transfer (or possession) of land to the builder at the time of handover the three constructed flats to you, capital gain shall be chargeable to tax in the year of completion of construction and handover of all the flats to you.
11. Timing, consideration & taxability would depend upon multiple factors like the terms, conditions & stipulations etc in the Development Agreement which would play a pivotal role in determining the taxability. A generalized reply is not possible in such cases. However, above brief discussion would certainly help the land owner to take required safeguard while entering in to development agreement. In view of the complexity of law & heavy stake involved, readers are advised to obtain individual professional advice before entering into such transactions/ agreements.