I offered my joint development gain in the year of the completion certificate under s.45(5A) - the officer says I sold part of my share first and the whole gain belongs to the year of the agreement. Is he right, and what follows?
The client is an individual at Bengaluru, a retired bank officer, who inherited a site of 1,858 square metres at Yelahanka from his mother in 2004; she had bought it in 1991 for Rs 2,40,000 and its value as on 1 April 2001 was Rs 11,60,000. On 18 July 2021 he executed a registered joint development agreement with a developer, taking 40 per cent of the built-up area - 14 flats aggregating 18,200 square feet - plus Rs 1,20,00,000 in cash, and handed over the site the same day under a registered power of attorney. The developer deducted Rs 12,00,000 under s.194-IC across FY 2021-22 and FY 2022-23. The competent authority issued a completion certificate for Block A on 27 February 2025. On 9 January 2025, seven weeks before that certificate, the client sold three of his fourteen flats for Rs 2,46,00,000 to fund his daughter's practice. The return for AY 2025-26, filed on 28 August 2025, offers the whole gain under s.45(5A) in that year, taking the stamp duty value of the fourteen flats at Rs 9,80,00,000 plus the cash. A notice under s.143(2) issued on 10 June 2026. The questionnaire of 2 September 2026 invokes the proviso to s.45(5A), says the gain belongs to AY 2022-23, and records that proceedings under s.148 for that year are under consideration.
Establish, from the sale deeds and the society records, the exact date on which the client first transferred any part of his share in the project, and compare it with the date on the completion certificate. That one comparison decides whether s.45(5A) applies at all, and everything else - the year, the consideration, the exemptions, the credit for the tax deducted - moves with it. Do this before responding on figures, because a computation offered in the wrong year concedes the only point on this file that is still open.
The sub-section applies only where an individual or a Hindu undivided family transfers land or building, or both, under a specified agreement, and it charges the gain in the previous year in which the competent authority issues the completion certificate for the whole or part of the project. It was inserted by the Finance Act 2017 with effect from 1 April 2018. A High Court has held it cannot be treated as retrospective, either by its express words or by necessary intendment, so an agreement signed before April 2018 gets no deferral; a Tribunal Bench has held the same from the other direction, that the sub-section cannot be used to move a gain that had already become chargeable in an earlier year. This agreement is of 18 July 2021 and the client is an individual, so the sub-section was available to him.
The proviso says that the sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of the completion certificate, that the capital gains shall be deemed to be the income of the previous year in which such transfer takes place, and that the rest of the Act applies to determine the full value of consideration. The client sold three of his fourteen flats seven weeks before the certificate. On the Department's reading the deferral goes for the whole share and not merely for the three flats, because the proviso disapplies the sub-section rather than apportioning it. This step is written from the statute, because there is no entry in this library construing the proviso at all.
Without the sub-section the year is decided by s.2(47), and the question is when the land was transferred to the developer. A High Court has held that a development agreement transfers no interest under the general law, that s.2(47)(v) exists precisely for that reason, and that the year is the year the contract was entered into if the contract read as a whole passes complete control of the property to the developer. Here the agreement was registered, possession went the same day and a registered power of attorney was given, which is the pattern that decision addresses. The Supreme Court has held that executing an agreement to sell can itself extinguish rights and answer the definition of transfer, which points the same way.
The two computations are not the same and the difference is real money. Under the sub-section the full value of consideration is the stamp duty value of the landowner's share of the project on the date of the completion certificate, plus any cash, which on this file is Rs 9,80,00,000 plus Rs 1,20,00,000. Once the proviso disapplies the sub-section, that measure goes with it and the ordinary provisions apply, so the consideration for the transfer of the land in the earlier year is what was received for it then, with s.50C available to the officer on the land if the stamp duty value of the land exceeds the consideration by more than the tolerance band. The cost side is the mother's cost, stepped to the 1 April 2001 value of Rs 11,60,000 as the previous owner's cost, with her holding period included.
Section 194-IC applies notwithstanding s.194-IA to any person paying a resident any sum by way of consideration, not being consideration in kind, under an agreement referred to in s.45(5A), at ten per cent with no threshold. So the Rs 12,00,000 was correctly deducted on the cash alone and nothing was due on the fourteen flats. A Tribunal Bench has held that a sum falls within the section only where it is consideration paid as part of a share in the land or building under a specified agreement, and that alternate accommodation charges and hardship allowance are not; another Bench has held that the section applies where the landowner is a perpetual lessee and not the freehold owner, because confining the definition to freehold title would take such a transfer out of the scheme altogether.
The January 2025 sale of three flats is its own transfer and needs its own computation, and it is short term or long term depending on when the client is treated as having acquired them. The library's position on flats is that the holding period runs from the allotment, not from possession or registration, and the general period rules since 23 July 2024 make everything other than listed securities long term after twenty-four months. On the ordinary rules the cost of the flats is what was given for them - the land - which is the same amount brought to charge on the land transfer, so the two computations have to be built together or the same value is taxed twice.
The exemptions run off the date of transfer, and that date is now in dispute, so a claim made for one year only will be lost if the other year wins. Bonds under s.54EC exempt so much of the long-term gain on land or building as is invested within six months after the transfer, capped at Rs 50 lakh. A claim under s.54F for a residential house needs the unutilised part of the net consideration deposited in the notified account before the due date under s.139(1), and a High Court has held that failure to deposit confines the exemption to what was actually spent. Another High Court has held that an incomplete house is not a ground to refuse the exemption where the whole net consideration was invested in the land and construction.
The officer has offered two years and the client cannot be taxed in both. Work the numbers for FY 2021-22 on the ordinary rules, for FY 2024-25 under the sub-section as returned, and for FY 2024-25 under the proviso on the year of the January sale, and compare the tax, the interest and the exemptions available in each. The proviso on its own words points to the previous year in which the transfer of the share takes place, which is FY 2024-25 - the same year the return uses - and that is the answer worth pressing, because it keeps the whole matter in an open assessment and out of a reassessment for an earlier year.
The deferral is usually lost where any part of the share was sold before the certificate - the proviso is plain and there is nothing to argue against it. What is genuinely open is which year replaces it, and that is decided at the first appeal more often than at the assessment. Officers commonly reach for the year of the agreement, because the older decisions on development agreements point there, and the answer that the proviso names the year of the later sale is a good point that has to be made carefully and early. Expect an assessment for the earlier year, a protective or substantive position taken for the later one, and two to three years before the duplication is resolved. The exemption claims are where most of the money is actually lost, and they are lost by being made for one year only.
