This document summarizes tax implications for construction projects in India. It discusses key income tax provisions, judicial decisions, and Ind-AS accounting standards relevant for joint development agreements. Specifically, it covers how capital gains are taxed, important case law around project possession and completion, and the accounting treatment for revenue and losses over the life of a construction contract.

1. Direct Tax implications in Construction Industry
CA Ram Prasad
caram@sbsandco.com
Date: 19th Feb 2016
by

2. OUTLOOK
 INCOME TAX PROVISIONS RELEVANT FOR JDA
 IMPORTANT ASPECTS- GENERAL LAW
 IMPORTANT JUDICIAL DECISIONS
 ICDS ON CONSTRUCTION CONTRACTS
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3. INCOME TAX PROVISIONS RELEVANT FOR JDA (1/2)
 'transfer' includes
• Any transaction which allows possession to be taken/retained in part
performance of a contract of the nature referred to in section 53A of the 1882
Act and
• Any transaction entered into in any manner which has the effect of
transferring or enabling the enjoyment of any immovable property. ( CBDT
CIRCULAR -495 -22/09/1987)
 Section 2(47)(v) read with section 45 indicates that capital gain is taxable in the
year in which such transactions are entered into even if the transfer of
immovable property is not effective or complete under the general law.
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4. INCOME TAX PROVISIONS RELEVANT FOR JDA (2/2)
 Enabling the Enjoyment of property by POA is a relevant fact. Without such
clause in POA there is no transfer. ( CIT VS C. SUGUMARAN- MADRAS HC).
 Section 53A of 1882 Act has been bodily transposed into section 2(47)(v) and
the effect of it would be that section 53A of 1882 Act shall be taken to be an
integral part of section 2(47)(v). In other words, the legal requirements of
section 53A are required to be fulfilled so as to attract the provisions of section
2(47)(v)
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5. IMPORTANT ASPECTS – GENERAL LAW (1/3)
 Development and construction and right of entry is only licence within the purview of
provisions of section 52 of Indian Easements Act 1882
 Examining the question of possession, one of the essential conditions for enforceability
of section 53A of 1882 Act is that the transferee must in part performance of the
contract take possession of the property or any part thereof
 'Possession' is a word of open texture. It implies a right to enjoy which is attached to
the right to property. It is not purely a legal concept but is a matter of fact. The issue of
ownership depends on rule of law whereas possession is a question dependent upon
fact without reference to law
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6. IMPORTANT ASPECTS – GENERAL LAW (2/3)
 Section 53A of the Transfer of Property Act, 1882 seeks to protect the prospective
transferees by allowing them to retain the possession over the property, against the
rights of the transferors
 The Registration and Other Related Laws (Amendment) Act, 2001 has brought about a
radical change in the rights flowing on the basis of agreements executed in part
performance of the contract under Section 53A of the 1882 Act. (WEF 24/09/2001)
 A contract accompanied by delivery of possession or executed in favour of a person in
possession, is compulsorily registrable under Section 17(1A) of the Registration Act,
1908
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7. IMPORTANT ASPECTS – GENERAL LAW (3/3)
 Failure to register such a contract would only deprive the person in possession
of any benefit conferred by Section 53A of the 1882 Act.
 The effect of the amendment is that now if any person takes possession in
pursuance to a contract which is required to be registered but has not been
registered, the transferee has no right to remain in possession of the property.
Sukhwinder Kaur v. Amarjit Singh – P & H High Court
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8. IMPORTANT JUDGEMENTS (1/4)
 Capital Gain is chargeable to tax in the year in which possession was handed
over to the developer and not on the date of agreement - CIT VS Mrs. Geeta
Devi Pasari 14 SOT 63 (Mum)
 Where only part of the property was transferred (1/3 ) capital gain should be
computed with reference to consideration (pro rata) received and not with
reference whole of the consideration agreed. CIT VS K. Jeelani Basha ( High
Court of Madras)
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9. IMPORTANT JUDGEMENTS (2/4)
 Developer had not done anything to discharge obligations cast on it capital gain
is not chargeable on signing of the development agreement. Binjusaria
Properties (P) Ltd VS ACIT( ITAT-HYD)
 Handing over of possession under the agreement amount to transfer and
capital gains are chargeable even where the payment of consideration is
deferred for future date. Potla Nageswara Rao VS Dy. CIT (AP HC). Similar
view expressed in cases of Chaturbhuj Dwarkadas Kapadia, Dr. T.K. Dayalu, Dr.
Maya Shenoy
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10. IMPORTANT JUDGEMENTS (3/4)
 Where the agreement only permitted the development to be carried on and
entire control over property is with the assessee and occupancy certificate was
given to the assessee execution of agreement couldn’t amount to transfer
contemplated under section 53A of TOPA. CIT VS Shri Sadia Shaik (HC of BOM
at Goa)
 Willingness to perform has to absolute and unconditional. If willingness is
studded with condition, it is no more than an offer and can’t be termed as
willingness. Fibras Infratech Pvt. Ltd VS ITO (ITAT-HYD)
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11. IMPORTANT JUDGEMENTS (4/4)
 The JDA to be covered under section 53A of 1882 Act was required to be a
registered instrument even for purposes of enforcing civil law rights. Once it
was embodied in section 2(47)(v) by incorporation, all the legal requirements of
section 53A of 1882 Act had to be complied with. In the absence of registration
of such an agreement, the same was not enforceable under general law
keeping in view the provisions of sections 17(1A) and 49 of the 1908 Act and at
the same time, the transaction would not fall under section 2(47)(v). Charanjit
Singh Atwal VS CIT (P&H HC)
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12. ICDS- CONSTRUCTION CONTRACTS (1/5)
 ICDS applies all assessees following mercantile system of accounting in
computing their income under the heads PGBP or IFOS (Notification 892(E)
dated 31/03/2015). ICDS shall apply to AY 2016-17 and subsequent AYs
 Non compliance of ICDS notified by the CG under section 145(2) may empower
the AO to make an assessment U/S 144
 In case of conflict between the provisions of Income tax Act and ICDS, the
provisions of Act shall prevail to that extent
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13. ICDS- CONSTRUCTION CONTRACTS (2/5)
 Contract revenue and Contract cost are required to be recognized on Percentage of
Completion Method (POCM). Once contract crosses 25% of the completion stage the
profit in respect of such contract is required to be recognized
 Pre-construction income in the nature of interest, dividend and capital gains is
specifically offered to tax and not allowed to be reduced from the cost of construction.
 Losses incurred on a contract are allowed only in proportion to the stage of
completion. Any future or anticipated losses are not considered allowable unless
actually incurred.
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14. ICDS- CONSTRUCTION CONTRACTS (3/5)
 Section 44AD provides for computation taxable income under presumptive basis. Not
required to maintain books if they offering income as per that section. Whether do they
require to comply with ICDS?
 Companies recognize income from contract in the books from day one. While ICDS require
recognition of income on reaching 25% threshold. It may have MAT implications
 ICDS provides for recognition of retention money on POCM basis. This is inserted with an
intention to overrule judicial pronouncements which states the retention money accrues to
contractor only when there is a right to receive such income accrues. It ignored concept of
prudence
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15. ICDS- CONSTRUCTION CONTRACTS (4/5)
 Charging section 4 and 5 of the Income Tax Act, 1961 provides for taxation of
real income. One may evaluate the tax treatment under ICDS with section 4 and
5 of the Act
 Provision for foreseeable losses or anticipated losses held allowable under
various judicial decisions. Section 28 of the Act allows the losses while
computing business income. ICDS provides for recognition of losses on POCM
basis. This will impact Fixed price Contracts
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16. ICDS- CONSTRUCTION CONTRACTS (5/5)
 Imposition of damages or downward variation by the customer reduces the contract
revenue. ICDS refers to upward variation which results in revenue.
 Any amount treated as receivable under ICDS and not reflected in the books becomes
irrecoverable can be claimed as bad debt even though the same is not written off in
the books. (FA 2015)
 No significant ICDS dealing with Service Concession Arrangements (SCA)- BOT/BOOT
projects
 Appendix C to Ind AS 115 specifically provides for recognition of revenue in case of
SCA
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caram@sbsandco.com
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