Incidence of tax on development agreement

I have a property, three grounds, in a suburb of Chennai. There is a demand from a developer who is prepared to construct four flats for me on the part to be retained by me in the property on surrender of 50 per cent of the right over the property in favour of his nominees. The plan is to construct eight flats on demolition of the existing property. Since I will be only converting the land into property, I should imagine that tax liability should arise only when I sell any of the flats which I will be getting on conversion. I am getting conflicting advice on the point.

Apparently the reader is not getting competent professional advice. There is a taxable event, when the reader surrenders 50 per cent of the land to the developer, the consideration for which is the value of the superstructure put up on his part retained by him so that liability would not wait till the constructed portion is sold. Since the developer usually gets a power of attorney, a transfer with liability for capital gains will be inferred on such grant of power of attorney because of the provision deeming transfer even on possession pursuant to an agreement of sale. Development agreement is treated as an agreement for sale. The departmental practice and some precedents favour such a view so that one should be ready for such tax though there is no cash flow as in the reader's case consequent on the development agreement.

If and when any of the flats, which the reader would get, is sold, there will be further liability in respect of proportionate consideration attributable to the retained land part now sold with the flat after deducting proportionate indexed cost, while in respect of superstructure, the value adopted for liability under the development agreement for the superstructure will be the cost in working out the capital gains. Land and superstructure would be treated as two different assets, short-term or long-term, depending on the period of holding.

The reader should get professional opinion if he wants to avoid the consequences of interest and penalty on any delay in complying with law relating to payment of advance tax and filing return in time. He may sometimes be able to mitigate his liability by availing himself of some rerolling benefits available in law.