Opinion Of Eminent Legal Luminaries On Controversial Issues

Are the sums offered by the builder for redevelopment of our co-op hsg society taxable?

QUERY: We have been approached by a builder for the redevelopment of our building. He says he will demolish parts of the building and reconstruct with more area. The society will be paid Rs. 1 crore while the members will be paid Rs. 25 lakhs each. He will retain a part of the area as his profit. Are the said sums chargeable to tax in the hands of the society and members?
ANSWER: Provisions of the Income-tax Act & D.C. Regulations:

Regulation 33(7) of the Development Control Regulations of the Municipal Corporation of Greater Bombay, 1991 (‘DCR’) provide for the grant of additional FSI if an existing building is redeveloped. The said additional FSI can be utilized either for the extension of the existing building or for the construction of a new building or may be sold for a consideration.

U/s 2(14), “capital asset” is defined to mean “property of any kind”, held by the assessee whether or not connected with his business or profession, but excluding ‘stock in trade’. The definition is wide enough to cover development rights within its ambit.

U/s 45, any profits and gains arising from the transfer of a capital asset is chargeable to tax. U/s 48, the profits and gains have to be computed by deducting from the full value of the consideration, the cost of acquisition and cost of improvement of the asset.

Though development rights are a capital asset, the moot question is whether there is a 'cost of acquisition' attached to them.

Judgements:

The leading judgements on the issue are that of the Mumbai Bench of the Tribunal in ITO vs. Lotia Court Co-operative Housing Society Ltd (2008) 12 DTR (Mumbai) (Trib) and New Shailaja CHS vs. ITO (ITAT Mumbai)

In Lotia Court Co-operative Housing Society the society and its members entered into a development agreement with a builder pursuant to which Transferable Development Rights (TDR) entitled to be received under the Development Control Regulations was assigned to the developer for the repairs and redevelopment of the building and the construction of additional floors. The AO sought to assess the society on the ground that it had made capital gains. However, the Tribunal held that as the TDRs were owned by the flat owners individually and as no consideration for the transfer of the TDRs was received by the assessee society nor any area in the constructed portion was allocated to the assessee society, the society was not chargeable to tax.

In New Shailaja CHS, the assessee-society became entitled by virtue of the Development Control Regulations to Transferable Development Rights (TDR) and the same were sold by it for a price to a builder. On the question of taxability in the hands of the Society, the Tribunal noted that the Supreme Court had laid down the law in B. C. Srinivasa Setty 128 ITR 294 (SC) that if there was an asset for which a cost of acquisition was not determinable, the gains could not be assessed as 'capital gains'. It was accordingly held that though the TDR was a ‘capital asset’, there being no ‘cost of acquisition’ for the same, the consideration could not be taxed.

The said view has been followed in Om Shanti Co-op Society vs. ITO (ITAT Mumbai). In this case, the assessee co-op housing society gave permission to a developer to construct 2 floors and 8 flats on the building belonging to the society by using the TDR / FSI available to the developer. In consideration, the developer paid Rs. 26 lakhs to the assessee and Rs. 66 lakhs to its members aggregating Rs. 92 lakhs. The AO took the view that the assessee had relinquished its right “to load TDR and construct additional floors” and as there was no cost of acquisition, the entire consideration of Rs. 26 L was assessable as long-term capital gains. On appeal, the CIT (A) took the view that even the amounts received by the Members were assessable in the assessee’s hands. He accordingly enhanced the assessment and directed that the consideration be taken at Rs. 92 L. However, the Tribunal reversed the AO and CIT (A) on the ground that the assessee and its members had no right to construct additional floors on the existing building as they had exhausted the right available while constructing the flats in the building. The TDR was not obtained by the assessee and sold to the developer. It was held that the assessee had not transferred any existing right to the developer nor any cost was incurred / suffered prior to permitting the developer to construct the additional floors. The Tribunal held that in the absence of a cost of acquisition, the judgement in B. C. Srinivasa Setty 128 ITR 294 (SC) applied and the consideration was not assessable as capital gains.

The taxability in the hands of the members of the society was considered in Jethalal D. Mehta vs. DCIT (2005) 2 SOT 422 (Mum). There also, following the judgment of Apex Court in CIT vs. B.C. Srinivasa Setty 128 ITR 294 (SC), it was held that as the TDR granted by DCR, 1991 qualifying for equivalent F.S.I had no cost of acquisition, the sale of the same did not give rise to assessable capital gains.

Conclusion:

The entire case rests on there not being a 'cost of acquisition' of the development right / FSI obtained pursuant to the Development Control Regulations. In respect of buildings that have been erected after the DC Regulations of 1991 came into force, it is a possible argument in favour of the Revenue that some part of the cost of the building is attributable to the said development right / FSI and that the principle of B. C. Srinivasa Setty does not apply.
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10 comments on “Are the sums offered by the builder for redevelopment of our co-op hsg society taxable?
  1. Prakash Jhunjhunwala says:

    Please note that in case the consideration is received towards Transfer of development rights (TDR) which is obtained after surrendering a part of land to BMC/other authority and obtains proportionate TDR from the authorities, then it could be assumed that the cost of TDR is inbuilt in the cost of land surrendered, then in such case, the sum received from transfer of TDR may not be exempt as it has a cost of acquisition.

  2. Alok Saksena says:

    In case the consideration received towards TDR for surrender of land to Government and the said land along with other land was acquired prior to the D C Rules 1991 can it be said that the TDR is an additional Right and having no costs especially if the entire FSI (of retained and surrendered) has been consumed by the owner.

  3. in as much as cost of acquisition is not ascertainable, revenue cannot index and index does not arise assessment is a futile exercise.
    i will go one step further. Indexing is not on realistic basis at all on any property sold, but index is some notional assessment, how revenue can rely and force the assese to pay some tax arrived on notion and so the very index itself to be contested in regular High court under Art 226, as Art 14 is applicable for assessment of Natural justice, equity and good conscience need to be examined by justices, in the light of facts of indirect taxes the assesse paid after acquisition of property and that way weights need to be found out on realistcs, as rupee value always dwindles every year which is an accepted fact under economics of rent. Rent is the indirect taxes levied on assessee to maintain himself as also the assect periodical renovations. Hence Palkiwala said income tax is a national disgrace as it enables lawyers and tax consultants earn a lot of moneys while assesees lost very heavily in real terms.

  4. i will give an example, a person acquires a flat from government allotment on hire purchase in 1983 say about 80 thousands and when he pays over period of time the housing finance loan on an interest rate, as interest rates are arrived at the inflation of rupee over a period of time and he pays loan say in 1992, after some defaults and paying default interests charges, sax x amount, not quantified on sensible asseessment values of rupee of 1981 and rupee value of 1991. so the calculations arrived at are just notional of revenue (tax) when he disposes his flat in 2007, on some notional valuation on the sale price. if the assessee sell on some plus compared to his acquiring price, then profit is getting on the index mechanism devised by revenue, assuming the Revenue has not done index on some highly sophisticated research methodology, but in fact it is, as it works on some other indexes again notional principles having no sound legal principles that is to be on sensible research on studies of rent, as the acquiring of property is from some leased out land, unlike free hold land. The very concepts of index is some half hearted mechanism, when so how one can accept the index is most sensible mechanism and this matter need to be contested under Art 32 at supreme court for sensible evaluation.
    so very concept of capital gains need to be struck down as revenue always arbitrarily tax all kinds of indirect taxes just to augment some revenue for governments notions of expenditures for public purposes when revenue of tax of direct taxes is falling under ‘deficiency of services’ the government rendered on assesse’s property, which if sensibly quantified, then some negligible percentage of total governments service contributed in the relevant area need to be assessed, may be some flat neglible rate can be envisaged as income tax’s direct tax is not something like property tax.
    So it calls for detailed study by competent tax practitioners and eminent lawyers to put their heads to see this National disgraceful rules of income tax have to be evaluated, then some respite is possible from arbitrary taxing by revenue, after all one buys or sells a property for residence and sells for some emerging urgencies of the assessee when so why thge asseessee be forced to put all that capital gains necessarily in another property? Is it not sensible question over government which collects revenues for squandering like paying lazy development money under NREGA where the worker is paid for no work practically for 100 days for the faiure of government to provide him job and that responsibility cannot be tied on tax payers for failure of parliamentary members and in fact it can be meaningful if these worthies pay from their own kitty for their own failure of accountability.

  5. if the tribunal bar council needs i can advice as to how to put up fight on this ridiculous concept of capital gains to be moved under article 32 of constitution of india where constitutional bench will decide on such crucial matter like this, as it is high time the government cannot ride on their inefficiencies and foist their liabilities on tax payers. tax payer pays for sensible activities in volition and persuasion not by fiats.
    After all income tax of direct taxes, is some authoritarian begging by government in power which should be struck down by constitutional courts and by administrative tribunals as they will perforce follow the government rules as tribunals cannot go against government, while it happened in British raj but today we have arbitrary raj.
    sorry to say as a lot of assessees complain their problems but stoically accepting irrational burden on tax payer. If one sells a property and he makes some profit that he can p lough in his urgent needs, if no profit why at all he should sell his property, is it not?

  6. Imprudent taxes are aberrations on public economics. Governments need to be prudential in taxing as tax concept is,’No taxation without representation’ an american thought, that way American independence fought the British imperialism in 16th and 17 centuries why indians cannot fight in 21st century as always indians are too late like a flickering tubelights.

  7. nehanimbalkar says:

    Our bldg.is under redevelopment . Developer is deducting TDS directely from the Rent more than Rs.15000/-pm

    Can he do such act? Pl. guide on the matter.

  8. SS says:

    Hello Mehanimbalkar:

    Here is a link to ITAT (Income Tax Appellate Tribunal) ruling issued in the year 2009 which clearly states that

    “tax cannot be levied on the money paid by a builder to a housing society or private individual for redevelopment of property, the Income Tax Appellate Tribunal (ITAT) has said in a recent order. ”

    Is there any subsequent ruling OVER RULING this one. I guess NOT.

    Hope this link helps you
    http://info.propertywala.com/real-estate-news/itat-ruling-likely-to-boost-redevelopment-of-mumbai/

    Thanks,

    SS

  9. Mukesh Jangir says:

    what will be the tax liability in the hands of individual on rent and shifting charges received by him from the developer?

  10. Manisha Lachake says:

    In redevelopment of CHS Ltd developer has paid Rs 43.50 lacs to individual members and Rs 15 crores to cooperatives society as corpus fund in FY 2010-2011. Is this sum taxable to individual member now . Many have not mentioned it in ITR considering as hardship money.

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