DE­VEL­OP­MENT RIGHTS:

DE­VEL­OP­MENT RIGHTS – WHO ARE EN­TI­TLE – SO­CI­ETIES OR MEM­BERS?

Accommodation Times - - .. Legal.. - By Vi­mal Pi­namiya, CA, LLB

In re­spect of Ten­ants co-part­ner­ship co-op­er­a­tive so­ci­eties, which are of the na­ture of “Flat Own­ers So­ci­eties” in which the flats are ac­quired by the so­ci­ety from the builder on own­er­ship ba­sis and there­after So­ci­ety is formed, and land is con­veyed to the so­ci­ety and in­di­vid­ual mem­bers ac­quire own­er­ship rights over the build­ing and un­der­neath the de­vel­op­ment rights.

This con­cept has been rec­og­nized un­der Bom­bay stamp Act as on the con­veyance in favour of the hous­ing so­ci­eties, stamp duty paid by the pur­chasers of flats on own­er­ship agree­ments is de­ducted from the stamp duty payable on the mar­ket value of the property trans­ferred in favour of the so­ci­ety as per pro­viso to ar­ti­cle 25 of sched­ule 1 of Bom­bay Stamp Act.

Cir­cu­lar No. F.N. 4 / 28 / 68 – WT DT. 10.0.1969 AND 27.01.1969 ex­plain­ing the pro­vi­sions of sec­tion 5(1)(iv), the Board clar­ify that flats vest with in­di­vid­ual mem­bers of so­ci­ety and wealth tax ex­emp­tion will be avail­able to in­di­vid­ual mem­bers.

1. Additional Area ex­pected at Re­de­vel­op­ment

Li­a­bil­ity of In­come/Cap­i­tal Gain Tax, if any, on:

(A) Additional area in the hands of in­di­vid­ual mem­bers.

Ans. As per Sec­tion 54 of the In­come Tax Act, 1961, if any res­i­den­tial property which was held for a pe­riod of more than 3 years is sold or given for re­de­vel­op­ment and the new flat is pur­chased or ac­quired within a pe­riod of 1 year be­fore or 2 years af­ter the sale or con­structed within 3 years af­ter the sale then cap­i­tal gain aris­ing on the trans­fer of the old flat will be ex­empt to tax u/s. 54 of the In­come Tax Act, 1961 to the ex­tent of the cost of such new flat.

In the case of re­de­vel­op­ment, the new flat to be ac­quired is treated as con­structed for the pur­pose of the Sec­tion 54. Thus, if the new flat is ac­quired by the owner within a pe­riod of 3 years from the sur­ren­der of the orig­i­nal flat then the cap­i­tal gain aris­ing from the sale of the orig­i­nal flat can be claimed to be ex­empted u/s. 54 of the In­come Tax Act.

If the new flat is not ac­quired by the owner within a pe­riod of 3years then the As­sess­ing Of­fi­cer at his dis­cre­tion can dis­al­low the same at any time dur­ing the as­sess­ment.

How­ever, al­lot­ment of a flat or a house by a co­op­er­a­tive so­ci­ety, of which the as­sessee is the mem­ber, is also treated as con­struc­tion of the house [Cir­cu­lar No. 672, dated 16-12-1993]. Fur­ther, in these cases, the as­sessee shall be en­ti­tled to claim ex­emp­tion in re­spect of cap­i­tal gains even though the con­struc­tion is not com­pleted within the statu­tory time limit. [ Sashi Varma v CIT (1997) 224 ITR 106 (MP)]. Delhi High Court has ap­plied the same anal­ogy where the as­sessee made sub­stan­tial pay­ment within the pre­scribed time and thus ac­quired sub­stan­tial do­main over the property, al­though the builder failed to hand over the pos­ses­sion within the stip­u­lated pe­riod. [ CIT v R.C. Sood (2000) 108 Tax­man 227 (Del)].

Hence, re­ly­ing upon the above judg­ments, even if in the case of de­vel­op­ment, the new flat is ac­quired by the owner af­ter a pe­riod of 3years from the sur­ren­der of the old flat, an as­sessee can claim ex­emp­tion u/s. 54.

If the new flat ac­quired to claim ex­emp­tion u/s. 54 is sold within a pe­riod of three years from the date of pur­chase then the cap­i­tal gain ex­emp­tion claimed ear­lier would be­come tax­able in the year the new flat is trans­ferred.

Thus, in your case, the Re­ceipt of ex­tra car­pet area over and above the ex­ist­ing area could be claimed as ex­emp­tion u/s. 54 of the In­come Tax Act,1961.

Fur­ther, we would like to state that un­der the def­i­ni­tion of “Trans­fer” ac­cord­ing to Sec 2(47) In­come Tax Act, 1961, trans­fer, in re­la­tion to a cap­i­tal as­set, in­cludes sale, ex­change, or re­lin­quish­ment of the as­set or the ex­tin­guish­ment of any rights therein or the com­pul­sory ac­qui­si­tion thereof un­der any law.

An ex­change in­volves the trans­fer of property by one per­son to an­other and re­cip­ro­cally the trans­fer of property by that other to the first per­son. There must be a mu­tual trans­fer of own­er­ship of one thing for the own­er­ship of an­other. Hence, the ac­qui­si­tion of new flat would be con­sid­ered as ex­change and would be con­sid­ered as trans­fer for the pur­pose of cap­i­tal gain.

Ar­gu­ment could not be made that no cost is in­curred by any mem­ber for the ac­qui­si­tion of the new flat and hence cap­i­tal gain can­not be com­puted and the case does not fall within the am­bit of Sec­tion 55(2). The mem­ber is for­go­ing his rights in the old flat. And hence, it would be con­sid­ered as the cost of ac­qui­si­tion of the new flat.

How­ever, if the res­i­den­tial flat is held for a pe­riod of less than 3 yrs than the re­ceipt of ex­tra area by the in­di­vid­ual mem­bers would be tax­able in the hands of the in­di­vid­ual mem­bers.

(B) Cash com­pen­sa­tion re­ceived upon sur­ren­der of en­ti­tled additional area, in part or in full, by an in­di­vid­ual mem­ber.

Ans. If the In­di­vid­ual mem­ber is sur­ren­der­ing a part of the ex­ist­ing area then the In­di­vid­ual mem­ber would be li­able to pay Cap­i­tal Gain Tax. The sale con­sid­er­a­tion would be cal­cu­lated as per Sec­tion 50C of the In­come Tax Act, which is as fol­lows:

“Where the con­sid­er­a­tion re­ceived or ac­cru­ing as a re­sult of the trans­fer by an as­sessee of a cap­i­tal as­set, be­ing land or build­ing or both, is less than the value adopted or as­sessed or as­sess­able by any author­ity of a State Govern­ment for the pur­pose of pay­ment of stamp duty in re­spect of such trans­fer, the value so adopted or as­sessed or as­sess­able shall, for the pur­poses of sec­tion 48, be deemed to be the full value of the con­sid­er­a­tion re­ceived or ac­cru­ing as a re­sult of such trans­fer.”

How­ever, if the In­di­vid­ual mem­ber is sur­ren­der­ing a part of the additional area then the In­di­vid­ual mem­ber would not be li­able to pay any in­come tax or cap­i­tal gain tax on the same.

(C) The So­ci­ety for re­ceiv­ing ameni­ties and fa­cil­i­ties for the com­mon use of its mem­bers and their fam­i­lies.

Ans. If the So­ci­ety is re­ceiv­ing for ameni­ties and fa­cil­i­ties for the com­mon use of its mem­bers and their fam­i­lies then the same is not tax­able in the hands of the So­ci­ety or the In­di­vid­ual mem­bers as there is no cost of ac­qui­si­tion of the same.

In de­cid­ing the case of JETHALAL D.ME­HTA V. DY. CIT [( 2005) 2 SOT 422 (MUM.), Hon. In­come Tax Ap­pel­late Tri­bunal mainly re­lied upon Supreme Court de­ci­sion in the case of CIT V. B.C.SRINVASA SHETTY 128 ITR 294 in which it was de­cided that if there is no cost no cap­i­tal gain can be worked out hence amount re­ceived is to be treated as ex­empt re­ceipt.

2. Cor­pus Money ex­pected at Re­de­vel­op­ment

Li­a­bil­ity of In­come/Cap­i­tal Gain Tax, if any, on:-

(A) Cor­pus Money re­ceived by the in­di­vid­ual mem­bers from the De­vel­oper in lieu of sur­ren­der of part en­ti­tle­ment of FSI/De­vel­op­ment rights.

Ans. If the In­di­vid­ual mem­ber is re­ceiv­ing an area which is same or more than the present area then the In­di­vid­ual mem­ber is not li­able to pay cap­i­tal gain tax on the same.

If how­ever, In­di­vid­ual mem­ber is re­ceiv­ing an area which is less than the present area than the In­di­vid­ual mem­ber is li­able to pay Cap­i­tal Gain Tax as per Sec­tion 50C of the In­come Tax Act, 1961 as al­ready ex­plained above.

(B) Cor­pus Money re­ceived by the So­ci­ety from the De­vel­oper in lieu of sur­ren­der of part en­ti­tle­ment of FSI/De­vel­op­ment Rights, such funds be­ing in­vested by the So­ci­ety to earn in­ter­est in­come to meet/ sub­si­dize the main­te­nance costs of its Re­de­vel­oped premises and property.

Ans. If at the time of Re­de­vel­op­ment, the So­ci­ety was in not in pos­ses­sion of unuti­lized FSI/De­vel­op­ment Rights, then the So­ci­ety would not be li­able to pay any Cap­i­tal Gain Tax on the re­ceipt of the Cor­pus Money on sur­ren­der of a part of FSI/De­vel­op­ment Rights.

Fur­ther, if the So­ci­ety has unuti­lized FSI/ De­vel­op­ment Rights in its pos­ses­sion at the time of Re­de­vel­op­ment, then the re­ceipt of the Cor­pus Money on sur­ren­der of the part of FSI/De­vel­op­ment Rights would be tax­able in the hands of the So­ci­ety.

Also, in the case of (1) New Shailaja CHS v. ITO (ITA NO. 512/M/2007. BENCH B dated 2nd Dec, 2008 (mum.)and (2) ITO v. LO­TIA COURT CO- OP. HSG. SOC. LTD. ( 2008) 12 DTR (MUM­BAI)(TRIB) 396 it was held that where the as­sessee, a Co-op. Hsg. Soc. Ltd. Be­came en­ti­tled, by the virtue of De­vel­op­ment Con­trol Reg­u­la­tions, to Trans­fer­able de­vel­op­ment Rights (TDR) and the same was MA­HESH­WAR PRAKASH 2 CHS LTD. 24 SOT 366 (MUM.), it was held that the as­sessee-so­ci­ety ac­quired the right to con­struct the additional floors by sold by it for a price to a builder , the ques­tion arose whether the trans­ac­tion of sale re­ceipt could be taxed. It was 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 same is held in the cases of NEW SHAILAJA CHS LIMITED (ITA NO. 512/MUM./ 2007), OM SHANTI CO-OP. HSG. SOC. LTD. (ITA NO.2550/ MUM./2008)& LO­TIA COURT CO-OP. HSG. SOC. LTD. (ITA NO. 5096/MUM./2008).

Fur­ther, in the case of virtue of DCR, 1991 which could not be avail­able to the as­sessee on ex­pen­di­ture of money. Prior to DCR, 1991, no so­ci­ety had any right to con­struct the additional floors, so it was not a trad­able com­mod­ity. Sud­denly by virtue of DCR, 1991, the right was con­ferred by the Govern­ment on the as­sessee. Such right ex­clu­sively be­longed to the build­ing owned by the so­ci­ety. It could not be trans­ferred to any other build­ing.

Sim­i­larly, sim­i­lar right be­long­ing to other so­ci­eties could not be pur­chased by the as­sessee for the pur­pose of con­struct­ing additional floors in its own build­ing. There­fore, such right had no in­her­ent qual­ity of be­ing avail­able on ex­pen­di­ture of money and, there­fore, cost of such as­set could not be en­vis­aged. Hence, the said view was fully jus­ti­fied in terms of the de­ci­sion of the Apex Court in the case of B.C. Shrini­vasa Shetty.

There­fore, the right ac­quired by the as­sessee did not fall within the am­bit of sec­tion 45 it­self. The amended pro­vi­sions of sec­tion 55(2) were also not ap­pli­ca­ble, since such right was not cov­ered by any of the as­sets spec­i­fied in sec­tion 55(2)(a).

There­fore, the sum of Rs. 42 lakhs re­ceived by the as­sessee from the de­vel­oper was not charge­able to tax un­der sec­tion 45. There­fore, the im­pugned or­ders passed by the lower au­thor­i­ties were to be set aside.

(C) Cor­pus Money re­ceived by the So­ci­ety from the De­vel­oper (as de­scribed in B above) and sub­se­quently dis­trib­uted to its mem­bers.

Whether such in­comes en­listed above at A, B and C, if tax­able, shall be treated as Cap­i­tal Gains or deemed to be in­come earned in the year of re­ceipt.

Ans. As per Ma­ha­rash­tra Coop. So­ci­eties Act, 1960, a Co­op­er­a­tive So­ci­ety can­not dis­trib­ute the cor­pus funds to its In­di­vid­ual mem­ber, it can only de­clare div­i­dends.

How­ever, the declar­ing of Div­i­dends has lots of re­stric­tions and for­mal­i­ties.

(D) Li­a­bil­ity of In­come Tax, if any, on in­ter­est in­come aris­ing from in­vest­ment of such Cor­pus Money by the So­ci­ety/ in­di­vid­ual mem­bers in the Co-op­er­a­tive/other Banks.

Ans. If the So­ci­ety re­ceives in­ter­est in­come form a Co-op­er­a­tive bank then the same is ex­empt from tax.

And, if the in­ter­est in­come is re­ceived from other banks than the same is tax­able and the So­ci­ety has to pay tax on the same.

How­ever, as per re­cent Hon’ble Tri­bunal Judg­ment in the case of ITO v. Sa­gar San­jog C.H.S. Ltd., ITA Nos. 1972 to 1974 and 2231 to 2233/ Mum./ 2005(BCAJ) it was held that the in­ter­est in­come earned out of the fund money in­vested went to re­duce the main­te­nance. Ac­cord­ing to the tri­bunal, the in­ter­est would have been tax­able, had there been sur­plus left af­ter it be­ing ad­justed against the main­te­nance ex­penses. To read full ar­ti­cle

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