In­come Tax Ex­emp­tion on Ten­ants un­der Re­de­vel­op­ment

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Re­de­vel­op­ment of a ten­anted build­ing in­volves de­mo­li­tion of ten­anted premises of the old build­ing, in lieu of grant of new premises in the new build­ing. The new premises may be pro­vided with own­er­ship rights or may be given on ten­ancy. In the later case, the old ten­ancy rights may be sur­ren­dered in lieu of the ten­ancy rights in re­spect of the new premises or it may be pre­sumed to have con­tin­ued. Un­der the pro­vi­sions of In­come Tax Act, the ten­ancy rights is a cap­i­tal as­set whose pe­riod of hold­ing be­gins with the com­mence­ment of ten­ancy. As per the pro­vi­sions of Sec­tion 55, the cost of ac­qui­si­tion of the ten­ancy rights is to be taken as Nil, un­less the ac­qui­si­tion is by way of pur­chase on pay­ment of pre­mium. Ac­cord­ingly the sur­ren­der of the ten­ancy rights, in the cir­cum­stances, for own­er­ship premises re­sults in a trans­fer of a cap­i­tal as­set for a valu­able con­sid­er­a­tion and is sub­jected to tax­a­tion un­der the head cap­i­tal gains. The other ben­e­fi­cial view re­gards the trans­ac­tion as that of the con­ver­sion of ten­ancy rights into the own­er­ship rights and holds that the said con­ver­sion does not re­sult into any trans­fer li­able to in­come tax. This view holds that the ten­ancy rights is a smaller as­set which merges into a big­ger as­set, i.e. the own­er­ship rights, on con­ver­sion and that in case of a merger, no trans­fer un­der the In­come Tax Act takes place. This view re­lies on the pro­vi­sions of sec­tion 111(d) of the Trans­fer of Prop­erty Act. Where a ten­ant is pro­vided ac­com­mo­da­tion in the new build­ing on own­er­ship ba­sis, the value of ac­com­mo­da­tion for the pur­pose of de­ter­min­ing the cap­i­tal gains shall be the fair mar­ket value of the ten­ancy rights trans­ferred and the cost of ac­qui­si­tion be­ing ‘Nil’, the en­tire value will be sub­ject to cap­i­tal gains. How­ever, since the ten­ancy rights are ex­changed for the own­er­ship of a flat, it can be con­sid­ered as pur­chase of a res­i­den­tial house by in­vest­ing the full value of con­sid­er­a­tion re­ceived on sur­ren­der of ten­ancy rights and the ten­ant would be en­ti­tled to claim the rein­vest­ment ben­e­fit avail­able un­der sec­tion 54F, sub­ject to com­pli­ance of the cer­tain con­di­tions stip­u­lated therein. How­ever, se­ri­ous dif­fi­cul­ties may arise where new premises re­ceived in lieu of sur­ren­der of ten­anted premises are com­mer­cial premises, since in such cases the ten­ant shall not be able to claim the rein­vest­ment ben­e­fit avail­able un­der sec­tion 54F as the rein­vest­ment is in a prop­erty, other than a res­i­den­tial house. Hence, ex­treme care should be taken while draft­ing the agree­ments so as to en­sure that the ten­ant does not end pay­ing huge cap­i­tal gains tax on the ba­sis of mar­ket value of the ten­anted premises upon sur­ren­der of ten­anted premises for the com­mer­cial premises. In such a sit­u­a­tion, it is ad­vis­able for the ten­ant to pay nom­i­nal con­sid­er­a­tion to the land­lord i.e 120 month’s rent for ac­quir­ing own­er­ship rights in the com­mer­cial premises. It is crit­i­cal, in all such cases, to de­ter­mine the date of trans­fer of ten­ancy rights. Sev­eral events take place be­fore the new premises are oc­cu­pied by the ten­ant as an owner. To start with, an MOU is en­tered in to for record­ing the terms of devel­op­ment, which is fol­lowed by hand­ing over pos­ses­sion to fa­cil­i­tate the de­mo­li­tion of the build­ing and there­after, a devel­op­ment agree­ment is ex­e­cuted with the land­lord, a new build­ing is con­structed and the pos­ses­sion of the new premises is handed over. In be­tween, at some point of time an agree­ment is ex­e­cuted for grant of per­ma­nent al­ter­na­tive ac­com­mo­da­tion on own­er­ship ba­sis. De­cid­ing the dates of trans­fer and rein­vest­ment is rel­e­vant for en­sur­ing the com­pli­ance of the pro­vi­sions of Sec­tion 54F for which pur­pose in­tense care should be taken while draft­ing the agree­ments, so as to en­sure that the date of trans­fer and the date of rein­vest­ment in the new prop­erty by the ten­ant does not ex­ceed the time limit stip­u­lated un­der Sec­tion 54F. The de­vel­oper in some cases, in­stead of grant­ing the own­er­ship rights to the ten­ant in the new premises, may con­tinue / grant ten­ancy rights in the new premises with an op­tion to con­vert the ten­ancy rights of new premises into own­er­ship rights therein, on pay­ment of a nom­i­nal con­sid­er­a­tion, af­ter oc­cu­pa­tion of the such premises. In our view, in such case, if proper care is taken while in struc­tur­ing the trans­ac­tion, there may be no tax im­pli­ca­tions on this type of ar­range­ment. The is­sues that are dis­cussed, while deal­ing with the mem­bers of the so­ci­ety, are equally rel­e­vant in case of ten­ants in re­spect of re­ceipts of tem­po­rary ac­com­mo­da­tion or rent thereof, ‘cor­pus fund’ and other fa­cil­i­ties. The date of ac­qui­si­tion of the new own­er­ship premises by the ten­ant is the date on which pos­ses­sion is re­ceived un­der an ex­e­cuted per­ma­nent al­ter­na­tive ac­com­mo­da­tion agree­ment and the pe­riod of hold­ing be­gins from the said date. The cost of ac­qui­si­tion of the new own­er­ship premises will be the fair mar­ket value of the as­set as on the date of al­lot­ment un­less as view is taken that no trans­fer took place on con­ver­sion of the ten­ancy right into own­er­ship rights. The re­ha­bil­i­ta­tion of slums has as­sumed a sig­nif­i­cant im­por­tance for the gov­ern­ment, th­ese days. For once it is re­alised that a slum is a mat­ter of shame for the coun­try and its cit­i­zens. A con­certed ef­fort is be­ing made by the gov­ern­ment to erad­i­cate this evil and bring dig­nity for the slum dwellers. Th­ese dwellers may or may not be the legal ten­ants of the premises oc­cu­pied by them. The dis­cus­sion re­lat­ing to the ten­ants will equally ap­ply to the ten­ants of the build­ings in slum. How­ever, the same may not be rel­e­vant where the oc­cu­piers are not the ten­ants and dif­fer­ent tax considerations may fol­low in case of non ten­ant dwellers, where if proper care is taken while draft­ing the agree­ment, the con­sid­er­a­tion re­ceived by such non ten­ant dwellers may be not sub­ject to tax.

The de­vel­oper in some cases, in­stead of grant­ing the own­er­ship rights to the ten­ant in the new premises, may con­tinue / grant ten­ancy rights in the new premises with an op­tion to con­vert the ten­ancy rights of new premises into own­er­ship rights therein, on pay­ment of a nom­i­nal con­sid­er­a­tion, af­ter oc­cu­pa­tion of the such premises. In our view, in such case, if proper care is taken while in struc­tur­ing the trans­ac­tion, there may be no tax

im­pli­ca­tions on this type of ar­range­ment.

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