Development Rights: development rights – who are entitle –societies or members?

By Vimal Punmiya

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 underutilized 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 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 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 virtue of DCR, 1991 which could not be available to the assesses on expenditure of money. Prior to DCR, 1991, no society had any right to construct the additional floors, so it was not a trad able 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 Co-op. Societies Act, 1960, a Co-operative 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. The tribunal also noted that there was nothing on record to suggest that the interest income would be given to members on dissolution of the Society.

Thus, even the interest income received from other than Co-operative
Bank and spent on Society’s work then the concept of Mutuality will apply and is not liable to tax but this view is not free from litigation.

3. Rent for Temporary Alternative Accommodation including Deposits, if any:

Rental allowance may be received by individual members in the event of need for Relocation during Redevelopment. Such amounts may be utilized in part or in full towards rent paid for alternative premises or may remain entirely unspent if the member already has his/her own alternative accommodation. Such allowance may be received for about three years, either together in one tranche in advance or in installments on a staggered basis.
Liability of Income Tax, if any, on such Rental Allowance, including Deposits, if any, received by the individual members.

Whether such income, if taxable, shall be treated as income earned in the year of receipt (if received on a staggered basis) or entirely as income in one year (if received fully in advance)

In order to get the old building redeveloped, the existing structure of the old building is required to be demolished and hence, it is necessary to vacant the same. To facilitate redevelopment and to compensate the flat owners for the hardship to be faced by them in this regard, the Developer might offer them Rent compensation which they would be paying for the temporary accommodation during the period of redevelopment.

The Rent Compensation so provided by the developer to the owner should be expended by the owners for the purpose of their temporary accommodation and other expenditure related thereto.

If the actual rent paid by the flat owners is less than the Rent compensation received by them from the redeveloper then the excess of such amount received will be taxable under the head Income From Other Sources, otherwise, the Rent compensation received by the flat owners from the redeveloper is not taxable.

The Rent Compensation given to the Individual Members shall be taxable in the year of receipt if the Rent Compensation is received on staggered basis and the whole is not spend by the Individual Members on their alternative accommodation.

However, if the Rent Compensation is given to the Individual Members in one tranche in advance, then the Rent Compensation received by the Individual Members would be taxable on proportionate basis if the same is not spend on the Alternative Accommodation.

4. Hardship Allowance/ Compensation for Inconvenience.

Members opting not to be temporarily relocated during the Redevelopment may receive “Hardship Allowance” from the Developer.
Members receive “Compensation for Inconvenience” from the Developer.
Liability of Income Tax, if any, on such Allowance/ Compensation and if taxable, mode of computation i.e. whether as income in the year of receipt or whether on a staggered basis as received.agreeing to be temporarily relocated during Redevelopment may Along with extra area and Rent compensation, the redevelopers also offer lump sum amount to the flat owners in addition to extra area and compensation. The transfer of TDR to Builder for development of property does not attract Capital Gain Tax.

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.
Hence, the Hardship Allowance and the Compensation for Inconvenience is not taxable in the Hands of the Individual Members as Hardship Allowance and Compensation for Inconvenience can’t be worked out in monetary terms and have no cost. Since there is no cost of acquisition, as per Income Tax Act, 1961, the receipt would not be treated as a Capital Receipt and thus, is exempt from tax.

5. White Goods/ Household Amenities received by Members from Developer.

Liability of Income Tax, if any, on individual members for White Goods/Household

Amenities such as Air-Conditioners, washing machine, modular kitchen, etc. that are sometimes included by Developers in the new premises on a complimentary basis.

All the White Goods/ Household Amenities which are attached to the Flat i.e. Fixtures, Modular Kitchen, Centralized A/c, etc. are treated as a part of the Flat and thus, are exempt and not taxable in the hands of the Individual Members. Other Movable items such as Refrigerator, Sofa Set and other furniture which are not attached to the walls of the flat and exceeds 50,000/- in value in totality are not treated as a part of the Flat and are thus taxable in the hands of the Individual Members

in the year of receipt of such amenities u/s. 56(2)(vii) of the Income Tax Act, 1961,which is as follows:

“where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,–

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

(b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property.

(c) any property, other than immovable property,–

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market
value of such property;

(ii) for a consideration which is less than the aggregate fair market
value of the property by an amount exceeding fifty thousand rupees,
the aggregate fair market value of such property as exceeds such
consideration”

6. Reimbursement of Expenses from Developer.

Liability of Income Tax, if any, on the Society/ individual members for Reimbursement from Developer of Expenses such as Stamp Duty, Fees of Consultants (Architect, Lawyers, Chartered Accountants, etc.) cost of updating members and holding General Body meetings, Administrative Expenses towards the Redevelopment Process, etc. incurred/ to be incurred.

Anything amount which is reimbursed by the Developer is not taxable either in the hands of the Society or the Individual Members, provided that the entire amount of reimbursement is been spent on the expenses it is reimbursed for.

Thus, if excess amount is reimbursed by the Developer than the amount which is actually spent for the purpose than the excess amount would be taxable on the receipt of the same.

However, in the case of a Society, if excess amount is reimbursed to a Society by the Developer than actually spent by the Society, and the excess amount so received is been used by the Society for payment of expenses which are for the welfare of the Society or the Individual Members than the excess amount received by the Society would not be taxed and hence, would be exempt. Otherwise the excess amount received by the Society would be taxable.

7. Liquidation & Disbursement of Existing Sinking Fund.

Liability of Income/Capital Gain Tax, if any, on the Society/ individual members upon liquidation and disbursement to existing members (with permission from Registrar/any other authority) of existing, unutilized Sinking Fund (generated by annual contributions from members and bank interest earned thereon.) prior to induction of new members arising from saleable portion of Redeveloped premises.

In our view, the Sinking Fund is to be used on the property itself either for the purpose of development or Heavy Repair.
However, if the Registrar gives permission then the Sinking Fund could be distributed amongst the Individual Members which again has a number of restrictions.

This distribution of Sinking Fund after the permission of the Registrar would be taxable in the hands of the Individual Members to the extent of the interest on such a fund. The distribution of the principal amount would not be taxable in the hands of the Society or the Individual Members.

8. TDS on receipt.

Whether tax shall be deducted at Source (TDS) from Corpus Money, Allowances, Compensations, Reimbursement of Fees of Consultants and other Expenses, Rent for Temporary Alternative Accommodation and Deposits or any other form of receipt in the hands of the hands of the Society/ its individual members.
As per the Income Tax Act, 1961, no TDS is to be deducted on the amount reimbursed by the Developer to the Society or the Individual Members or on other items such as Corpus Money, Allowances, Compensations, Reimbursement of Fees of Consultants and other Expenses, Rent for Temporary Alternative Accommodation and Deposits or any other form of receipt.

However, when the Society makes payments such as Professional Fees,
Contractor, etc, the Society is to Deduct Tax at Source at the rate given herebelow and pay the same to the Income Tax Department and file the Quarterly Returns:
Contractor

1% in the case of individual/HUF

2% in the case of others u/s 194C

Professional Fees

Commission & Brokerage

10% u/s 194I

10% u/s 194J

10% u/s 194H

9. Tax Planning (Saving) Instrument.

Recommendation of umbrella of designated schemes, funds, securities, etc. under which the Society/ its individual members may invest taxable proceeds, if any, to minimize the impact of Income/ Capital Gain Tax.

Ans. In our view, whether there would be any capital gain tax liability arising on account of such transactions of Redevelopment, is not free from litigation, in view of the fact that various litigations are going on in various courts in our country and the issue would finally be settled when the Supreme Court decides the matter. It is also to be noted that even the Supreme Court changes its view from time to time depending on the frequent amendments in the Income Tax Laws.

Further we would like to state that Income Tax Department have filed appeal before Hon. High Court and, if the court allows them against the assessees then the same would be taxable for the Society otherwise till now it is tax free. Even assuming that Hon High Court decide the case against the assessee then assessee will be liable to pay tax with interest but no penalty can be charged in view of recent decision of Supreme Court decided in the case of Reliance Petro products Pvt. Ltd. Vs. CIT 92010) 322 ITR 158 (SC) on the principle that if assessee give all particulars of income in return and claim certain wrong deduction due to ignorance of highly technical law then that will not attract penalty u/s 271(1)(c) of the Income Tax Act, 1961.

Further we would like to say that based on the above, till now the Corpus received by the Society and the individual members is tax free but in case the High Court decides the case against the Society then to be on the safer side and to avoid litigation with the Income Tax Department, we suggest that recipient can Bonds to claim exemption u/s. 54EC of the Income Tax Act. One can earn interest by investment in the Bonds for 3 yrs which would be an added benefit. The interest so
earned would be taxable. Section54EC of the Income Tax Act, 1961, is produced here invest the same in Specified
“Where the capital gain arises from the transfer of a long-term capital asset and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section,

(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45 ;

(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45:
Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees.”long-term specified asset” for making any investment under this section during the period
commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007, -by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988); or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit

10. Implications of VAT/Service Tax.

Whether all receipts in the hands of the Society/ its individual members shall be net of Vat and Service Tax Responsibility/ liability of Society/Its Members towards the same for services rendered to it by professionals/consultants.

As Society is not providing any Services to the Developer, the Society is not liable to pay Service Tax or VAT on any of the payments receipt by the Society in the form of reimbursements or Corpus Money or Compensations, etc. If the Society is making any payment of Fees to the Professionals or Contractors,then the Society is liable to pay Service Tax @10.3% to the Professionals and Service Tax or Vat to Contractors on such a payment.
The professionals and the Contractors would in turn pay the same to the respective Central Government or State Government as applicable.

11. Responsibility/ Liability towards stamp duty.

Responsibility/Liability of the Society/its individual members towards Stamp Duty, if any, in transition from surrender of existing premises to the Develop to the occupation and registration of the Redeveloped premises Normally, in the cases of Redevelopment, the Stamp Duty and the Registration Charge on surrender of the existing premises to the Developer for the purpose of Redevelopment would be paid by the Developer. Whereas, when the Individual Members receives the Redeveloped Premises from the Developer, he is liable to pay Stamp Duty and Registration Charges on the same. The Stamp Duty payable would be on the cost of construction of the present area of the Premises and on the market value for the extra area received as per the Ready Reckoner Value published by the Government of Maharashtra every year on 1st January.

12. Restructuring of Society.

Whether the composition of the Society may need to be restructured in any manner so as to facilitate minimization of the tax liability.
Whether admission of new members (from saleable portion.) in the existing Society or their Accommodation as an independent new Society would have any bearing on the tax liability of the Society/its individual members.

No, the composition of the Society need not be restructured in any manner so as to facilitate minimization of the tax liability.

The admission of the new members to the existing Society or their
accommodation to the new Society would not make much difference to the tax liability of the Society or its Individual Members.

However, it would be advisable to admit the new members to the existing Society because due to increase in the number of the Members of the Society, the Fixed charges or expenses of the Society like maintenance, etc would be distributed amongst the Members.





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One thought on “Development Rights: development rights – who are entitle –societies or members?

  1. MY SON is an NRI and presently in London. He has flat in KAMAL KUNJ Housing Cooperative society going for Redevelopment.

    The corpus was fixed of Rs. 90 Lacs towards hardship compensation.

    And after I handed over the keys of my son flat then at that time the developer says 20% TDS will be deducted as per law enacted in 2013 towards capital gain on sale of land towards which corpus moneybis paid.

    I feel very much annoyed and after all is over it is revealed like this.

    Please advise me what can be done.

    Nitin varia

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