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.