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SUMMARISED JUDICIAL PRONOUCEMENTS ON INCOME TAX RELATING TO REDEVELOPMENT OF PROPERTIES
Finally, the judicial pronoucements on income tax relating to the subject of redevelopment of properties are summarised hereunder :
1. The Mumbai Tribunal in the case of Raj Ratan Palace Co-op. Hsg. Soc. Ltd. Vs. DCIT (ITA No. 674/ Mum/2004) has held that mere grant of consent by the land owner (Society) to the developer to consume TDR on the Society’s Plot does not amount to transfer of land/or any rights therein and therefore the compensation paid by the developer to the members of the society cannot be taxed in the hands of the Society
2. The Mumbai Tribunal in the case of ITO Vs. Hemandas J. Pariyani (ITA No. 2508/Mum/2010) has held that TDR granted under the by the Development Control Regulations for Greater Mumbai, 1991, qualifying for equivalent FSI has no cost of acquisition and so sale thereof does not give rise to taxable capital gains.
The Tribunal while delivering the aforesaid decision followed its earlier decision in the case of Jethalal D. Mehta Vs. DCIT (2005) (2 SOT 422), discussed earlier wherein it had held that TDR which came into existence by operation of law pursuant to the Development Control Regulations of 1991 had no cost and therefore no capital gains was taxable in the event of sale. The said decision delivered in the case of Jethalal D. Mehta (supra) was based on the decision of the Supreme Court in the case of B.C. Srinivasa Setty (128 ITR 294) wherein the Supreme Court had held that if a capital asset has no cost of acquisition then no capital gain can arise on sale of the same.
3. The Mumbai Tribunal in the case of Auro Ville Co.op Hsg. Soc. Ltd., Vs. ACIT (ITA No. 570/ Mum/2008) has held that the capital gains arising on transfer of TDR FSI by the Society is taxable in the hands of the members and not in the hands of the Society. The important observations made by the Tribunal in the aforesaid decision are reproduced hereunder :
(a)The assessee is a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act, 1960 as a Tenant Co-Partnership Housing Society under Rule 10(1) – clause 5(b). The flat owner members have transferred their individual entitlements / right to TDR / FSI in favour of the developers and are entitled to receive the compensation directly.
(b)All the individual flat owners have offered for taxation their share of compensation, in their respective return of income.
(c)According to the CBDT Circular No. 9 dated 25th March, 1969, the legal ownership in the flats is vested in individual member and not in the Co-operative Society. The flat owners have proportionate interest in the land and building. The society is only ostensible owner and in reality and truth the flat owners owns the land and building for which they have paid full consideration and the amount received from the developer by the flat owner in their individual capacity is the income of the individual flat owner. The flat owners have relinquished their interest in the property and the society has no control over such income of the individual owners.
(d)The benefit of additional TDR FSI was derived and enjoyed by the members of the society and no income accrued to the society.
(e)There is no merit in computing capital gains on the sale of TDR FSI in the hands of the Society following the decision of Mumbai Tribunal in the case of Jethalal D Mehta Vs. DCIT.
4.The Mumbai Tribunal in the case of ITO Vs. Lotia Court CHS Ltd. (2008) (118 TTJ 199) has held that allowing a developer to load TDR and to use it on the Society’s property would not result in any taxable income in the hands of the Society. Even in the case of flat owners, no capital gains could be taxed in view of the fact that they had acquired the rights by virtue of the Development Control Regulations of 1991.
5.The Mumbai Tribunal in the case of Deepak S. Shah Vs. ITO (2009) (29 SOT 26) has held that since the society entered into an agreement granting permission for development and constructing of additional floors for which the members of the society received a certain sum on account of such a grant, the assessee was not liable to capital gains tax in view of the fact that there was no cost of acquisition to him.
6.The Mumbai Tribunal in the case of Om Shanti Co. Op. Hsg. Society Ltd. Vs. ITO (ITA No. 2550/ Mum/2008) has held that the amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilizing TDR FSI belonging to him is not chargeable to tax, since there is no cost of acquisition.
7.The Mumbai Tribunal in the case of New Shailaja Co. Op. Hsg. Society Ltd. Vs. ITO (2008) (121 TTJ 62) has held that though the TDR was a capital asset, since there was no cost of acquisition, the sale proceeds could not be taxed.
8.The Mumbai Tribunal in the case of ITO Vs. Ashok Hindu Co-operative Housing Society Limited (ITA/No. 630/Mum/2006) was confronted with the following facts :
(a)The assessee society was the owner of land together with two buildings situated thereon. The society had sixteen members who held, on ownership basis, sixteen flats in the said buildings. It was possible to construct additional flats on the existing buildings by utilising balance FSI of the property and FSI that may be obtained from other properties under the TDR scheme. The total area of the property was 1063.60 sq. mts., it was possible to construct 11,448 sq. feet on the said property by procuring TDR FSI
(b)The society, at its Special General Body Meeting held on 15th July, 2001 passed a resolution to the effect that the benefit of constructing additional flats by utilising any FSI available on the said property and by bringing in TDR FSI belongs to the members equally. Each member thus became entitled to 715.50 sq. feet by way of TDR FSI. The society agreed that each member would be entitled at their own costs to procure proportionate TDR FSI and to use his/her respective entitlement for constructing a new flat for himself or each member may grant development rights to a common developer
(c)The developer vide agreement dated 29th August 2001 agreed to pay to the society an amount of Rs. 1,76,000/- as well as carry out works of repairs and improvements to the existing buildings and compound of the society in consideration of the society permitting the developer to construct additional floors from the entitlement of each of the members of the society.
(d)The developers agreed to pay each of the members a lump sum of Rs.7,00,000/- as compensation for inconveniences and hardships faced or to be faced by the members during and on account of additional construction. Further, in consideration of the member granting development rights in respect of his/her entitlement to the developers, the developers agreed to pay the member a lump sum monetary consideration of Rs.7,20,000/-.
Based on the foregoing facts, the Tribunal held that upon considering the definition of the term ‘society’ as defined in the Maharashtra Co-operative Societies Act and also the fact that the Bombay Stamp Act provides for payment of stamp duty by each member at the time of purchase of individual flat and that such registered agreements are deemed to be conveyance, the capital gains have to be taxed in the hands of the members of the society, who have accounted for the same in their individual returns of income. The Tribunal further held that the beneficial ownership was that of the members of the society. It was the members who transferred the rights and received consideration for such transfer.
9. Recently, an interesting decision has been delivered by the Mumbai Tribunal in the case of Kushal K Bangia (the taxpayer) (ITA/No. 630/Mum/2006) wherein it has held that the cash compensation received by a member of the housing society under a redevelopment scheme from a developer is to be treated as a “capital receipt” and hence not taxable as “revenue receipt” in the hands of the member. Consequently, the said compensation would reduce the cost of acquisition of the new flat at the time of computing the capital gains in respect of the said new flat. The brief facts of the case and the ruling of the Tribunal are worth noting :
-The taxpayer, an individual, was a member of a housing society. The housing society along with its members entered into an agreement with a developer for demolishing the residential building and reconstruction of a new multi-storied building by using the FSI arising out of the property and by utilizing the TDR.
– Under this arrangement, the taxpayer received a slightly larger flat in the new building, a displacement compensation of Rs. 6,12,000/- (computed @ Rs. 34,000/- per month) for the period of construction of the new building and an additional compensation in cash of Rs. 11,75,000/-.
– The Assessing Officer (AO) brought to tax both the estimated value of the additional space in the new flat and also the cash compensation received by the taxpayer.
– Aggrieved by the order of the AO, the taxpayer preferred an appeal before the CIT (A). The CIT(A) deleted the addition of the estimated value of the additional space. However, the treatment of the cash compensation as “casual income” chargeable to tax as “income from other sources” was upheld by the CIT(A).
– A capital receipt, in principle, is outside the scope of income chargeable to tax.
– Hence, the connotation of income howsoever wide and exhaustive, can take into account only such capital receipts as taxable income as are provided as specifically taxable in the Income Tax Act.
– Unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act, the receipt would not be taxable.
– Further, one has to analyze the nature of payment in the hands of the receiver and not what it is in the hands of the payer.
– The compensation received by the taxpayer is relating to the flat owned by the taxpayer and is clearly capital in nature (as the flat is a capital asset) even if it is revenue expenditure for the developer.
– The impugned receipt though not taxable as revenue receipt would end up reducing the cost of acquisition of the flat and would be taken into account as and when the occasion arises for computing the capital gains in respect of the new residential flat.
In the foregoing decision, the Mumbai Tribunal has re-iterated the need to characterize the nature of receipt (i.e. capital or revenue) for determining taxability, particularly from the perspective of the recipient. Thus the facts of each redevelopment agreement would need to be examined to verify if a gain in the nature of “capital gains” arises to the members or to the society.