Redevlopement of Co-operative Society


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Redevlopment of old societies involves various tax & regulatory issues. Tax issues on Society & Member has been analysed in this writeup

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Redevlopement of Co-operative Society

  1. 1. SpecIAl SToRy – Real estates projects & Redevelopment ReDeveloPmenT – TAx ASPeCTS CA Paras K. Savla1. Background 1.3 Redevelopment of old structures involves1.1 With increase in population and people various complicated and peculiar regulatorymigrating from rural areas, demand for urban and tax issues. Important parties to thehousing is increasing and urban area is running redevelopment scheme are:out of land. It is estimated that there are more i) Land owners/society;than 52,000 slums in India, with more than 8 ii) Tenants/flat owners/dwellers/societymillion dwelling units. Out these 17,000 slums members;with more than 3 million dwelling units are iii) Developerssituated in Maharashtra. iv) Various Governmental agencies.1.2 In view the fact that land cannot be However for the purpose of taxation we arecreated; supply of land for new construction concerned with tax issues that may surroundwould be from: first three parties only. Tax implication ona) Redevelopment of old buildings, developers are specifically not dealt herewith since all the expenses incurred by the developerb) Development of slums. would be in the ordinary course of businessc) ‘Supply from old mills and salt pans’ – in and no specific tax issue arises merely on cities like Mumbai undertaking redevelopment. Though there are various industry specific issues which arises onHowever environmental disquiet has held the all types of construction. During the course of re-plans for developing salt pans. Hence currently development of society, society and/or membersredevelopment of chawls, dilapidated buildings, are in receipt of sum in one or the other form.some crumbling co-operative societies and slums Let us consider each of these situations one bywould drive the market. one.2. Receipt of consideration by Society on transfer of Transferable Development Rights: Transfer of TDR t Consideration on Transfer of TDR tSociety Developer Member Income Tax Review 27| SS-I-19| April, 2011
  2. 2. Redevelopment – Tax Aspects2.1 Before considering tax impact on transfer 2.2 With this background let us examineof ‘Transferable Development Rights’ (TDR) whether receipt of sum on transfer of TDR islet us understand ‘what is TDR?’ TDR is not taxable in the hands of society?defined under the Income-tax Act. As per FEMA(Permissible Capital Account Transactions) 2.3 Under section 2(14) of IT Act, capitalRegulations, 2000 - Regulation 2(d) – TDR asset means property of any kind (othermeans certificates issued in respect to category than specifically excluded) held by assessee.of lands acquired for public purpose either by ‘Property’ is a term of the widest import and,Central or State Government in consideration subject to any limitation which the context mayof surrender of land by the owner without require, it signifies every possible interest whichmonetary compensation, which are transferable a person can clearly hold or enjoy.1 The wordin part or whole. Every city/town has its own ‘property’ not only includes tangible assets butdevelopment plans. In Maharashtra, city/ also intangible assets. In view of this TDR is atown development plans are prepared under capital asset.Maharashtra Regional and Town Planning 2.4 Section 48 sets out the mode ofAct. City/town plans reserves some area for computation of income under the head Capitalthe various general public utility purposes like gains by providing that the expenditure incurredrecreational ground, school, road, hospitals etc. wholly and exclusively in connection with theReserved plots are required to be surrendered transfer of a capital asset along with the costto the local authorities for their reserved use. of acquisition and cost of any improvement, ifHowever on such surrender, owners are to be any, shall be deducted from the full value ofcompensated adequately. Providing monetary consideration received or accrued as a resultcompensation to the owners would put gigantic of the transfer of capital asset. The Hon’blepressure on State / Local Government’s financial Supreme Court in the celebrated case, B.C.resources. Hence new concept of TDR has been Srinivasa Setty2 has held that transfer of capitalevolved under Development Control (DC) asset which does not have any cost of acquisitionRegulations. DC regulations are district or town does not result into capital gains chargeable tospecific. Under DC regulations, development tax under section 45. The law is settled and therepotential of reserved land is isolated from land. is no dispute on the said position that when anThis isolated right is called as TDR, which asset has no cost of acquisition, the gains on salecan be used to load additional floor space (in or transfer of same cannot be brought to tax.addition to permitted area) on other properties.Local authority generally issues a certificate for 2.5 The right to receive TDR arises in theTDR which is known as Development Rights hands of society because society is the owner ofCertificates (DRC). Holder of DRC can transfer the land and building. Until the point of timethem for the monetary consideration. TDR may DC regulation came into existence, the assesseealso arise due to additional Floor Space Index did not have right to receive and apply for the(FSI). In Mumbai TDR arises under Development TDR. In case where TDR is transferred, theControl Rules, 1991 of the Bombay Municipal society is the owner of the land and building andCorporation. Such TDR can be utilized on any continued to remain the same, even after transferplot, vacant or already developed or by erection of the said capital asset. In other words whatof additional storeys subject to the availability society transfer is not the plot or the building,of FSI and conditions prescribed under DC but parts with the new right which did not resultRegulation. in parting with land or building. Further the1 Ahmed G.H. Ariff vs. CWT[1970] 76 ITR 471 (SC)2 CIT vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC); [1981] 5 Taxman 1 (SC) 28 Income Tax Review April, 2011 | SS-I-20|
  3. 3. SpecIAl SToRy – Real estates projects & Redevelopmentrights are acquired by virtue of being owner of that when the assets so specified in sub-sectionthe plot in the specified area but that does not (2) of section 55 are transferred, then the cost ofmean that the cost incurred on the plot is the acquisition has been taken at ` nil except wherecost of acquiring these rights. Thus, the cost of the assessee had acquired such assets by meansthe land and building of the existing structure of purchasing from the previous owner and thecould not be attributed to the additional FSI computation of the capital gains would be donereceived by means of DC regulation. The costs accordingly. There is a difference in the situationof obtaining local authority approval for the when cost of acquisition is ` nil and where thebuilding plan can also not be said to be the costs cost of acquisition cannot be ascertained or noof acquisition of these rights as these rights do cost of acquisition has been incurred.not arise by the virtue of getting these approvalsbut by the virtue of a legal right independent 2.7 The items of capital assets specified inthereof.3 section 55(2) are those for which the cost of acquisition shall be taken at ` nil for computing2.6 As discussed earlier such right is a capital capital gains. However if the assessee had notasset but in order to compute capital gains apart incurred any cost of acquisition on a capitalfrom the existence of capital asset, there should asset and such capital asset does not fall inbe sale consideration accruing as a result of the category of the capital assets specified intransfer of capital asset as well as the cost of section 55(2) then the judgment of the Hon’bleacquisition of the asset along with the cost of Supreme Court in B.C. Srinivasa Setty shallany improvement thereto, if any. The legislature apply and no capital gains would be its wisdom brought out certain categories In view of this, no capital gains can be chargedof capital assets under section 55(2) as having on the transfer of the additional FSI by thecost of acquisition at ` nil, where such assets society.4have not been purchased by the assessee forconsideration. The effect of this sub-section is 3. Consideration for transfer of TDR received by members: Transfer of TDR t Consideration on Transfer of TDR tSociety Developer Member3.1 Another situation may arise where on transfer of TDR amount is received by society membersand not by the society and developer also agrees to carry repairs to the building. Under thesescenario what would be the tax implications?3.2 Similar issue has arisen in the case of Lotia Court Co-op. Housing Society Ltd.5 wherein theassessee is a registered society consisting of 11 members. The assessee society was entitled to receive3 Jethalal D. Mehta vs. DCIT [2005] 2 SOT 422 (Mum.)4 New Shailaja Co-operative Housing Society Ltd. vs. ITO [2010] 36 SOT 19 (Mum.)5 ITO vs. Lotia Court Co-op. Housing Society Ltd. [2009] 27 SOT 36 (Mum.) Income Tax Review 29| SS-I-21| April, 2011
  4. 4. Redevelopment – Tax Aspectscertain TDR from the Municipal Corporation of transferred to the society. Certain repairs andMumbai, as per which additional floors could redevelopment of the flat had to be undertakenbe constructed on the existing building. The and an agreement was written between thesaid right to receive TDR was assigned to a assessee society and the developer for the repairsbuilder by the members of the society for the of the building and for construction of additionalpurpose of repairing the said building. The floors in the flats of individual flats owned byassessee entered into an agreement with the the members of the society. An agreement wasdeveloper wherein the terms of settlement vis- entered into between the assessee society and theà-vis the members of the society were agreed developer but no consideration for the transferupon. Separate agreement was entered into of TDRs owned by the flat owners individuallyby the respective owners of the flats, i.e., the was received by the assessee society nor anymembers of the society with the developer for area in the constructed portion was allocated tothe assignment of the TDR and construction of the assessee society. The members of the societyadditional floors in respect of each flat owned individually entered into an agreement withby the respective parties. The benefit of the the developer for the construction of additionaladditional TDR was derived and enjoyed by floors or portions annexed to their individualthe members of the assessee society and no flats and for the repairs of the building. Theconsideration whatsoever was received by the assignment of the TDR to the developer andassessee society for the assignment of the TDRs in turn the additional floors to be constructedand for carrying out the repairs of the building and also repairs/renovation of the building toand construction of the additional floors. The be carried out, does not entail accruing of anyAssessing Officer treated the consideration income in the hands of the assessee society, whoreceived/receivable by the members of the is not the owner of the plot. Even in the case ofsociety as income in the hands of the society. flat owners who owned the individual flats in the respective names, following the decisions3.3 The Tribunal observed that the assessee of Jethalal D. Metha’s case it has been held thatsociety was not the owner of the land. The flats there is no question of taxability of receipt onwere owned by individual members who had account of sale of additional FSI received by theformed the society but the plot of land was not assessee by virtue of transfer of TDR.4. Sum received by society for allowing developer to construct additional floors on the existing structure Allows to load TDR & constructs additional floors t Compensation tSociety Developer Member4.1 Under this scenario, existing co-operative housing society owns a building. This building hadbeen constructed after utilising the entire FSI available to it at that point of time. Therefore, no rightwas available for any further construction on this plot of land. However, the Municipal Corporationrelaxed the development regulations. Due to relaxation additional loading of TDR, is allowed. As 30 Income Tax Review April, 2011 | SS-I-22|
  5. 5. SpecIAl SToRy – Real estates projects & Redevelopmentper the scheme, either the society could construct the building owned by the society. It could notadditional floors by purchasing TDR from be transferred to any other building. Similarly,the market or could transfer such right to any similar right belonging to other societies couldother builder or developer who had the TDR or not be purchased by society for the purposewho could arrange the TDR from the market. of constructing additional floors in its ownIn short, the society is entitled to construct building. Therefore, such right had no inherentadditional space. In view of the availability of quality being available on expenditure of moneysuch right, the society entered into an agreement and therefore, the cost of such asset could notwith developers for construction of additional be envisaged. Therefore, the right (to constructfloors on the existing structure of the society’s additional floor) acquired by the society didbuilding and society receives compensation from not fall within the ambit of section 45 itself. Thedeveloper for allowing development. amended provisions of section 55(2) were also not applicable, since such right was not covered4.2 The society acquired the right to construct by any of the assets specified in section 55(2)(a).the additional floors by virtue of DC Regulationwhich could not be available to society on 4.3 Such right being no cost asset as discussedexpenditure of money. Prior to DC Regulation, above, applying decision in case of B.C. Srinivasano society had any right to construct the Setty, taxing mechanism fails and amountadditional floors. Hence it was not a tradable received by the assessee society is not chargeablecommodity. Such right exclusively belonged to to tax under section 45.65. Sum received by society members for allowing developer to construct additional floors on the existing structure Allows to load TDR & constructs additional floors t Compensation tSociety Developer Member5.1 The individual is a member of a housing 5.2 The definition of capital asset given in sectionsociety which owned certain property viz. land, 2(14) is for the purpose of the entire Act and notbuildings and flats. A developer is in possession for the purpose of capital gains only. Although aof TDR is looking for properties wherein it particular thing, right or interest may be a capitalcould utilize TDR. The society enters into an asset within the meaning of section 2(14), yetagreement with the property developer to grant transaction in relation thereto may not give risepermission to construct additional floors in to taxable capital gains. This would be because ofthe existing building. The members of society the fact that no transfer as envisaged by the Act isreceived certain sum on account of grant of involved. Similarly, there would be certain capitaldevelopment rights to developer. Whether such asset which could not give rise to capital gainsums received by the member of the society because of the fact that no cost of acquisition can bewould be chargeable to tax? envisaged in the acquisition of that asset.6 Maheshwar Prakash-2 Co-op. Hsg. Society Ltd. vs. ITO[2008] 24 SOT 366 (MUM.); Om Shanti Co-op Hsg. Society Ltd. vs. ITO ITA No. 2550/Mum./2008 Income Tax Review 31| SS-I-23| April, 2011
  6. 6. Redevelopment – Tax Aspects5.3 Neither the society nor the members 5.4 Accordingly, the voluntary consent givenowned or possessed any TDR. The TDR is cannot constitute or form part of the bundleowned and possessed by the builder and in of rights which are owned or possessed byterms of the regulations framed by Municipal the member in or with respect to the tenure ofCorporation, it was permissible for the building the flat granted to the member by the utilize the said transferable development The area occupied by the members was only arights in or with respect to the prescribed area “measure” in quantitative terms inasmuch as theincluding the land and building owned by the extent of hardship which may be faced cannotsociety. The members of the society had paid be quantified. When an additional constructionfor the purchase of the flat, which confers very is made, the location of the flat, as such, is oflimited rights in terms of the regulations of no significance or importance, since everyonethe society and ‘right to grant permission for suffers the hardship and the extent cannotadditional construction’, as such does not form be determined through any “measure”. Thepart of any rights; but it arises on account of the members had not transferred any rights in orvolition or voluntary desire of a person. Such with respect to the flat or compromised anypermission cannot be obtained by enforcing any rights in or with respect to the flat or sufferedrights or obligation arising from the agreement any deficiency or limitation in or with respect toto purchase the flat and/or the regulations of the the rights in the flat in fact they had added thesociety. Further the act of affirmative voting in risk of adding load to the building. Accordingly,favour of the resolution passed in the EOGM is the cost of flat cannot be any measure for thenot a recurring event to likely happen regularly, purpose of finding out the cost of the allegednor it is expected to happen again and again “capital asset” and the alleged “transfer” of suchand, hence, the receipt of money for affirmative asset. The assessee is neither holding any capitalvoting for the resolution is not a receipt in the asset nor the same has been sold, exchanged ornature of an income.7 relinquished. In other words there is no transfer of capital asset.86. Existing building is demolished and flat owners are granted new flat in exchange of old flats: Allows to demolish existing Allots flat in new structure & develop new building t building utilising current FSI & new TDR Lump sum t payment, alternative accommodation compensationSociety Developer Member6.1 The individual is a member of a housing society which owned certain property viz., land,buildings and flats. A developer having possession of TDR was looking for properties wherein itcould utilize TDR. The society entered into an agreement with the developer and transferred theentire development potential. The developer demolishes existing structure and utilises original FSIand also loads additional TDR so that he could construct area in addition to the area of currentbuilding. He provides flats to the members of same area or flats with larger area. A member also7 CIT vs. David Lopes Menezes [2010] 195 Taxman 131 (Mum.)8 Deepak S. Shah vs. ITO [2009] 29 SOT 26 (Mum.) 32 Income Tax Review April, 2011 | SS-I-24|
  7. 7. SpecIAl SToRy – Real estates projects & Redevelopmentreceives certain lump sum amount and during therein. However computation of capital gainsthe construction period each member is provided and exemption would be a tricky exercise.with a fixed sum towards compensation for Gross amount of consideration would the costalternative accommodation. Whether such sums incurred by the developer on reconstruction ofreceived by the member of the society would be existing area (including additional area allottedchargeable to tax? to the owners), the cost of acquisition of TDR space will be the consideration and gain is to be6.2 Circular No. F.N. 4 / 28 / 68 – WT DT. computed by deducting from it the indexed cost10-1-1969 and 27-1-1969 explaining the of acquisition of the capital asset. Gains wouldprovisions of section 5(1)(iv) of Wealth-tax be long term or short term depending upon theAct, the Board clarifies that flats vest with holding period of old premises. In case holdingindividual members of society and wealth period of the asset is less than 36 months,tax exemption will be available to individual assessee would not be entitled for the indexedmembers. Similarly this concept has also been cost of acquisition and also exemptions u/s 54recognized under Bombay Stamp Act as on the & 54F. Period of holding of the new premisesconveyance in favour of the housing societies, would not include the period of old premises.stamp duty paid by the purchasers of flats on In case new premises is transferred within 36ownership agreements is deducted from the months, assessee would lose exemption u/s 54stamp duty payable on the market value of the / 54F, if claimed earlier and gains on sale ofproperty transferred in favour of the society. In new premises would be chargeable as short termshort, members of the society are the legal owner capital gains.of the flat in the society. 6.4 Receipts of lump sum amount by6.3 In case where the existing members the members of the society may be taxableexchange old flats with the new flats of the in their hands. However in case it could besame size or larger size, there is a transfer in demonstrated that such sums is receivedterms of S. 2(47) of the Act and this gives a rise towards the transfer of TDR as discussed in theto the taxable event. However such member is earlier paras it may be possible for the assesseealso entitled to claim exemption u/s 54 where to claim such amount exempt from tax. In casehe is allotted residential flat in exchange of the members are able to demonstrate that such sumsexisting flat. But exemption u/s 54 is available are received as compensation for injuriouslyonly for a residential premise is allotted against affecting their existing rights, amount may notexisting residential flat. Where commercial be exigible to tax in view of decision of Lohtsepremises e.g. shop, office is allotted against Co-op. Housing Society Ltd.9the existing residential or commercial premisesno exemption is available u/s 54. In case a 6.5 Receipt of compensation towardsresidential premise is offered against commercial alternative accommodation may be taxable aspremises deduction would be available u/s 54F. income from other sources. Further the amountBut exemption u/s 54EC would be available in paid towards actual rent may be claimed ascase where new premises is not an residential deduction. As per another school of thought,premises (by investing capital gains in the such amount is not taxable since these sums arespecified bonds). These exemptions are subject nothing but compensation for dislocation andto fulfilment of the various conditions prescribed hardship that may cause to owners.9 Lohtse Co-op. Housing Society Ltd. vs. Seventh Income-tax Officer [1994] 51 ITD 608 (Bom.) Income Tax Review 33| SS-I-25| April, 2011
  8. 8. Redevelopment – Tax Aspects7. existing building is demolished and tenants allotted new premises on ownership basis. Allows to demolish existing Allots ownership flat structure & develop new in new building t building utilising current FSI & new TDR t Surrenders tenancy rights tOwner/Society Developer Tenant7.1 This situation is similar to that what is surrender agreement provides that tenant woulddiscussed in para 6, but with the difference be continuing to hold tenancy till the date ofthat premise occupants are tenant and not the allotment of new premises and continue toowners. Under the redevelopment scheme pay monthly rent to the owners. Under thistenants surrender their tenancy rights and in situation whether giving possession of thelieu of this they are allotted new premises on tenanted premises to the owners/developerownership basis. would be considered as the date of transfer or contractual agreed date would be considered7.2 The tenancy right is a capital asset with as date of transfer. There are two schools ofnil cost of acquisition, unless any amount paid thought in this regard. However better viewto acquire it. The surrender of the tenancy right is that for the purpose of income-tax tenancyis a ‘transfer’ u/s 2(47) and and would give rise would be treated as surrendered on the dateto taxable event. The consideration received, on which possession of premises is granted totherefore, is a capital receipt within the meaning the developer.12 However merely entering intoof section 45. 10 Period of holding of tenancy agreement without parting of possession to therights would determine whether gains are long- developer would not create taxable event.13term or short-term. In case gains are long-termtenant can claim exemption u/s 54F/54EC asthe case may be. Where a tenant is allotted new 8. other pointsresidential premises he could claim exemption 8.1 Piecemeal transfer: It may so happen thatu/s 54F. However where premises allotted is not merely upon executing the agreement it doesa residential premises he may claim deduction not create any right, title or interest in the wholeu/s 54EC by investing capital gains in the property. Upon receipt of the part considerationspecified bonds. For the purpose of determining proportionate possession is granted to thethe period of holding of new premises allotted, developers during the relevant point of time.period of holding of tenancy is not considered.11 Here issue may arise whether whole of the consideration received or receivable would be7.3 Another tricky issue arises, what would be charged to tax or consideration linked with thethe date of surrender of tenancy rights. Generally grant of proportionate possession in property10 CIT vs. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 142 Taxman 713 (SC)11 CIT vs. D A Irani (1999) 151 CTR 288 (Mum.)12 ACIT vs. G.D. Thirani [1999] 70 ITD 148 (Cal.)13 Megji Mathradas vs. JCIT [2000] 75 ITD 52 (Mum.) 34 Income Tax Review April, 2011 | SS-I-26|
  9. 9. SpecIAl SToRy – Real estates projects & Redevelopmentwould be considered for computing capital specified in section 14 items A to E. Therefore,gains? In such a scenario capital gains shall be if the income is included under any one of thearising only on the said proportion amount of heads, it cannot be brought to tax under theconsideration received and possession granted. residuary provisions of S. 56.Hence proportionate consideration is chargedto tax in the relevant year and not on the entire From the discussion in the preceding parasconsideration stipulated in the sale agreement, is there is no dispute that various sums receivedchargeable to tax.14 is on account of transfer of capital asset. If the income cannot be charged under section 45,8.2 In case amount is not chargeable as capital because of the inapplicability of the computationgains whether the same would be taxable as provided under section 48, it cannot be taxedincome from other sources? at all. Furthermore, it would be illogical and against the language of section 56 to hold thatSection 14 of the Act provided that “All income everything that is exempted (including failureshall for the purposes of charge of income-tax of computing mechanism) from capital gains byand computation of total income be classified statute could be taxed u/s 56.15 S. 56 applies inunder six heads of income,” namely: case money is received without consideration.(A) Salaries; In the instant case society or member has one or the other right. Hence it could be argued(B) Interest on securities; that amount received is not without(C) Income from house property; consideration.(D) Profits and gains of business or profession; Conclusion(E) Capital gains; Albert Einstein said that “The hardest thing in the world to understand is income tax”. It(F) Income from other sources unless is essential for the property owners to ensure otherwise, provided in the Act. a smooth transition during redevelopmentS. 56 provides for the chargeability of income of process, transaction is appropriately structuredevery kind which has not to be excluded from considering the legal and tax implications, sothe total income under the Act, only if it is not that undesirable tax consequences are kept atchargeable to income-tax under any of the heads bay.14 Ajai Kumar Sah Jagati vs. ITO (1995) 55 ITD 348 (Del.); G. G. Dandekar Machines Works Ltd. vs. JCIT, ITA No. 181/Mum/2001, Bench – F15 CIT vs. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 142 Taxman 713 (SC) Civilization, in the real sense of the term, consists not in the multiplication, but in the deliberate and voluntary reduction of wants. This alone promotes real happiess and contentment, and increases the capacity of service. — Gandhi Income Tax Review 35| SS-I-27| April, 2011