Income Tax Implications in the hands of Co-operative Housing Society & it’s Members in case of Re-development

I Introduction

1) Re-development process is usually undertaken by a co-operative housing society when the Society building becomes old. The new building also gives the advantages of parking spaces and common amenities which may not exist in the old building. As the Society does not have the wherewithal & funds to undertake re-development, same is undertaken by appointing a Developer.

2) Recently there have been multiple changes in law in Maharashtra and particularly Mumbai with a view to provide impetus for redevelopment of Co-operative Housing Societies.

3) Under Section 79(A) of the Maharashtra Co-operative Societies Act, 1960, [‘MCS Act”] the Govt of Maharashtra has issued revised directions being Govt Resolution No SaGruYO 2018/Pra.Kra.85/14-S, dated 4th July, 2019 which prescribe procedure regarding making re-development of the Co-operative Housing Society. Said directions supersede the earlier directions SaGruYO 2007/Pra.Kra.554/14-S dated 3rd January, 2009. The revised directions aim to provide more transparency in the redevelopment process and bring about uniformity in Agreements with the developers with a view to instill confidence in the members towards the re-development process. The most important change made in the revised directions of 2019 is that it has reduced the consent required for redevelopment to 51%. This will expedite redevelopment process. Further, w.e.f 9th March, 2019, a separate Chapter XIII-B comprising Sections 154B to S.154B-31 has been inserted in the Maharashtra Co-operative Societies Act, 1960 to cater to the specific requirements of co-op housing societies. Under said chapter, a housing society is defined and redevelopment is specifically provided as object of a Housing society. Further the Chapter also applies to Developers and deals with dispute resolution between Society, Members, Developers, Architects and Project management Consultants involved with the re-development.

4) As far as the new Development Control and Promotion Regulations for Greater Mumbai, 2034 (DCPR,2034) are concerned it has increased the Permissible FSI in the Island City of Mumbai. It further allows loading of TDR in the Island city which was not permitted under the Development Control Regulations of 1991. Further, a specific regulation being Regulation 33(7)(B) provides utilizing Additional FSI to certain extent without payment of premium. Further the Fungible compensatory area on the existing authorized Built-up area shall be without charging premium. Thus, the new DCPR, 2034 will boost redevelopment of Co-operative Housing societies.

5) The various changes as pointed out above will also have impact on the taxation of Co-operative Housing societies and it’s members on account of re-development. The relevant provisions of MCS Act and DCPR having impact on taxation are covered at relevant places in this Article.

6) Typically in case of a Co-operative Housing Society, a tri-partite Development Agreement is entered into between the Society as Owner, Developer and the Members of the Society usually as a confirming party and the development rights or right to construct by loading of TDR is transferred to the developer. Usually in Mumbai, the Society continues as owner of Land and building. However, it is also possible that by virtue of the Development Agreement, Land and Building may be transferred to the Developer. The Development Agreement contains various terms and conditions of re-development. It contains provisions for the area of new flat to be allotted to the Members, temporary alternate accommodation to be provided to the members, the corpus fund to be provided to the member/society and the area available with the developer for Sale in the new building. The Society gives the Developer a general Power of Attorney to apply for various permissions and to permit him to enter the premises for demolition of old building and construction of new building. The Developer enters into a Permanent Alternate Accommodation Agreement (PAAA) with individual members with respect to new flat to be allotted to the member in the re-developed Building. Such Development Agreement is registered. The Developer obtains various permissions to commence the construction by demolition. Usually upon obtaining the permissions, the members vacate their old premises. The Developer hands-over the new flats upon completion of redevelopment. The new flat owners who purchase flats from the developer’s share are given membership in the Society. The various issues of taxation arising in above process of re-development of co-operative housing society are discussed hereinafter.

II WHETHER SALE OF DEVELOPMENT RIGHTS ARE TAXABLE.

  1. DEVELOPMENT RIGHTS ARE CAPITAL ASSETS.

A1) Development rights are rights by virtue of which the development potential of the Land can be exploited by making construction. The development potential of the land is determined by various Local Authorities by fixing the Floor Space Index (FSI). The construction can be made to the extent of such FSI. In Mumbai, one of the means by which additional construction over and above the existing FSI can be made is by Loading of Transferrable Development Rights.(TDR) in accordance with Law. It is the exploitation of this additional FSI which makes a re-development project through the agency of Developer viable.

A2) In Land Breez Co. Operative Hosing Society Ltd. v. ITO [2013] 55 SOT 103 (Mum)(Trib) it is held that “Thus, such a right is definitely a “Capital Asset” held by the assessee and assignment of such a right in favour of the developer amounts to transfer of capital asset. In our conclusion, transfer of TDRs amounts to transfer of a “Capital Asset”. In Maheshwar Prakash-2 Co-op. Hsg. Society Ltd v. ITO [2009] 121 TTJ 641 (Mum)(Trib) [Confirmed by Bombay high court in INCOME TAX APPEAL NO.2346 OF 2009 dtd 24/4/2015] it was held that “In view of this legal position, it is held that the right to construct the additional storeys on account of increase in FSI by virtue of Regulation No. 14 of the Appendix VII to DCR, 1991 was a capital asset held by the assessee. Therefore, assignment of such right in favour of the developers amounted to transfer of capital asset.”

A3) Hence, Development rights constitute a capital asset.

  1. ISSUE OF YEAR OF TRANSFER.

B1) The year of transfer in case of Joint development Agreements has been a matter of great dispute. When pursuant to a Development Agreement, Assessee mainly receives share in the constructed area and if such share is taxed in the year of execution of Development Agreement then Assessee has to pay huge taxes on the share in constructed area even though the constructed area is to be received in future.

B2) The Supreme Court in Alapati Venkataramiah v. CIT (1963) 57 ITR 185(SC) held that transfer means effective conveyance and handing over of possession or receiving consideration was not sufficient. There was wide spread evasion of stamp duty and Income tax in India as Vendor would receive the consideration and handover the possession to Buyer but not execute a conveyance. To plug this mischief Sec. 2(47)(v) was inserted w.e.f 1/4/1988 whereby transfer included any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882.

B3) In Shrimant Shamrao Suryavanshi v. Pralhad Bhairoba Suryavanshi [2002] 3 SCC 676(SC) it is stated as follows in the context of Section 53A :

“16. But there are certain conditions which are required to be fulfilled if a transferee wants to defend or protect his possession under Section 53-A of the Act. The necessary conditions are:

  1. there must be a contract to transfer for consideration of any immovable property;

  2. the contract must be in writing, signed by the transferor, or by someone on his behalf;

  3. the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;

  4. the transferee must in part-performance of the contract take possession of the property, or of any part thereof;

  5. the transferee must have done some act in furtherance of the contract; and

  6. the transferee must have performed or be willing to perform his part of the contract.”

B4) From the year 2001, it is also important that to constitute part-performance within the meaning of S.53A, the Agreement/Contract must be registered.

B5) The Bombay High Court in Chheda Housing Development Corpn., a Partnership firm v. Bibijan Shaikh, Farid & Ors. (2007) (3) MHLJ 402 (Bom.), while dealing with specific performance of Agreement for use of TDR, held that FSI/TDR are benefit arising from the land consequently must be held as immovable property. Thus, S. 2(47)(v) will apply irrespective whether a Development Agreement is only transferring development rights or transferring land or building along-with development rights.

B6) In the case of Development Agreements, date of transfer has to be decided in the context of Section 2(47)(v). Perhaps the first decision on this point was of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia v. CIT- [2003] 260 ITR 491 (Bom). In this case it was held that the year of taxation was the year in which Development agreement was executed and not the year in which possession was handed over to the Developer. However, in CIT v. Geetadevi Pasari- [2009] 17 DTR 280 (Bom.) it was held that the year of transfer was the year in which possession was handed over to the Developer after receiving entire consideration. It may be noted that in both the cases consideration for transfer of development rights was only cash and no share in constructed area was to be given to the owner. In CIT v. DR. T.K. Dayalu- [2011] 14 taxmann.com 120 (Karn) consideration to be received by owner on parting with development rights was both i.e. cash component and share in the constructed area. Assessee contended that year of transfer was the year in which it received the constructed area. AO contended that year of transfer was year of execution of development agreement. The Court held that the year of transfer was the year in which actual possession was handed over to the developer. Thus, though year of transfer was not the year of execution of development agreement but the year of handing over possession, Assessee would face hardship of paying taxes on his share in constructed area even without receiving the same. Hence, hereafter, the Assessee’s mainly focused on what would constitute possession for attracting S.53A of TOPA and whether terms of Development agreement constitute said possession. In CIT v. Sadia Shaikh [Tax Appeal No. 11 of 2013 dtd 30/1/2014](Bom)(HC) it was held that there was no transfer as possession was not given as per S.53A i.e entire control was over property was with owner and Licence and Occupation certificate was in the name of Owner.

B7) In Bhatia Nagar Premises, Co-operative Society Ltd. v. ITO [2013] 37 taxmann.com 9 (Mum)(Trib)/[2013] 59 SOT 134 (Mum)(URO)(Trib) the issue arose in the case of Co-operative Housing Society whether there was transfer within S.2(47)(v) of Additional FSI pursuant to Development Agreement in the year of execution & registration of Development agreement ie. AY 2009-2010. It was held that as no permissions were obtained and old building was not demolished, there was no transfer within the meaning of S.2(47)(v). The relevant portion is as under :

“………………….The assessee in this case has not transferred the land and the building. The assessee has only transferred its entitlement to additional FSI to the developer for reconstruction of building. The developer is required to demolish and reconstruct the old building with an additional 28% carpet area and hand over the same to the existing members. The transfer is only of additional FSI available to assessee in respect to the existing land for the purpose of construction of additional buildings which would be owned by the developer. Therefore, the real issue is whether assessee has transferred its rights in the additional FSI during the year.

  1. The clause (j) of DRA clearly provided that the developer was authorized to demolish and reconstruct the old building and simultaneously he was authorized to develop the remaining property consuming the principal FSI of the plot and by buying and utilizing additional TDR as per DC regulations. Therefore, assessee could transfer the additional FSI only on demolition of old building which has not taken place even till now.The developer has not been able to obtain even the IOD and CC in respect of the reconstruction of the old building as was required to be done under the DRA. The old building has not been demolished till date and the members continue to occupy their flats in the old buildings. In such a situation it could not be said that the assessee had transferred its rights over the FSI to the developer in assessment year 2009-10.”

The above decision of the tribunal was confirmed by the Bombay High court as reported in [2017] 246 Taxman 387 (Bom)(HC).

B8) In CIT v. Balbir Singh Maini – (2017) 398 ITR 531 (SC) the assessee was a member of the Punjabi Cooperative Housing Building Society Ltd. The society entered into Joint Development Agreement (JDA) for development of 21.2 acres of land with the Developers. The consideration was fixed as cash and share in constructed area to be given to the individual members. The Supreme Court held that S.2(47)(v) was not applicable as the JDA was not registered. The Supreme Court also analyzed the alternate argument of transfer u/s 2(47)(vi). S.2(47)(vi) provides that transfer includes any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. The Supreme Court held as under :

“The object of Section 2(47)(vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression “enabling the enjoyment of” takes color from the earlier expression “transferring”, so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact.

A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction.”

It was also held that the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA as permissions were not obtained and the JDA fell through.

B9) Thus, above judicial precedents show a transition in determination of year of transfer from the date of execution of development agreement to the year of possession to the year of obtaining permissions and consequent demolition. The year of taxability is also held in some cases to be the year in which share in constructed area is received. Also, for determining year of transfer, subsequent events such as not obtaining approvals, cancellation of agreement have to be taken into consideration. In short, year of transfer would largely depend on the terms and conditions of the Development agreement.

B10) As far as redevelopment of Co-operative Housing societies in Maharashtra is concerned, it would be useful to refer to some guidelines provided under revised directions issued u/s 79A of MCS Act being Govt Resolution No SaGruYO 2018/Pra.Kra.85/14-S, dated 4th July, 2019 which prescribe procedure regarding making re-development of the Co-operative Housing Society. Some of the guidelines which may be useful in determining the year of transfer are as under :

1) The Development Agreement with the Society and the Permanent Alternate Accommodation with the members shall be registered.

2) The Developer shall make available Alternative residential facility.

3) The tenement members shall vacate the tenements only after the Developer has obtained all legal approvals from the redevelopment.

4) Redevelopment project has to be completed within 2 years/3 years from date of first completion certificate.

If one reads above guidelines in light of Section 2(47)(v) & 2(47)(vi), it can be fairly concluded that year of transfer should be the year where tenement is vacated after Developer has obtained all legal permissions and made arrangements of Alternate accommodation for the member of the society. Such an interpretation will be more acceptable to both the Department and the Assessee.

  1. FAILURE OF COMPUTATION MACHINERY.

C1) This issue is typical to the city of Mumbai and other cities having pari-materia provisions. The Development Control regulations, 1991 introduced the concept of loading of TDR to make further construction on Plots of Land where entire Basic FSI is exhausted. So the developer would purchase TDR generated in accordance with DCR, 1991 and load the same on the Plot of Land of the Society to make additional construction. The Courts took the view that where pursuant to Development Agreement, right to construct by loading TDR is transferred to a Developer by a Society formed before 1991, there will be no capital gains tax liability as the Additional FSI had it’s origin in DCR, 1991 for which there was no cost of acquisition paid or ascertainable u/s 55 and thus the computation machinery failed resulting in no capital gains Tax as held by the Supreme Court in CIT v. B.C.Srinivasa Setty [1981] 128 ITR 294 (SC). This legal principle has been laid down in following decisions ;

  • New Shailaja Co-operative Housing Society Ltd. v. ITO [2009] 121 TTJ 62 (Mum)(Trib)

  • Maheshwar Prakash-2 Co-op. Hsg. Society Ltd v. ITO [2009] 121 TTJ 641 (Mum)(Trib) [Confirmed by Bombay high court in INCOME TAX APPEAL NO.2346 OF 2009 dtd 24/4/2015]

  • Land Breez Co. Operative Hosing Society Ltd. v. ITO [2013] 55 SOT 103 (Mum)(Trib)

  • Bhatia Nagar Premises, Co-operative Society Ltd. v ITO [2013] 37 taxmann.com 9 (Mum)(Trib)/[2013] 59 SOT 134 (Mum)(URO)(Trib) confirmed by Bombay High court in [2017] 246 Taxman 387 (Bom)(HC).

  • CIT v Sambhaji Nagar Co-op. Hsg. Society Ltd [2015] 370 ITR 325 (Bom)(HC)

In Ishverlal Manmohandas Kanakia v. ACIT ITA No. : 3053/Mum/2010 AY 06-07 (Trib)(Mum) it was held that there was no capital gains tax even when there was transfer of Basic FSI and Additional FSI. It was held as under :

“In that view of the matter we are of the view that the receipts on assignment of FSI including originating from the plot of land and/or married to it and right to load consume and use FSI credit by way of TDR which was the subject matter of transfer by the Assessee was a capital asset in respect of which the cost of improvement could not be ascertained and therefore the receipts of consideration for transfer of the said rights cannot be brought to tax as the said receipts will be capital receipts and not capital gain. The authorities below erred in law and on facts in holding to the contrary.”

C2) It will be relevant to examine the Legal position in light of FSI provisions under the DCPR, 2034 which are now in vogue in the city of Mumbai. As per Regulation 30 of DCPR, 2034 Basic FSI is 1.33 for Island City and 1 for the Suburbs. However, permissible FSI for Island City is minimum 1.33 and maximum 3 and for Suburb is minimum 1 and maximum 2.5 depending upon the width of the road. To exhaust the FSI over and above the Basic FSI upto Permissible FSI, certain percentage of Additional FSI on payment of Premium to MCGM (50% of Ready Reckoner rate) and Admissible TDR has to be utilized. For Example, in Island City where width of road is above 27m, Basic FSI will be 1, Addln FSI by payment of premium is 0.84, Admissible TDR is 0.83 taking the permissible FSI to 3 (1+0.84+0.83). Further Fungible Compensatory Area (commonly known as Fungible FSI) can be built up-to certain extent over and above the Permissible FSI by making payment to MCGM. DCR 33(7)(B) provides certain extent of Additional FSI and Fungible FSI in case of re-development of Co-operative Housing societies which are more than 30 years old without payment of premium.

C3) Thus, as far as loading of particular percentage of TDR is concerned, said is the creature of DCPR, 2034 and hence giving right to load TDR will not be taxable. Similarly utilizing additional FSI and fungible FSI by making payment of premium would also be not taxable as both have their origin in DCPR, 2034. Payment of premium to obtain additional FSI and Fungible FSI is same as making payment for purchasing TDR and hence as far as owner of Plot is concerned it will not make any difference.

C4) However, another view may be possible with respect to additional FSI and fungible FSI obtained by payment of premium. TDR generation is by operation of Law under various circumstances as provided under DCR,1991 and also DCPR, 2034. Whereas generation of Additional FSI and Fungible FSI is simply by making payment of premium. Infact in Maheshwar Prakash-2 Co-op. Hsg. Society Ltd v. ITO [2009] 121 TTJ 641 (Mum)(Trib) it was held as under:

“The above discussion shows that two separate and distinct rights arose as per DCR, 1991 i.e., TDR and the right to construct additional floor. The former has inbuilt cost while the later one arose without any cost. Regulation 14 makes it clear that FSI of receiving plot shall be allowed to be excluded in the prescribed manner. Such right was made available automatically without paying anything either to BMC or to the Government.”

C5) Hence, it appears that some dispute with respect to validity of the argument of failure of computation machinery on utilization of additional FSI and fungible FSI may take place.

  1. APPLICABILITY OF S.50C

D1) In Chiranjeevlal Khanna v. ITO (2011) 132 ITD 474 (Mum.)(Trib.) it was argued by the assessee who was the owner of land and building and had entered into development agreement that S. 50C is not applicable to transfer of rights in land and building. The Hon’ble Tribunal on perusal of the Development agreement came to the conclusion that what was really transferred by virtue of the development agreement was not merely rights in land and building but the land and building itself and hence, S. 50C was applicable.

D2) In Voltas Ltd v. ITO [2016] 161 ITD 199 (Mum)(Trib) it was held that S.50C was not applicable to transfer of development rights i.e. rights in land or building as by virtue of development agreement land or building was not transferred.

D3) In cases where transfer of development rights is not exigible to tax as pointed out above, then the question of Applicability of S.50C does not arise.

  1. TAXABLE IN WHOSE HANDS.

E1) We are mainly concerned with two types of Co-operative Housing Societies ie “Tenant ownership housing society” and “Tenant co-partnership housing societies”. In respect of “tenant ownership housing society” commonly known as “Plot owners Society”, the land is held by Society as a lessee/owner and the members are the owners of the Building on such plot of Land. In such cases there won’t be much dispute about taxability in case of Development Agreements as it can be clearly concluded that whatever is received by the Member say new constructed area is accrued to the member only as he is owner of the building. Thus, whatever is received by the society may be taxed in the hands of the Society and whatever is received by the member of the Society will be taxed in the hands of the Member. In-fact in CIT v. Balbir Singh Maini (Supra), where the Society appears to be a Plot owners type society, the new area and cash component received by the member was sought to be taxed in the hands of the member of the society.

E2) In respect of “Tenant co-partnership housing societies”, which are of the nature of “Flat Owners Societies“ in which the flats are acquired by the members from the builder on ownership basis and thereafter Society is formed, and land & building is conveyed to the society and the member has what is known as occupation rights. Majority of the Societies in Mumbai are of this type. An issue arises whether new area and compensation received directly by the member can be taxed in the hands of the Society as it is the owner of Land and Building. If it is taxed in the hands of the Society then such Society is not eligible for Exemption u/s 54 & 54F. In-fact in Bhatia Nagar Premises, Co-operative Society Ltd. v. ITO [2013] 37 taxmann.com 9 (Mum)(Trib)/[2013] 59 SOT 134 (Mum)(URO)(Trib), the AO sought to tax the new premises, rent for alternate accommodation and other compensation to be paid to the member in the hands of the Society. Though this issue was raised same was not decided as it was held that transfer was not chargeable to tax.

E3) As per CBDT Circular : No. 9 [F. No. 8/2/69-IT(A-I)], dated 25-3-1969 it is stated that in case of “Tenant co-partnership co-operative housing societies” that the legal ownership in the flats can be said to vest in the individual members themselves and not in the co-operative society and hence, for all purposes (including attachment and recovery of tax, etc.) the individual members should be regarded as the legal owners of the property in question.” Further under Maharashtra 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. Thus, even in case of Flat owners Society it can be said that consideration received/paid to a member of a society will accrue in the hands of the Member.

E4) In Raj Ratan Palace Co-operative Housing Society Ltd v. DCIT (2011) 46 SOT 217 (Mum)(URO) out of total consideration of ₹ 3,02,16,828, ₹ 2,51,000/- was paid to the Society and balance was received by members. The AO sought to tax the amounts received by the members in the hands of the Society. The tribunal deleting the addition held that :

“It was also seen that the some of the individual members had offered the receipts from the developer to tax and the same had also been brought to tax in the hands of the individual members. In this scenario, the addition made in the hands of the assessee society was without any basis. Consequently the addition made in the hands of the society was to be deleted.”

In appeal against the above order of ITAT, the Hon’ble Bombay High Court in CIT v. Raj Ratan Palace Co­operative Housing Society ITA No 2292 of 2011 dated 27-2-2013 while confirming order of ITAT dealt with following question was raised by the department-

“Whether on the facts and in the circumstances of the case and in law, the Tribunal is right in holding that amount received cannot be taxed in the hands of assessee society because society continues to be owner of the land as no change in ownership of land has taken place without appreciation the fact that the assessee has received compensation of ₹ 3,02,16,828/-for granting the developer the right to develop the property which is clearly taxable as per provisions of Section 2(24) read with Section 2(47) and 2(14) of the Income Tax Act?”

The Hon’ble Court decided the issue as under :

“2. The Revenue seeks to tax the society in respect of the amount received on transfer of TDR. The Tribunal in the impugned order recorded a finding of fact that the amount which was received on the transfer of TDR was received by members of Respondent Society. The members of the Society had offered the amounts received by them to tax in their individual returns. In fact, copies of orders of the Tribunal in respect of individual members who received amount from the developers and offered to tax was also placed before the Tribunal.”

SLP against the above decision of the High court was dismissed. [CIT v. Raj Ratan Palace Co-operative Housing society ltd (2014) 362 ITR 1(SC)(St)]

E5) In MIG-Co-operative Housing Society Group-II Limited v. ITO ITA No 896&1099/M/16 dated 17/2/2017(Mum)(Trib) development agreement was entered into between the Society and the Developer whereby Corpus Fund was paid to the Society and the members were entitled to new Flat in the Re-developed building as well as cash compensation. The Society had offered to tax the amounts received by it and the members offered to tax the consideration received by it. The AO sought to tax value of new flat as well as cash compensation in the hands of the society on the ground that society was the owner of land and building. The Hon’ble ITAT deleting the additions made in the hands of the Society held as under

“We find that facts of the case before us are almost similar to the facts of Raj Ratan Palace CHG (supra). As stated earlier,the developer had made payments to the Society as well as to the members and they had offered the amounts received by them, for taxation. In our opinion, once the members had shown the income received by them in their hands there can not be any justification for taxing the same in the hands of society. No double taxation and no double deduction is one of the well recognised and fundamental principles of taxation. In our opinion, signing of agreement by the members or society cannot be base for taxing of income. As per the scheme of the Act, income received by any person or income accrued to him has to be taxed. In the case under consideration, income was received by the members and they had offered the same for taxation.”

E6) Thus, where the Development agreement clearly identifies consideration which is to be paid to the Society and that which is paid to the members and the developer directly pays the consideration to the members than the consideration received by the member cannot be taxed in the hands of the Society.

III ADDITIONAL AREA RECEIVED BY THE MEMBER. – ELIGIBILITY TO EXEMPTION U/S 54.

In the case of redevelopment, the new flat to be acquired will be treated as construction 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 date of transfer 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 subject to fulfillment of conditions u/s 54.. In case of delayed possession or breach of conditions u/s 54 etc, the jurisprudence with respect to S.54 will have to be seen.

IV CORPUS FUND RECEIVED BY THE SOCIETY AND DEDUCTION U/S 80P.

1) Societies charge Corpus Fund to enable it to meet the increase in maintenance charges post re-development. Issue arises whether said receipt is a capital receipt or is chargeable to tax under the head capital gains or is chargeable to tax as income from other sources.

2) In MIG-Co-operative Housing Society Group-II Limited v. ITO ITA No 896&1099/M/16 dated 17/2/2017(Mum)(Trib) it was held that Corpus Fund received by the Society shall be taxable as under the head Capital Gains and not Income from other Sources. As regards interest income on corpus funds kept with Banks it was held that Assessee can claim deduction u/s 80P.

3) Thus where there is no exigibility to tax under the head Capital gains on transfer of development rights, then amounts received as corpus funds will also not be taxable.

V RENT RECEIVED BY THE MEMBER FOR TEMPORARY ACCOMMODATION.

1) The developer is required to pay rent for alternate accommodation after the old building is demolished. If such rent is considered as part of consideration exigible to tax under the head capital gains then Assessee can claim exemption u/s 54. If same is taxable under the head income from other sources then it is seen that the AO does not allow deduction of rent paid on the ground that it amounts to application of income and same cannot be allowed u/s 57. However, to the extent rent is paid it is nothing but reimbursement and does not have the character of income.

2) In Jitendra Kumar Soneja v. ITO [2016] 161 ITD 269 (Mum)(Trib) it was held that the rent received was utilized for paying rent and hence, it cannot be said to be income of Assessee. In Jatinder Kumar Madan v. ITO [2012] 51 SOT 583 (Mum)(Trib) it was held that rent was taxable as Income from other sources and not Capital Gains. However, the rent paid will be allowed as deduction. In P Madhusudan v. ACIT [2019] 419 ITR 194 (Mad)(HC) where rent was directly paid by the developer and assessee was provided rent free accommodation, it was held that same cannot be assessed as capital gains in the hands of the assessee.

3) It can be concluded that whether rent can be taxed as Capital gains or Income from other sources may depend on the wordings of the Agreement. In case of reimbursement there will be no income chargeable to tax.

VI COMPENSATION RECEIVED BY MEMBER OF SOCIETY OVER AND ABOVE RENT REFERRED TO AS HARDSHIP ALLOWANCE /CORPUS FUND ETC.

1) In case of re-development, many times the members are paid compensation for hardship/inconvenience caused to them on account of various reasons such as more no of members in the new building, sharing of amenities with more members, issues during shifting etc. Hence, many times developers pay compensation to members for such hardship/inconvenience.

2) In Kushal K Bangia v. ITO [2012] 50 SOT 1 (Mumbai)/[2012] 145 TTJ 37 (Mumbai)(UO) Development Agreement was entered into between Developer & Society and PAAA with individual member. The Additional Area , rent for alternate accommodation and cash compensation paid to members was Taxed in the hands of member. With respect to the cash compensation, it was held that same was a Capital receipt not liable to tax. It was held as under :

“This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income 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. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same.”

3) In Jitendra Kumar Soneja v. ITO [2016] 161 ITD 269 (Mumbai) Assessing Officer made addition of ₹ 30,55,800/-, consisting of a sum of ₹ 22 lacs as corpus fund received by assessee during financial year 2006-07 and rental of ₹ 8,55,800/- appearing as credited to his bank account. It was stated that corpus fund was paid to member on account of hardship caused due to re-development. The ITAT held that same was not taxable as it is a capital receipt. However, the ITAT also held that said capital receipt will be adjusted against the cost of acquisition. In Kishore D Patel v. ITO ITA No 3796/M/2014 dated 17/2/2017(Mum)(Trib) inconvenience compensation paid by developer for constructing additional floors was held to be capital receipt.

VII. CONCLUSION

The article covers several issues which directly arise due to the process of re-development. There can be multiple issues which may arise in the fact of each case such as non-eligibility u/s 54, or transfer of new flat by a members before completion of construction etc. Each such case will have to be decided in light of terms of the Agreements, year of transfer and relevant provisions of the Income Tax Act. Recently, lot of Co-operative Societies are considering self-redevelopment wherein the contractor is appointed for carrying out the Construction and the Society keeps the additional Flats which it can sell. Tax implications in case of such self-redevelopment will be different than re-development carried out through developers.

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