TAXATION OF REAL ESTATE TRANSACTIONS & DEVELOPMENT RIGHTS Nihar N. Jambusaria 16 th April, 2011
ROAD MAP OF THE CONTENTS Accounting Aspects of Real Estate development & Revenue Recognition Forms of Development Agreements & Tax Issues Other Tax Issues Redevelopment
ACCOUNTING ASPECTS OF REAL ESTATE DEVELOPMENT & REVENUE RECOGNITION
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION Guidance Note by ICAI Applicable methods Tax Audit Percentage Completion Method Project Completion Method Change of method of accounting
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION GUIDANCE NOTE BY ICAI Guidance Note by ICAI AS 9 - Revenue Recognition Conditions: Seller has transferred significant risk and reward. No significant uncertainty about consideration. Not unreasonable to expect ultimate collection AS 7 - Construction Contracts Conditions: AS 7 When seller Construction is obliged to perform substantial Contracts after transfer of risk and reward Revenue should be recognized on proportionate basis applying % of completion method in the manner explained in AS 7
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION APPLICABLE METHODS OF ACCOUNTING Illustration: Year 1 Total flats 50 flats Total flats sold 15 flats Selling price for 15 flats 15.00 Construction Expenses 7.50 Work completed 30% Year 2 Further flats sold 20 flats Selling price for 20 flats 25.00 Construction Expenses 13.50 Work completed 70% Year 3 Remaining flats sold 15 flats Selling price for 15 flats 19.00 Construction Expenses 9.00 Work completed 100%
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PERCENTAGE COMPLETION METHOD - ILLUSTRATION Year 1 Total flats 50 flats Total flats sold 15 flats Selling price for 15 flats 15.00 Construction Expenses 7.50 Work completed 30% Profit & Loss Account (Year 1) INR To Construction expenses 7.50 By Income from operations (15*30%) 4.50 INR By Closing Stock (7.5*35/50) 5.25 To Gross Profit 2.25 Total 9.75 Total 9.75
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PERCENTAGE COMPLETION METHOD - ILLUSTRATION Year 2 Further flats sold 20 flats Selling price for 20 flats 25.00 Construction Expenses 13.50 Work completed 70% Profit & Loss Account (Year 2) INR INR To Opening Stock To Construction Expenses 5.25 13.50 By Income from operation 15*70% 25*70% Less: Offered in Year 1 10.50 17.50 28.00 (4.50) 23.50 By Closing Stock (21*15/50) 6.30 To Gross Profit 11.05 TOTAL 29.80 TOTAL 29.80
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PERCENTAGE COMPLETION METHOD - ILLUSTRATION Year 3 Remaining flats sold 15 flats Selling price for 15 flats 19.00 Construction Expenses 9.00 Work completed 100% To Opening Stock To Construction Expenses Profit & Loss Account (Year 3) INR 6.30 9.00 By Sale Year 1 Year 2 Year 3 Less: Offered in Year 1 & 2 15.00 25.00 19.00 59.00 INR (28.00) 31.00 By Gross Profit 15.70 TOTAL 31.00 TOTAL 31.00
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION SUMMARY OF YEAR WISE PROFIT UNDER PERCENTAGE COMPLETION METHOD Profit Rs. In crores Year 1 2.25 Year 2 11.05 Year 3 15.70 TOTAL 29.00
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PROJECT COMPLETION METHOD - ILLUSTRATION Profit & Loss Account INR INR Total Construction cot 30.00 Total Revenue 59.00 Profit 29.00 Total 59.00 Total 59.00
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PERCENTAGE COMPLETION METHOD JUDICIAL PRECEDENT CIT vs. Advance Construction Co. (P) Ltd. (2005) 275 ITR 30 (Guj) It is held that Assessee-contractor having offered profits for tax on the basis of percentage completion method which is a standard accounting practice and has been constantly followed by the assessee in subsequent years, the same could not be rejected.
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PROJECT COMPLETION METHOD JUDICIAL PRECEDENT CIT vs. Bilahari Investments (P) Ltd. (2008) 299 ITR 1(SC) It is held that Recognition/identification of income under the Act, is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract is one such method. Similarly, percentage of completion is another such method. Prestige Estate Projects (P) Ltd. 33 DTR 514 (Bang) Assessee developer having regularly employed project completion method which is an accepted method of accounting, and the Central Government having not notified AS-7 u/s. 145(2), AO could not reject the accounts u/s. 145(3) on the ground that the assessee had not followed the percentage completion method
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PROJECT COMPLETION METHOD JUDICIAL PRECEDENT Nandi Housing (P) Ltd. NTD (2003) 80 TTJ (Bang.) 750 The assessee projects were of a longer duration than one particular accounting year. The project may take a few years and actual sale may take place subsequently. The Project Completion method is a permissible method recognized by the ICAI. This is regularly employed by the assessee and the Department had not found any mistakes. The addition of 8% on WIP was totally uncalled for. H.M. Constructions (2003) 84 ITD 429 (Bang) A Builder followed the Project Completion Method regularly. The AO attempted to adopt 8% of Contract receipts as the income. It was held that this is a recognized method recommended by the ICAI and if the Revenue attempts to tax the income on the basis of receipts, it could lead to absurd results because receipts may come earlier and the expenditure would have to be incurred over a period of time. It was held that Project Completion Method was correct.
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PROJECT COMPLETION METHOD JUDICIAL PRECEDENT Champion Construction Co 5 ITD 495 The assessee contended that the profit should be taxed only on completion. The ITAT held that as the construction was completed and 80% of the flats had been sold, the income could be estimated in that year and that substantial completion was what was relevant. Dalmia Promoters Developers (P) Ltd. (2006) 281 ITR 346 (Del) The issue in this case was whether interest income was to be held as incidental to the Real Estate business or whether it was to be taxable as Income from other Sources. The Judgement however refers to the fact that assessee followed project completion method of accounting.
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TREATMENT UNDER PROJECT COMPLETION METHOD JUDICIAL PRECEDENT Certain other judgments where Project Completion Method has been accepted: Shree Nirmal Commercial Ltd. 193 ITR 694 (Bom) D.K. Enterprises 39 ITD 394 (Bom) WD Estate (P) Ltd. 45 ITD 477 (Bom) Shapoorji Pallonji & Co. (Rajkot)(P) Ltd. 49 ITD 479 (Bom)
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION CHANGE OF METHOD OF ACCOUNTING JUDICIAL PRECEDENT Satish H. Patel 93 TTJ 458 (Pune) It is held that the assessee having changed his method of accounting from work-inprogress in original return to project completion method in revised return, project completion method also followed by assessee in subsequent year and same also accepted by revenue- assessee can change one system of accounting to another system before assessment is completed.
ACCOUNTING ASPECTS OF REAL ESTATE & REVENUE RECOGNITION TAX AUDIT JUDICIAL PRECEDENT Gopal Krishnan Builders [92 TTJ 215 (Luck)]) Amount received as advance by builder following project completion method whether tax audit applicable and penalty under section 271B imposable It is held that amounts received as advance by the assessee-builder from customers had an element of profit and same were to be adjusted towards the cost of flats booked by each customer and thus, the amounts of advance have to be included in "gross receipts" for the purpose of s. 44AB; assessee being under obligation to get its accounts audited under s. 44AB. It cannot be contended that the assessee following project completion method would get the books of account audited in the last year and not in earlier years when he is debiting the expenses and other items and showing different types of receipts penalty under s. 271B was imposable for its failure to get the same done
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES Forms of Development Agreements: (A) Fixed Price Agreement (B) Sharing of Revenue (C) Sharing of Profits AOP issues (D) Allotment of space in building to the Land-owner Page 20
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES (A) Fixed Price Agreement A Land Owner, enters into a development agreement to sell land for a fixed monetary consideration. Tax Perspective Section 2(47)(v) of the I.Tax Act, 1961 states: Transfer in relation to capital asset includes Any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of contract of the nature referred to in Sec. 53 A of the Transfer of Property Act, 1882. By entering into a Development Agreement and permitting construction to be commenced, the Owner would state that he had merely given a licence to the Developer to enter upon the property for the limited purposes of construction and had not handed over possession to the Developer. Hence, he would contend that no capital gains tax was leviable. Page 21
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES Chaturbhuj Dwarkadas Kapadia vs. CIT 180 CTR Bom 107 Transfer of property under a development agreement Arrangements conferring privileges of ownership even without transfer of title fall under s. 2(47)(v) In cases of development agreements, the year of chargeability of capital gains is the year in which the contract is executed Substantial performance of the contract is not relevant If the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability Under the terms of the agreement between the assessee and the developer a limited power of attorney was intended to be given to the developer to deal with the property Hence, the date of contract was the relevant date of transfer under s. 2(47)(v) Finding of the Tribunal that the transfer had taken place during the relevant asst. yr. is also vitiated by mistakes apparent on the face of the record. Page 22
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES Conversion of Capital Asset into Stock-in-trade [Section 45(2)] Section 45 --- (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as, stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Page 23
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES Shirinbai Kooka 46 ITR 86 (SC) Process of conversion Get a Valuation Report of the land. In the case of a Company, pass a resolution to convert the land and follow this up with a formal declaration or affidavit The necessary entries must be passed in the books of account. Page 24
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES Stock-in-trade : Certain issues What is the date of sale or transfer in the case of stock-in-trade? Is it the date on which the Land Owner entered into the Development Agreement? Is it the date on which the Developer entered into an agreement to sell a particular flat? Is it the dates on which the Developer receives and installments of sale proceeds? Is it the date on which the Developer hands over possession of a flat? Is it the date on which the Developer conveys the building to the society? Page 25
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES (B) Sharing of Revenue The Owner enters into an agreement in which he is to get a share of top line. Since this consideration is not quantified at the initial stage of development, such a situation would normally result in the receipts by Owner, being treated as business receipts. If the land had been held until then as a Capital Asset, the Owner may convert the Capital Asset into Stock-in-Trade for clear classification and treatment of revenues. Page 26
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES (C) Sharing of Profits Land Owner is to get a certain basic price and thereafter a share of profit The AO may contend that this is an AOP Option 1: Formation of an AOP/LLP: Introduction of land into the AOP/LLP at a mutually agreed price [u/s. 45(3)] Division of profits between the parties. Option 2: Combination of profit sharing and sharing of revenue or other such basis so that the parties are entitled to an independent share in the income. Page 27
FORMS OF DEVELOPMENT AGREEMENTS & TAX ISSUES (D) Allocation of Area The Owner enters into an agreement with the Developer under which the Developer is to carry on construction at the Developer s cost. The Owner receives a certain percentage of area in return. Page 28
TAX ISSUES FINANCE COST, INDIRECT COST & COMPOUNDING CHARGES 50C P. B I PROPERTY VS. BUSINESS INCOME 80-IB(10)
TAX ISSUES FINANCE COST, INDIRECT COST & COMPOUNDING CHARGES CIT vs. Lokhandwala Construction, (2003) 260 ITR 579 (Bom) It is held that construction project undertaken by the assessee-builder constituted its stock-in-trade and the assessee was entitled to deduction under s. 36(1)(iii) in respect of interest on loan obtained for execution of said project. Wall street Constructions Ltd. & Anr. Vs. JCIT 2006 101 ITD 156 (Mum) (SB) It is held that the assessee following project-completion method of accounting, the interest identifiable with that project should be allowed only in the year when the project is completed and the income from that project is offered for taxation. The same cannot be deducted as period cost from year to year. True profits in such a case can be determined only when entire cost of the project, direct or indirect, including finance cost is added to the value of work-in progress Page 30
TAX ISSUES FINANCE COST, INDIRECT COST & COMPOUNDING CHARGES JCIT vs. Raheja (P) Ltd. (2006) 102 ITD 414 (Mum.) It is held that even though assessee was following competed contract method for returning its income, its claim of finance cost as a period cost in nature of interest was allowable in the year in which it was incurred or accrued, in accordance with AS 7 issued by the ICAI. Income Tax Officer vs. Panchvati Developers [115 TTJ 139 (Mum)] It is held that Assessee following project completion method, and advertisement expenses of the two projects being allocable to individual project, such advertisement expenses have to be capitalized as work in progress to be allowed deduction in the year of completion of project. Page 31
TAX ISSUES FINANCE COST, INDIRECT COST & COMPOUNDING CHARGES Mamta Enterprises [135 Taxman 393 (Karnataka.)] In this case it was held in the order passed by a competent authority of Town Planning in unmistakable terms stated that he had permitted the payment of compounding charges by erring builders to regularize the infirmity in the building construction. There could not be any doubt that what had been done was to permit the assessee to compound the offence committed by it putting up an unauthorized construction. Explanation to Sec. 37(1) defines that any expenditure incurred for any purpose which is an offence or which is prohibited by law is not entitled to deduction. Hence compounding of the offence under Corporation Act cannot take away the rigour of explanation to sec 37 and the deduction is not available. Page 32
TAX ISSUES SECTION 50C Applicable to capital asset and not for business assets CIT Vs. Thiruvengadam Investment Pvt Ltd 320 ITR 345 Inderlok Hotels Pvt Ltd [4376/Mum/2008 ] Not applicable in respect of transfer of tenancy rights Kishori Sharad Gaitonde [ ITA No.1561/Mum/2009] Stamp duty Stamp duty authority accepted consideration then no question of once again referring to DVO u/s 50C Punjab Poly Jute Corpn [120 ITD 233]
TAX ISSUES SECTION 50C Does not apply to cases in which the transfer property is not the subject matter of registration and the question of valuation for stamp duty purpose has not a reason Navneet Kumar Thakkar [112 TTJ 76 ] Note : Explanation to Sec.50C (2) is added w.e.f 1/10/2009 stating that the expression assessable means the price the stamp duty authority would have adopted or assessed if it were referred to such authority for the purpose of payment of stamp duty
TAX ISSUES PROPERTY V/S BUSINESS INCOME Shambhu Investment Private Ltd v/s CIT [263 ITR 143 (SC)] In this case assessee was letting out furnished premises on monthly rent to various parties along with furniture, fixture, A.C., etc. for being used as table space". Entire cost of property already recovered by way of interest free advance by assessee. Only intention was to let out a portion of premises to respective occupant. It was held that income derived from letting rightly held as income from property and not business income. PFH Mall & Retail Management Ltd v/s ITO [110 ITD 337(Kol)] It was held that the fact that Apex court held that income earned by Shambhu Investment Pvt Ltd is assessable as property income has no relevance in the facts and circumstances of the present case because in that case the fact showed that the main intention was to earn rental income. That was why the entire cost of property was recovered from tenant by way of interest free advance. In the instant case the assessee has taken bank loan to finance his projects like any other business man. Every action of the present assessee appears to be the sole object of commercial exploitation of the premises CIT v/s Sarabhai Pvt Ltd [263 ITR 197(Guj)] When property has been let out not only as property but with services which is complex letting, the income cannot be said to be derived from mere ownership of house property but may be assessable as income from business. Page 35
TAX ISSUES SECTION 80-IB(10) SOME RECENT JUDICIAL PRECEDENTS Bhrama Associates vs. JCIT (ITAT Pune Special Bench) ITA No. 1417/PN/06 Where the local authority does not grant approvals to housing projects but instead grants approvals to residential and residential cum commercial projects, one will have to adopt the doctrine of purposive interpretation to draw a lakshman rekha and ensure that the basic character of the project continues to remain in harmony with the object of the tax incentive i.e. augmenting affordable dwelling units. Applying the said doctrine of purposive interpretation, cases where commercial built up area does not exceed 10% of the total area are eligible for the benefit as such projects are predominantly residential in nature Cases where the commercial area is more than 10% will not be eligible for deduction unless it can be shown that income from the residential dwelling units can be worked out separately and even after excluding the commercial use of plot, the project satisfies all the requirements of section 80-IB (10) On the question as to the extent to which commercial use in a housing project is permissible, the approval by the local authority of a project as a housing project is conclusive and no further enquiry is required
TAX ISSUES SECTION 80-IB(10) SOME RECENT JUDICIAL PRECEDENTS KZK Developers (2010) 130 TTJ 57 (Cuttack) (UO) In this case the assessee entered in to an agreement with the lessee of a plot, on principal to principal basis for co-constructing a multi storeyed residential complex whereby it was assigned the right to use, develop, construct, sell or transfer the saleable area, it was not a contractor at all. Assessee had the right to select its own design, development plan and customers. Notwithstanding the fact that the approval for developing the housing project was given by the competent authority in favour of the co-venturer, the deduction under section 80IB(10) was still made available to the assessee G. V. Corporation (2010) 133 TTJ 178 (Mum.) (Trib) Assessee undertaking engaged in development of housing projects could not be denied deduction under section 80IB, on the ground that it failed to fulfill all conditions of industrial undertaking, as prescribed by sub section (2) of section 80IB. Provisions of sec.80ib(2) has no application for claiming deduction u/s.80ib(10) and thus, the condition that the assessee has to be an industrial undertaking does not apply for claiming deduction u/s.80ib(10)
TAX ISSUES SECTION 80-IB(10) SOME RECENT JUDICIAL PRECEDENTS Vandana Properties (2009) 31 SOT 392(Mum) In this case the assessee was granted Commencement certificate for 4 Buildings and building 5 plan got approved on the same plot. Since the commencement certificate was granted, it could be said that the building 5 was a separate and independent housing project. Thus Housing project does not mean that there should be a group of buildings and that housing project would include construction of any building and thus the assessee can claim deduction u/s 80 IB(10) in respect of building 5 independently B.K Enterprise (2009) 125 TTJ 974 (Pune) In this case the assessee developing a housing project and fulfilling all other requirements of section 80-IB(10) was allowed to adopt percentage completion method to arrive at the eligible profits for claiming deduction under the said section. Deduction cannot be postponed to a later year; i.e., on completion of project.
TAX ISSUES SECTION 80-IB(10) SOME RECENT NOTIFICATIONS & INSTRUCTIONS Slum rehabilitation scheme recognized u/s 80IB- Notification 67/2010 dated 3 rd August, 2010 Slum Rehabilitation was required to be notified to be eligible to the benefits of the deduction as stipulated under section 80IB(10). Hence, according to CBDT circular any scheme of Slum Rehabilitation would be eligible for claiming deduction under the said section of the Act provided all the other conditions are fulfilled Deduction in respect of undertakings of developing housing projects: Instruction No. 4/2009, dated 30 th June, 2009 Clarification regarding claiming of Section 80IB(10) if the assessee follows percentage completion method of accounting and offer proportionate profit on qualifying project on year on year basis
REDEVELOPMENT BENEFITS FOR MEMBERS & DEVELOPERS CRACKING ISSUES & ITS TAXABILITY
REDEVELOPMENT BENEFITS FOR CO-OPERATIVE SOCIETY / MEMBERS Old & Dilapidated Building (lack of resources for renovation) Left with unutilized FSI and possibility of TDR/FSI in receiving zone under D.C.Regulation Payment by Developer an amount to society as corpus Extra area for member without liability for stamp duty & registration fees Redevelopment of Housing Society - Goregaon Study Circle Page 41
REDEVELOPMENT BENEFITS FOR DEVELOPER Unavailability of land in good location Purchase of land requires huge capital investment Already developed area No need for forming a society/ conveying land to society Redevelopment of Housing Society - Goregaon Study Circle Page 42
REDEVELOPMENT - STEPS INVOLVED IN ARRANGEMENT Ensuring society has a legal title over the land and capable of undertaking construction as per redevelopment plan Finalizing agreement for alternate accommodation to existing members & give notice to members to vacate the flats Executing Power of Attorney in favour of developer to do all act incidental to carry on construction work Approval of redevelopment in managing committee of society Entering into redevelopment agreement Ensuring that the Occupation certificate and Completion Certificate are obtained Resolution of General Body ratifying proposal of managing committee Resolution to be adopted for engagement of developer & letter of appointment to be issued to him Taking possession of society/members agreed portion after occupation certificate is obtained Obtaining consent of individual member Society to give expression of Interest to established developers Inducting new purchasers as new members of society Redevelopment of Housing Society - Goregaon Study Circle Page 43
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - I Where Society transfers additional entitlement (development right) to the Developer for development. Is such transfer of development right liable to tax? Redevelopment of Housing Society - Goregaon Study Circle Page 44
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO I An Analysis: Development right is capital asset as per provision of Section 2(14) of the Act For computing Capital gains there should be sale consideration and cost of acquisition along with the cost of improvement Gain on transfer of capital asset whose cost is not ascertainable, no capital gain chargeable to tax under section 45 of the Act - CIT v. B.C.Srinvasa Shetty [1981] 128 ITR 294 (SC) Redevelopment of Housing Society - Goregaon Study Circle Page 45
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO I If the assessee has not incurred any cost of acquisition on a capital asset, such capital asset does not fall in the category of the capital asset specified under section 55(2) of the Act. Therefore, it is covered by the Judgment of the Supreme Court in case of B.C.Srinvasa shetty (Supra) New Shaila CHS v/s. ITO (IT) No.512/M/2007 Held: Though the TDR was a Capital Asset, since there was no cost of acquisition, the sale proceeds could not be taxed. Note: If an assessee has bought a property after 1991 then he has acquired the rights to TDR as part of his cost and this must be distinguished from that of a person who acquired the property before 1991. Redevelopment of Housing Society - Goregaon Study Circle Page 46
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO I The rights are acquired by virtue of being owner of the plot in the specified area, but this does not mean that the cost incurred on the plot is the cost of acquiring development right Jethalal D. Mehta vs. D.CIT (2005) 2 SOT 422 (Mum) Held: TDR which came into existence by operation of law pursuant to the Development Control Regulations of 1991 had no cost and therefore no Capital Gain was taxable in the event of sale. Accordingly, transfer of TDR to Builder for development of property does not attract Capital Gain Tax - CIT v. B.C.Srinvasa Shetty Page 47
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - II Where Society transfers additional entitlement (development right) to the Developer for development & does not receive any monetary consideration. However, builder agrees to carry out repairs to the building. Is such transfer of development right liable to tax? Redevelopment of Housing Society - Goregaon Study Circle Page 48
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - II Analysis: The assignment of the TDR to the developer and in turn the additional floor to be constructed and also repair / renovation of building to be carried out, does not entail accruing of any income in the hands of the assessee society. Accordingly, it does not attract tax liability ITO v. Lotia Court CHS Ltd. (2008) 12 DTR (Mum)(Trib) 396 Held: Allowing a developer to allow 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 D.C. Regulations. Redevelopment of Housing Society - Goregaon Study Circle Page 49
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO- III Whether compensation received by the society or by the member for allowing the developer (rightful owner of TDR/FSI) to develop or construct the property is liable to be tax?
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - III Analysis: Transferable Development Rights were owned or possessed by the builder in terms of the regulations, it was permissible for the builder to utilise the said transferable right in or with respect to the prescribed area including the land. No Capital gain tax on permitting construction of additional floors, whether or not any right is available with the society or its members, as it does not involve any cost of acquisition in the light of decision of the Supreme Court in the case of CIT vs. B.C.Srinivasa Shetty (Supra) - Om Shanti Cooperative Society [ITA. No. 2550 /Mum/2008]
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - III Analysis: Compensation paid to the Members of the society, not holding any capital asset, will not attract capital gain tax under section 45 of the Act Deepak S. Shah vs. ITO (2009) 29 SOT 26 (Mum) Held: Since the Society entered into an agreement granting permission for development and constructing additional floors and 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. Compensation received by member, for inconvenience caused to them due to construction activity is not an income - Lohtse Co-operative Housing Society Limited v. ITO (51 ITD 608)
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - IV Where under an agreement the members transfer the entire development potential consisting of original FSI as well as TDR FSI to the developer with a stipulation that the developer will demolish the existing structure and in exchange of those rights provide to the existing members new flats at his own cost. What is tax implication? Redevelopment of Housing Society - Goregaon Study Circle Page 53
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - IV Analysis: The said transaction is a transfer of entire property Further, it may become a case of transfer by exchange in which the members exchange their existing flats for the new flats. The gain arising, therefore, may qualify for exemption under section 54 of the Income tax Act If, however, Assessing Officer holds a view that it is the transfer of TDR rights and not residential house, then applicability of Section 54 will be ruled out and the only available provision will be Section 54F or Section 54EC of Income-tax Act
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - V Where under an agreement the members retain the FSI required to be consumed for construction of their flats and transfer only the surplus TDR FSI to the developer. The agreement will also provide that the developer will construct flats for the owners as their contractor by utilizing the FSI + TDR retained by members in consideration of developer acquiring surplus TDR FSI. What is the tax Implication on such transaction? Redevelopment of Housing Society - Goregaon Study Circle Page 55
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY SCENARIO - V Analysis: In such a case, there being no transfer involved with reference to the construction on retained portion, no capital gain arises on the FSI retained including the residential flats The gain arises only from that part of the TDR FSI which is transferred to the developer. The transferred property not being the residential house, will not qualify for exemption under Section 54. The only applicable exemption provisions will be Section 54F or 54EC of the Income-tax Act Redevelopment of Housing Society - Goregaon Study Circle Page 56
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY If the Developer pays directly to a Third Party Owner for alternate accommodation, this may not be subject to tax in the hands of the flat owner. If the Developer pays any amount to the flat owner then this is likely to be taxed in the hands of the flat owner even if the flat owner pays rent for alternate accommodation. When the Society/flat owners allow the FSI to be loaded and used on that particular flat, then a tax issue does arise. Has the Society or have the flat owners transferred any part of their interest in the property? Ownership of immovable property is traditionally defined as a bundle of rights. By giving up part of the bundle of rights, have the flat owners transferred and how is that to be evaluated? 57
REDEVELOPMENT CRACKING ISSUES & ITS TAXABILITY - AREA OF ALLOTTED FLAT If a flat purchaser gets a larger area, this may not be taxed. If the assessee had acquired the flat after 1991 then the right of TDR was already embedded in its cost and therefore such an assessee would not be able to claim an exemption at all on this ground. However he may claim that he transferred his older flat of 1000 sq.ft. and received a new flat of 1200 sq.ft. and that therefore since he reinvested the entire Capital Gain u/s.54 and there was no liability. This would, however, be subject to the conditions u/s.54. If the flat owners get a certain monetary compensation this would again have to be viewed on the principles above mentioned. Likewise if the Society gets monetary compensation.
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