Corpus Fund

Most of the redevelopment agreements provide for the payment of ‘corpus fund’ by the developer to the society for meeting the further cost of maintenance of the flats owned by the members. This ‘corpus fund’ absolves the members from payment of the maintenance in future. This fund is paid by the developer as a consideration for the grant of the development rights .

  Members

·         Under a typical redevelopment arrangement, a developer agrees to provide the following to each of the members of the society:-

(a)    Temporary Alternative Accommodation- TAA or rent

(b)   Compensation for inconvenience

(c)    Funds to meet municipal tax liability in future

(d)   Permanent Alternative Accommodation-PAA

(e)    Additional area

(f)    Compensation for furnishing

(g)   Provision of household amenities

·         The tax incidence of each of these receipts in the hands of the members requires consideration. One view of view of the matter is that everything that is received represents the consideration for the permission to develop and therefore, will from part of the sale consideration in computing the capital gains. The other view is that each item should be considered independently for deciding the incidence of tax thereon.

·         The receipt of TAA, free of cost, during the period of development allows the member to reside therein without incurring any expenditure, out of pocket, which he would otherwise have been required to meet for his residence. This benefit flows from the agreement for development and therefore apparently is construed as a part of the consideration and may be taxed as the capital gains, provided a ‘transfer’ by the member is presumed.

·         If the same is treated as a substitution for personal expenditure, it may treated as it would have been in the nature of revenue income.

·         The other possibility is that the same be treated as compensation received for putting up with the inconvenience during the period of development and may be held as a capital receipt not liable to tax. The case for tax free receipt is stronger in a case where the members continue to reside in the same premises while additional construction is taking place over the existing building and the members receive compensation for putting up with the inconvenience.

·         The treatment shall not be different where the members receive the rent in cash for TAA and make their own arrangement for residence during the development period. An added issue in this alternative is the possibility of deduction for the rent paid out of the said rent received and the treatment of balance, if any. 

·         To pay the maintenance charges of the new premises is the obligation of the member. This obligation is sought to be met, fully or partly, out of the income of the corpus fund received from the developer. This corpus fund or a lump sum amount, received directly, by the member becomes the absolute property of such member with complete right of disposition over such property. This property is received under the agreement for grant of development rights and therefore should from part of the consideration received for transfer of such rights provided a transfer by the member is an accepted position.

·         Ordinarily in a scheme of reconstruction, a member receives the new premises in the reconstructed building in place of the old premises in the old building. The rights of the developer to demolish the old premises and of the member to receive the new premises are recorded in an agreement for grant of the permanent alternative accommodation. A question that arises for consideration is the liability to capital gains tax on such a transaction. The transaction shall be regarded as a transfer in as much a it involves surrender of a capital asset or rights therein for a valuable consideration. Accordingly, the capital gains will have to be computed as per the provision of sections 45 to 55 of the Act. The other view is that no transfer takes place on such a transaction. The member continues to be owner of the premises and that no transfer takes place, in view of the fact that the new premises represent nothing but the reconstructed premises without involving any transfer of ownership of the old premises to the developer.

·         The position will not be different even where the member receives a large area in the new premises, provided the view that there is a transfer is accepted.

·         The related issue concerns the eligibility for exemption u/s 54, on account of reinvestment of the said capital gains. The benefit of s. 54 shall surely be available subject to compliance of other conditions of the said section, including the requirement relating to purchase within the prescribed period and of the holding of the new premises, again for the prescribed period. In case of surrendering the commercial premises, the possibility of the benefit u/s 54F may be explored where the new premises happen to be residential premises. Genuine difficulties may arise for transfer of residential premises in consideration of the new commercial premises, in cases, where the old premises were not used for commercial purpose.