Redevelopment of the society’s property involves Income-tax, Stamp Duty, Property Tax, Service-Tax etc. A study of the taxation involved is required before embarking on redevelopment in order to avoid litigation.
Taxability depends upon the mode of redevelopment which is adopted by the society. This has been discussed in chapter no.2
Let us now examine the taxability of each method.
A). Self Development
If the society appoints a developer for reconstruction and pays the charges for the same to the developer, there cannot be any income to the society. The Society may allot additionally constructed flats etc. to its members even at a market price or subsidized or free of cost. There will be no taxable income for such sale to members, as the same would be covered by the concept f mutuality. The individual members may sell off such additional flats for which they would be liable to tax in the usual manner.
In cases where the society decides to lease/rent out the flats arising out of additional construction for the rent and security deposit, the deposit would not come under the taxable income for such sale to members, as the same would be covered by the concept of mutuality. The individual members may sell off such additional flats for which they would be liable to tax in the usual manner.
In cases where the society decides to lease/rent out the flats arising out of additional construction for the rent and security deposit, the deposit would not come under the tax net. Rent collected will be income of the Society under the head ‘Income from House Property’. Income can be set off by collecting either nil or less contribution from members for monthly maintenance/outgoing.
Individual Members & Common Developer
In this case the individual members and not the society would be liable to tax.
By Society contracts with the Developer
Entitlement to balance FSI and the right to use TDR upon the receivable land has their origin in the land and such entitlement and rights belong to the owner of the land. Further, such rights are assets, Section 2(14) of the Income-tax Act, 1961 states that allowing a developer to use such rights would be considered as transfer of assets under section 2(47) of the Act. The consideration receivable from the developer for transfer of such rights would be taxable under the head ‘Capital Gain’.
Under the applicable laws, a duly registered co-operative housing society is the owner of the land and buildings. A member is considered an owner of his flat, only if he has a right to occupy the same. Even if a member is considered an owner of his flat under Section 27(iii) of the Income tax Act, he has no interest or rights in the ownership of the land and building. The society is the owner thereof. The society, being the legal owner, the consideration received for transfer of balance FSI and right to use TDR would be taxable in the hands of the Society. Even if an arrangement were made in which the developer does not pay consideration to the society and pays separately to the individual members, the society would be taxable for the same. This is because the members are not owners of the assets namely the balance FSI and the right to use TDR upon the receivable land of the society. The Current view is it is that the amount paid by the developer to the members to meet the damages/inconveniences would not be liable to tax under the Income-tax Act as the receipt for such personal inconveniences/damages would be a capital receipt in the hands of the members. This view is expressed in the decision in the case of Lohtse CHS Ltd. Reported at 51 ITD 608 Bom. Further, the amount received from the developer in cash and in kind may not be entirely taxable in view of the judgments in the cases of Miss Dhun Dadabhoy Kapadia v. CIT, Bombay at 63 ITR 651 (SC) and CIT v. Smt. M. Subaida Beevi 160 ITR 557(Ker). Thus, if the right over balance FSI and use of TDR are inherent in the ownership of land and building, these rights belong to the society. The amount paid to members by the developer is the consideration for inconvenience during the reconstruction and reduction in facilities enjoyed prior to reconstruction. Similarly, after the proposed reconstruction, existing members may face increased liability in terms of property tax. An amount is paid by the developer to such members is as compensation for inconvenience. Such amounts are not taxable, as they amount to capital receipt.