Taxation of Co-operative Societies

(iv)  Non-occupancy charges

A member of the society may give his flat to an outsider on rent etc. The society may collect from its members non-occupancy charges. The amount collected is used for the benefit of the existing members of the society.

Therefore in the above case the principle of mutuality is not violated and hence it is non-taxable.

(v)  Additional floor space index (FSI) and transfer of development rights (TDR)

There are two conflicting views on the tax liability of the owner of the Development of Rights Certificate (DRC) on transfer of the same. As DRC is acquired through the surrender of immovable property, the cost of the land that is surrendered will be considered to be the cost of DRC. The grant by the government of Transfer of the Development Right (TDR), thus results in the acquisition of a capital asset. Hence the transfer of the same gives rise to the transfer of capital gain. If it is transferred before 3 years of its acquisition, it will be considered short term capital gain. In case it is transferred after 3 years, it is considered to be long term capital gain and taxed accordingly. This view was upheld in A.R. Krishna Murphy & Anr. V. CIT reported in 176 ITR 417 (S.C.).

On the other hand, the other view considers such income as non taxable. Here, it is considered that TDR received is different and there is no cost of acquisition. Therefore, the right to TDR itself is surrendered and there is no capital gain tax liability. This is based on the understanding that TDR ca not be expressed in terms of actual value. The Supreme Court in CIT v. B.C. Srinivas Setty 128 ITR 294 laid down the proposition that a gain, arising from the transfer of assets for which no cost could be identified, would be outside the computation provisions of Section 48 of the Income Tax Act, 1961.

It must be noted here that the first view is the correct view. Floor Space Inbox (FSI) is the factor that makes the land valuable from the point of view of construction. Thus FSI, when transferred through the DRC, must be considered to be a conveyance of immovable property. Consequently, it should be considered to be capital gain and taxed accordingly.