Question: A Housing Society was approached by a builder for the redevelopment of its building. The builder said he will demolish parts of the building and reconstruct with more area. The Society would be paid Rs. 1 crore while the members would be paid Rs. 25 lakhs each. He would retain a part of the area as his profit. The question is, are the said sums chargeable to tax in the hands of the Society and members? 

Provisions of the Income-tax Act & D.C. Regulations: 

Regulation 33(7) of the Development Control Regulations of the Municipal Corporation of Greater Bombay, 1991 (‘DCR’) provide for the grant of additional FSI if an existing building is redeveloped. The said additional FSI can be utilized either for the extension of the existing building or for the construction of a new building or may be sold for a consideration. 

U/s 2(14), “Capital Asset” is defined to mean “property of any kind”, held by the assessee whether or not connected with his business or profession, but excluding ‘stock in trade’. The definition is wide enough to cover development rights within its ambit. 

U/s 45, any profits and gains arising from the transfer of a capital asset is chargeable to tax. U/s 48, the profits and gains have to be computed by deducting from the full value of the consideration, the cost of acquisition and cost of improvement of the asset.

Though development rights are a capital asset, the moot question is whether there is a ‘cost of acquisition’ attached to them.

Judgments:

The leading judgments on the issue are that of the Mumbai Bench of the Tribunal in ITO vs. Lotia Court Co-operative Housing Society Ltd (2008) 12 DTR (Mumbai) (Tribunal) and New Shailaja CHS vs. ITO (ITAT Mumbai)  

In Lotia Court Co-operative Housing Society the Society and its members entered into a development agreement with a builder pursuant to which Transferable Development Rights (TDR) entitled to be received under the Development Control Regulations was assigned to the developer for the repairs and redevelopment of the building and the construction of additional floors. The AO sought to assess the Society on the ground that it had made capital gains. However, the Tribunal held that as the TDRs were owned by the flat owners individually and as no consideration for the transfer of the TDRs was received by the assessee Society nor any area in the constructed portion was allocated to the assessee Society, the Society was not chargeable to tax. 

In New Shailaja CHS, the assessee-Society became entitled by virtue of the Development Control Regulations to Transferable Development Rights (TDR) and the same were sold by it for a price to a builder. On the question of taxability in the hands of the Society, the Tribunal noted that the Supreme Court had laid down the law in B. C. Srinivasa Setty 128 ITR 294 (SC) that if there was an asset for which a cost of acquisition was not determinable, the gains could not be assessed as ‘Capital Gains’. It was accordingly held that though the TDR was a ‘capital asset’, there being no ‘cost of acquisition’ for the same, the consideration could not be taxed. 

The said view has been followed in Om Shanti Co-op Society vs. ITO (ITAT Mumbai). In this case, the assessee co-op housing Society gave permission to a developer to construct 2 floors and 8 flats on the building belonging to the Society by using the TDR / FSI available to the developer. In consideration, the developer paid Rs. 26 lakhs to the assessee and Rs. 66 lakhs to its members aggregating Rs. 92 lakhs. 

The AO took the view that the assessee had relinquished its right “to load TDR and construct additional floors” and as there was no cost of acquisition, the entire consideration of Rs. 26 L was assessable as long-term capital gains. On appeal, the CIT (A) took the view that even the amounts received by the Members were assessable in the assessee’s hands. He accordingly enhanced the assessment and directed that the consideration be taken at Rs. 92 L. 

However, the Tribunal reversed the AO and CIT (A) on the ground that the assessee and its members had no right to construct additional floors on the existing building as they had exhausted the right available while constructing the flats in the building. The TDR was not obtained by the assessee and sold to the developer. It was held that the assessee had not transferred any existing right to the developer nor any cost was incurred / suffered prior to permitting the developer to construct the additional floors. The Tribunal held that in the absence of a cost of acquisition, the judgment in B. C. Srinivasa Setty 128 ITR 294 (SC) applied and the consideration was not assessable as capital gains. 

The taxability in the hands of the members of the Society was considered in Jethalal D. Mehta vs. DCIT (2005) 2 SOT 422 (Mum). There also, following the judgment of Apex Court in CIT vs. B.C. Srinivasa Setty 128 ITR 294 (SC), it was held that as the TDR granted by DCR, 1991 qualifying for equivalent FSI had no cost of acquisition, the sale of the same did not give rise to assessable capital gains.

Conclusion:The entire case rests on there not being a ‘cost of acquisition’ of the development right / FSI obtained pursuant to the Development Control Regulations. In respect of buildings that have been erected after the DC Regulations of 1991 came into force, it is a possible argument in favor of the Revenue that some part of the cost of the building is attributable to the said development right / FSI and that the principle of B. C. Srinivasa Setty does not apply. 

Hence, if no ‘cost of acquisition’ is attributable to the development rights, the gains arising on their transfer are not assessable in either the hands of the Society or in the hands of the members.

 

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IN THE INCOME TAX APPELLATE TRIBUNAL

 MUMBAI BENCH “K” MUMBAI 

BEFORE MS. SUSHMA CHOWLA (JM) AND MR. B. RAMAKOTAIAH (AM) 

ITA No. 5096/M/05    ASSESSMENT YEAR: 2003-04 

The ITO, Ward – 19(1) (1)

No. 319, 3rd Floor, 

Piramal Chambers, Lalbaug,

Mumbai – 400 0012    … Appellant 

Vs. 

M/s. Lotia Court Co-Op. Housing Society Ltd.,

453, 15th Road, Khar (W), 

Mumbai – 400 052 

PAN / GIR NO. ITO 19(1) (1)           … Respondent  

Appellant by:  Shri Manish Mishra 

Respondent by:     Mr. Prakash K. Jotwani

            O R D E R 

PER MS. SUSHMA CHOWLA, JM:  

This appeal filed by the Revenue is against the order of CIT (A) - XX, Mumbai dated 02/05/2005 relating to Assessment Year 2003-04 and arises out of the assessment completed under Section 143(3) read with Section 148 of the Income Tax Act, 1961. 

The only issue raised by the Revenue in its appeal is against the computation of Capital Gains. 

Mr. Manish Mishra, Departmental Representative appeared for the Revenue and Mr. Prakash K. Jotwani, learned counsel appeal for the assessee and put forward their contentions. 

The brief facts of the case are that the assessee is a Registered Society consisting of 11 members. The assessee society was entitled to receive certain TDR from the Municipal Corporation of Mumbai, as per which additional floors could be constructed on the existing building. The said right to receive TDR was assigned to a Builder by the members  of  the  society  for  the  purpose  of  repairing  the  said  building.  

The assessee entered into an agreement with the developer wherein the terms of settlement vis-à-vis the Member of the society were agreed upon. Separate agreement was entered into by the respective owners of the flats i.e., the Members of the society with the developer for the assignment of the TDR and construction of additional floors in respect of each flat owned by the respective parties. 

The benefit of the additional TDR was derived and enjoyed by the members of the assessee society and no consideration whatsoever was received by the assessee society for the assignment of the TDR and for carrying out the repairs of the building and construction of the additional floors. The Assessing Officer treated the consideration received/receivable by the members of the society as income in the hands of the society. The CIT (A) noted that neither any income has been received by the society nor any income had accrued to the society and following the ratio laid down by the Mumbai Bench of Tribunal in Jethalal D. Mehta vs. DCIT in ITA No. 672/Mum/2000 relating to Assessment Year 1996-97, it was held that there is no merit in computing any capital gains on the sale of said TDR in the hands of assessee society.

 7. We have heard the rival submissions and perused the records. In the facts of the present case before us, the assessee society was not the owner of the land. The flats were owned by individual members who had formed the society but the plot of land was not transferred to the society. Certain repairs and redevelopment of the flat had to be undertaken and an agreement was written between the assessee society and the developer for the repairs of the building and for construction of addition floors in the flats of individual flats owned by the members of the society. 

8. An agreement was entered into between the assessee society and the developer but no consideration for the transfer of TDR owned by the flat owners individually was received by the assessee society nor was any area in the constructed portion allocated to the assessee society. The members of the society individually entered into an agreement with the developer for the construction of additional floors or portions annexed to their individual flats and for the repairs of the building. 

9. The assignment of the TDR to the developer and in turn the additional floors to be constructed and also repairs / renovation of the building to be carried out, does not entail accruing of any income in the hands of the assessee society, who is not the owner of the plot. Even in the case of flat owners who owned the individual flats in the respective names, it has been held by the Mumbai bench of Tribunal that there is no question of taxability of receipt on account of sale of additional floor space index received by the assessee by virtue of transfer of TDR under the Development Control Regulation for Greater Mumbai, 1991. 

10. The Mumbai bench of Tribunal in Jethalal D. Mehta vs. DCIT (supra) vide order dated 27/1/2005 had held that the receipt on sale of assignment of rights to receive TDR was not liable to tax. 

11. In the facts of the present case before us, the assessee society and not the members of the assessee society have been taxed in respect of receipts arising on account of TDR. Three is no merit in the order of Assessing Officer and we confirm the order of CIT (A) in this respect. The receipts arising on assignment of TDR is not taxable in the hands of the assessee society. Accordingly, the grounds of appeal raised by the revenue are dismissed.

In the result, the appeal filed by the Revenue is dismissed.

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