Q: The building was constructed 25 years ago and the Co-operative Society was registered 20 yrs ago. Despite the members’ best efforts the builders have not given conveyance of property to the Society. The Society wants to use TDR. Can the Society use TDR-FSI?

A: No, till the Co-operative Society obtains conveyance of the property in its name.

Q: Flat Owners Co-operative Society was formed by purchasers of flats from a builder. The Society executed Development Agreement with a builder. As per the arrangement, each member will surrender the existing flat and get a new flat which will have one more room. Is the member required to pay capital gains tax on surrender of the old flat in exchange for a new flat?

A: In an arrangement where the Society is of the nature of flat owners Society, the capital gains accrue to the individual members, who are owners of the land, and consequently own development rights. In such a case members may collectively enter into an agreement with the Developer. The taxability of members will depend upon the manner in which the agreement is drafted. There may be an agreement under which 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.

The same object could also be achieved by drafting an agreement in a different manner under which 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.

In the former case, the question arises as to whether the transfer is of the residential flats owned by all the members. It is possible to take the view that since the development rights are transferred in entirety, it is virtually transfer of entire property. With this view, 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.

In the latter case, where the FSI and some percentage of TDR-FSI has been retained by members and the surplus TDR-FSI is transferred, the Developer will be acting as a contractor for construction of flats for the owners. 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.

Q: Whether Society has to pay capital gains tax on the basis of market value determined by the Stamp Duty Authority as per provisions of Sec. 50-C of I. T. Act?

A: Section 50-C is attracted if the capital asset involved in transfer is land or building or both. The transfer of right to load TDR is not transfer of land and/or building or both. Under the Development Agreement, the land with building continues to remain vested in the Society or the members as the case may be.
Hence provisions of Section 50C of the Income-tax Act cannot be made applicable to the capital gain arising from the grant of right to load TDR.

Q: Where a Flat Owners Society distributes the unutilized FSI among the existing members in proportion to the area occupied by them and gives them the right to develop their share with or without the assistance of a builder, whether the distribution will make Society liable for taxation? In such a situation, whether the compensation received from the builder will be the taxable income of the member? Whether it will be treated as dividend from the Society?

A: Such distribution in the case of Flat Owners Society would be of the nature of conversion of collective ownership into individual ownership and will not amount to transfer. However, when the members transfer their rights to a builder, it may result in short term or long term capital gain. The members may take advantage of Sec. 54-F or 54-EC. (Benefit of Sec.54 may be doubtful as transfer of TDR may not be treated as a transfer of residential house). As the TDR rights already belonged to the member, though collectively, it should not be taken as distribution of dividend. A different view is, however, possible in case of plot purchased type Society. Allocation of FSI to members may not be taken as distribution of asset held collectively.

Q: Where in a development agreement, the builder agrees to provide additional facilities by way of gymnasium, club house or swimming pool and makes such facilities available to the existing as well as new members, does profit arises to the Society by such an arrangement? What, if it levies charges for the use of such facilities?

A: The Club house etc. will become of the property of the Society. The purchasers of flats from the Developer will pay for the cost of Club house etc. to him. The existing members will get the benefit to use these facilities without any cost. The proportionate cost of Club house etc. attributable to area occupied by existing members is the consideration received by the Society. After induction of new members, old as well as new members will form the membership of the Society. Charges levied from members are not subjected to tax in the hands of the Society on principle of mutuality.

Q: Is it permissible for the Society to avail of the benefits of Section 54-EC?

A: Yes.

Q.13. In case the consideration money under a Development Agreement or the proceeds of investment are deposited u/s. 54-EC and on maturity distributed amongst the members, will it amount to distribution of dividend and hit by Sec. 67 of the Maharashtra Co-op. Societies Act restricting such distribution to 15% only ?

Q: In an arrangement where the redevelopment work is undertaken by the Society itself with funds provided by the members, will there be any tax implication?

A: There being no transfer involved in such a case, there is no gain and hence no tax implication at the stage of redevelopment. However, if flats are sold by the Society there would be tax liability.

Q: As a recipient of extra constructed area being retained by the members/ Society and constructed by the Developers, will a member of the Society be liable to pay any stamp duty on either the extra constructed area, or on the entire newly re-constructed flat?

A: The Member of the Society shall not be liable to pay any stamp duty on either the extra constructed area under the Development Right Agreement or on the entire reconstructed flat for following reasons. There is no transfer involved in the transaction, as far as the Member is concerned, since the extra area to the Member is due to grant of right to use TDR which already belongs to the Society. The Developer simply acts as the contractor for the construction of the entire area of the Members’ flat.

The Developer has to pay stamp duty on the Development Right Agreement to be executed between the Society, the Members and the Developer, @1% of the market value estimated by Stamp Duty Authorities which will include cost of construction of the Members’ Flats and the market value of TDR/loading rights being transferred to the Developer.

Q: By any chance, will the Society be required to pay any stamp duty towards the re-construction of the building?

A: The Society is not liable to pay any stamp duty towards the reconstruction of the building. The reconstructed building will consist of flats/car parking for the existing members of the Society and the balance flats/car parking spaces for sale by the Developers to prospective purchasers.

The stamp duty for the balance flats/car parking spaces to be sold by the Developers shall be paid later on by the prospective purchasers on the ownership agreements to be executed between the Developers and prospective purchasers. As regards the flats of the existing members of the Society in proposed building are concerned, the Society is not liable to pay any stamp duty on the same as discussed in reply to Question No.16 above.

Q: Whether stamp duty is payable if a member of a Society purchases additional area from the Developer after the execution of Development Agreement?

A: The member in this case falls in the category of prospective purchaser in respect of additional area for which there will be proper purchase agreement which will attract stamp duty

Q: What is the position of the conveyance in the scheme of redevelopment with respect to the additional area offered to the Society/flat owners by the Developer?

A: The Society is already the owner of the plot in all the government records including the records of City Survey Office. The area of plot does not change due to construction of additional area on account of consumption of TDR FSI. Hence there is no need to have fresh conveyance.