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Taxation and Redevelopment of Property

CA Nihar Jambusaria

TDR

� Background

� Cracking Nuts

� Taxability

Definitions

� TDR is not defined in Income Tax Act, 1961

� Regulation 2(d) of Foreign ExchangeManagement (Permissible Capital AccountTransactions) Regulations 2000 defines theTransactions) Regulations 2000 defines theterm “TDR”.

� The concept of TDR is explained by Regulation34 of the Development Control Regulation ofGreater Mumbai,1991

Key Features of TDR

� TDR cannot be used all over Mumbai. it can beused only for designated areas.

� Violation of FSI laws may result in demolitionof illegally constructed floors.of illegally constructed floors.

� No Stamp duty on transfer of property to theauthority.

� Development Rights are granted to owner/s orlessee only for reserved land.

Cracking Nuts under different scenario

� Scenario-1 Where Society transfers additionalentitlement (development right)to the Developer fordevelopment. Is such transfer of development rightliable to tax?

Taxability in Scenario-1

� Development Right is a capital asset as per theProvision of Section 2(14) of the Act

� For computing Capital gains there should besale consideration and cost of acquisition alongsale consideration and cost of acquisition alongwith the cost of improvement thereto.

� Gain on transfer of capital asset whose cost isnot ascertainable, no capital gain chargeable totax under section 45 of the Act- CIT v.B.C.Srinvasa shetty [1981] 128 ITR 294 (SC)


� If the assessee has not incurred any cost ofacquisition on a capital asset, such capitalasset does not fall in the category of the capitalasset does not fall in the category of the capitalasset specified under section 55(2) of the Act.Therefore, it is covered by the Judgment of theSupreme Court in case of B.C.Srinvasa shetty(Supra) - M/s New Shailaja CHS Limited[supra].


� The rights are acquired by virtue of beingowner of the plot in the specified area, but thisdoes not mean that the cost incurred on theplot is the cost of acquiring development right-Jethalal D.Mehta v. Dy. CIT [(2005) 2 SOT 422Jethalal D.Mehta v. Dy. CIT [(2005) 2 SOT 422(Mumbai)].

� Accordingly, transfer of TDR to Builder fordevelopment of property does not attractCapital Gain Tax. CIT v. B.C.Srinvasa shetty[supra].


� Cost of the land and building of the existingstructure could not be attributable to theadditional FSI received by means of theDevelopment Control Regulations,1991.-[M/sNew Shailaja CHS Limited [ITANo.512/Mum/2007].No.512/Mum/2007].

� There is difference in the situation when cost ofacquisition is Rs. NiL and where the cost ofacquisition cannot be ascertained or no costhas been incurred.-[M/s New Shailaja CHSLimited[supra]

Cracking Nuts under different Scinario

� Scenario-2 Where Society transfersentitlement (development right) to theDeveloper for development and doesnot receive any monetarynot receive any monetaryconsideration. However, builder agreesto carry out repairs to the building. Issuch transfer liable to tax?


The assignment of the TDR to the developerand in turn the additional floor to beconstructed and also repair / renovation ofbuilding to be carried out, does not entailaccruing of any income in the hands of theassessee society. Accordingly, it does notaccruing of any income in the hands of theassessee society. Accordingly, it does notattract tax liability- ITO vs. M/s Lotia Court Co-op. Housing Society Ltd.,[ITA No. 5096/M/05]

Cracking Nuts under different Scinario

� Scenario-3 Whether compensationreceived by the society or by membersfor allowing the developer( rightfulowner of TDR/FSI ) to develop orowner of TDR/FSI ) to develop orconstruct the property is liable to betaxed in the hands of the society ormembers?

Taxability in Scenario-3:

� Transferable Development Rights were owned orpossessed by the builder in terms of theregulations, it was permissible for the builder toutilise the said transferable right in or with respectto the prescribed area including the land. OmShanti Cooperative Society [ITA. No. 2550Shanti Cooperative Society [ITA. No. 2550/Mum/2008]

� No Capital gain tax on permitting construction ofadditional floors, whether or not any right isavailable with the society or its members, as it doesnot involve any cost of acquisition in the light ofdecision of the Supreme Court in the case of CITvs. B.C.Srinivasa Shetty (Supra)- Om ShantiCooperative Society [supra]


� Compensation paid to the Members of the society,not holding any capital asset , will not attractcapital gain tax under section 45 of the Act-Deepak S.Shah v. ITO [(2009) 29 SOT 26(Mumbai)].(Mumbai)].


Scenario 4 – in case of demolition of oldbuilding structure (i.e. flat ownersociety), who is liable to receiveconsideration (whether member orconsideration (whether member orsociety) on transfer of TDR to builderand tax liability?

TAXABILITY UNDER SCENARIO-4

� Under the given circumstance the legalownership lies with the individual member andtherefore individual members are entitled toreceive consideration and claim exemptionunder section 5(1)(iv) of the Wealth Tax.under section 5(1)(iv) of the Wealth Tax.

� Further, as far as taxability is concerned inrespect of consideration received by themembers, the case is covered by the Mumbaitribunal decision in case of Deepak S. Shah vs.ITO [2009] 29 SOT 26 (Mumbai).


Scenario 5 Where under an agreement themembers transfer the entiredevelopment potential consisting oforiginal F.S.I. as well as TDR FSI to thedeveloper with a stipulation that thedeveloper with a stipulation that thedeveloper will demolish the existingstructure and in exchange of thoserights provide to the existing membersnew flats at his own cost. What is taximplication?


� The said transaction is a transfer of entire property.Further, it may become a case of transfer byexchange in which the members exchange theirexisting flats for the new flats. The gain arising,therefore, may qualify for exemption under section54 of the Income tax Act. If, however, Assessing54 of the Income tax Act. If, however, AssessingOfficer holds a view that it is the transfer of TDRrights and not residential house, then applicability ofSection 54 will be ruled out and the only availableprovision will be Section 54F or Section 54EC ofIncome-tax Act.


Scenario-6 Where under an agreement themembers retain the FSI required to beconsumed for construction of their flats andtransfer only the surplus TDR FSI to thedeveloper. The agreement will also providethat the developer will construct flats for thedeveloper. The agreement will also providethat the developer will construct flats for theowners as their contractor by utilizing the FSI+ TDR retained by members in consideration ofdeveloper acquiring surplus TDR FSI. What isthe tax Implication on such transaction ?


� In such a case, there being no transfer involvedwith reference to the construction on retainedportion, no capital gain arises on the FSI retainedincluding the residential flats.

The gain arises only from that part of the TDR FSI� The gain arises only from that part of the TDR FSIwhich is transferred to the developer. Thetransferred property not being the residentialhouse, will not qualify for exemption under Section54. The only applicable exemption provisions will beSection 54F or 54EC of the Income-tax Act.

Scenario-7 What will be the position inScenario 5 & 6 (Supra) if the landbelongs to the society and the buildingis also constructed by it ?is also constructed by it ?


� There is no transfer by the members and hencethere will be no capital gain tax liability formembers. In such a case capital gain arises to thesociety only. The society is eligible for exemptionunder section 54EC and not Section 54 / Sectionunder section 54EC and not Section 54 / Section54F of Income Tax.


� Scenario 8: Where a Flat Owners society distributesthe unutilized FSI among the existing members inproportion to the area occupied by them and givesthem the right to develop their share with orwithout the assistance of a builder, Whether societywithout the assistance of a builder, Whether societyis liable to tax on such distribution ?, Whethercompensation received will be taxable in the handsof the members?, will it be treated as dividend inthe hands of the members?


� Such distribution will not amount to transfer.

� when the members transfer their rights to abuilder, it may result in short term or longterm capital gain. The members may takeadvantage of Sec. 54-F or 54-EC. (Benefit ofterm capital gain. The members may takeadvantage of Sec. 54-F or 54-EC. (Benefit ofSec.54 may be doubtful as transfer of TDRmay not be treated as a transfer ofresidential house).

� As the TDR rights already belonged to themember, though collectively, it should not betaken as distribution of dividend.


� A different view is, however, possible in case of plotpurchased type society. Allocation of FSI tomembers may not be taken as distribution of assetheld collectively.


� Scenario-9 Where a plot purchased type societyenters into a development agreement with a buildergiving him the right to demolish and reconstruct thebuilding by utilising the existing FSI and loading TDRso as to compensate the members with additionalspace (Say 20%)and pay to the society an agreedspace (Say 20%)and pay to the society an agreedamount. Whether there will be tax implications for theSociety or for the individual members who will getadditional space. If yes, how will the gain bedetermined? Whether in such a case, it is permissibleto avail of the benefits of Section 54 of I. T. Act. ?


� Grant of right to load TDR FSI will accrue to thesociety and not to the individual members and it isthe society which will be subjected to tax on capitalgains. ITO vs. Bhagwandas J. Lakhiani [ITA

No.7054/MUM/2005 dated 30-3-2005].No.7054/MUM/2005 dated 30-3-2005].

� the cost incurred by the developer onreconstruction of existing area with additional 20%including the cost of acquisition of TDR space willbe the consideration and gain is to be computed bydeducting from it the indexed cost of acquisition ofthe capital asset.


� Scenario-10 Where temporary accommodation isprovided by the builder orinconvenience/disturbance compensation is paid forfinding an alternate accommodation, during periodof construction of new building, will suchcompensation be deemed to be part of thecompensation be deemed to be part of theconsideration received by the society and takeninto account in working out the taxable gains? Canit be offered to tax by the members? Or, no taxliability arises in respect of such income?


� Accommodation or compensation given to themember is not in the nature of income in the handsof the members.

� In a case decided by ITAT, Mumbai in Lohtse Co-operative Housing Society Vs. 7th I.T.O. 051 ITDoperative Housing Society Vs. 7th I.T.O. 051 ITD0608, it was held that use of TDR injuriously affectsthe rights of existing occupants and, therefore,what is received is compensation for the injurycaused.

� Hence there is no tax liability.

Thank You

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