The income-tax appellate tribunal in Mumbai recently ruled that no tax is payable on a development agreement between a society and a builder as no income arises from the deal.
Housing societies going into redevelopment need not fret over a huge income tax liability. The income-tax appellate tribunal in Mumbai recently ruled that no tax is payable on a development agreement between a society and a builder as no income arises from the deal.
The ruling, on an appeal by Shailaja Co-operative Housing Society, will have huge implications for such societies in Mumbai, according to Tarun Ghia, counsel for the society.
“Over 30,000 buildings across the western suburbs are poised to go in for redevelopment over the next few years,” Ghia, a chartered accountant who writes a weekly column in DNA, said. “The tax liability would have run into crores in each case.”
Shailaja Society at Ghatkopar (East) had entered into an agreement with DK Builders in January 2003 to redevelop its plot. The society had 19 flats in four storeys and a total of 11,000 square feet. Under the Development Control Regulations, it was entitled to use transfer of development rights (TDR) and put up additional floors.
Using the available floor space index (FSI), the builder was to construct three more floors with 11,000 square feet, including around 1,000 square feet for covering open terraces.
The builder paid the society Rs48.96 lakh for additional FSI and was to earn from the sale of additional construction using it.
The society’s woes started there. Stamp duty valuation on the agreement came to Rs1,47,24,500, based on which the assessing officer made a demand for Rs1,01,54,195 from the society, including tax liability of Rs54,64,055, interest and penalty.
An appeal to the income-tax commissioner confirmed the demand and the society was directed to pay in instalments of Rs2 lakh a month.
The society moved the tribunal and brought the matter to the notice of the Central Board of Direct Taxes. The CBDT brought the instalments down to Rs15,000 a month.
The society again moved the tribunal, which ruled that no income arose out of the development agreement and so no tax was payable.
The land and building continued to remain with the society even after the society sold to the builder development rights arising to it afterwards and without cost, and applying the ratio laid down by the Supreme Court. No capital gains arose on sale thereof, the tribunal said.
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