Please note, sections mentioned in this article are from 'The Income Tax Act, 1961' and the term 'TDR' used in this article includes term 'FSI'.
Since the last decade, we are seeing that many housing societies in Mumbai are going through redevelopment of their dilapidated building by transferring or selling their TDR in favour of the builder or developer. In turn, the residents of the societies get new flat with or without additional area and compensation for allowing demolition of their house and staying elsewhere, most of the time it is rented place and also they get one time lump sum compensation.
The question arises about the taxability of all these two receipts.
Taxability of TDR in the hands of society
Taxability of Compensation in the hand of the flat owner (Not discussed in this article)
Taxability of TDR in the hands of housing society:
The taxability of any long-term capital asset is provided in section 45. The relevant legal terminologies used in section 45 are, ‘Profit and Gain’, ‘Transfer’, ‘Capital Asset’. In a transaction of transfer or sale of TDR, there has to be profit and gain. Once this is established, the next step is to find out whether there is transfer or not. One may refer to section 2(47) and conclude that, yes, there is a ‘transfer’ involved in this transaction. Then one needs to verify, whether there is any ‘capital asset’ as defined in section 2(14). The answer is yes, there arises a capital asset in this transaction.
Since the above terms are established, let us now verify taxability position.
The treatment of taxability of capital gain runs from Section 45 to section 55A. Since the above terms do exist in this transaction, section 45 is attracted. Therefore, there is an element of capital gain in this transaction.
One may now refer to section 48, that is, 'Mode of computation'. As per section 48(ii) the 'cost of acquisition' needs to be deducted from the sale consideration or from fair market value, whichever is higher. In the transaction of sale/transfer of a TDR, there may or may not be 'sale consideration' but there surely is a 'fair market value' associated with it.
So far we have established that there is profit/gain, transfer, capital asset and fair market value to this transaction. Now let us study about the term ‘cost of acquisition’.
The term ‘Cost of acquisition’ is defined in section 48(2). For taxing every capital gain there has to be cost of acquisition. In the case of the housing societies there is no cost of acquisition, since the TDR is self-generated asset and not an acquired asset by the society.
Section 55(2)(a) separately determines cost of acquisition for the nature of income which are taxable even when there is no cost of acquisition but its cost of acquisition to be taken as ‘Nil’ for computing capital gain. The term TDR is not mentioned in the said section and hence it cannot be presumed that the cost of acquisition to TDR is ‘Nil’. In terms of income tax ‘no’ cost of acquisition and ‘nil’ cost of acquisition have different meaning.
The TDR of the society has no cost of acquisition and hence though there is a fair market value associated with it, it is not possible to calculate capital gain since there is ‘no’ cost of acquisition and therefore it can be conclude that no capital gain tax is attracted to the society on transfer of TDR in favour of a builder or developer.
Referred Decisions:
- Hon'ble SC in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294
- CIT Vs Sambhaji Nagar CHS Ltd. [2015] 370 ITR 325 (Bom HC)
- Land Breez CHS Ltd. V. ITO [2013] 21 ITR 467 (ITAT-Mum)
ACIT v. I G E India Ltd. [2013] 22 ITR 365 (ITAT-Mum)
- Maheshwar Prakash 2 CHS. V. ITO [2009] 313 ITR (Appellate Tribunal 103 (Mum)
- New Shailaja CHS Ltd. Vs ITO [2009] 18 DTR 385 (ITAT-Mum)
- ITO Vs Lotia Court CHS Ltd. [2008] 12 DTR 396 (ITR-Mum)
- Relevant Sections: 2(14), 2(47), 45, 48, 55, 55A
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Author : Manish J. Sheth
Published : 31-10-2022
Disclaimer
This blog is meant purely for educational/research and discussion only to give a general understanding. Any subsequent amendments or changes to the law may change the tax implications. It is not legal advice and should not be treated as such. You may not rely on the information on this blog as an alternative to legal advice from your attorney or other professional service provider. Any use, reference to, distribution or reliance on the content of this blog may be done by reader at their own risk and the author is not responsible for any loss or damage incurred to the reader.