MALAD CHAMBER OF TAX CONSULTANTS

FULL DAY SEMINAR ON REDEVELOPMENTS ON 13 02 2011

TOPIC : REDEVELOPMENT OF IMMOVABLE PROPERTIES : INCOME

TAX AND RELATED ISSUES
By CA. Tarun Ghia and Advocate Pradnya Vairale
ghiatarun@rediffmail.com,
tarunghiadirtaxes-subscribe@yahoogroups.co.in,
advpradnyag@gmail.com
9821345687

Individual agreements with the builder would be quite beneficial from the
legal as well as from tax point of view. It will better protect the rights of the
individual flat owners.

Many a times first Memorandum of Understanding is entered into and

thereafter Development Agreement is executed. However, if the MOU
unconditionally transfers rights in favour of the developer, can attract tax
implications based on terms contained therein.

One should be aware that recently Hon’ble Mumbai Tribunal has taken a
view that a development agreement attracts provisions of Section 50C.
However, the view should not be applicable to society redevelopments as
there is transfer of development rights only and there is no transfer of land
or building in such redevelopment.

Specific income tax implications would be based on the facts of the case
and on the manner in which the transaction is structured and the
documents drafted. In general one can take a view that transfer of
development rights through TDR route should not attract income tax in
respect of the compensation and consideration receivable from the
developer. Compensation is not income and when the consideration is
received for sale of an asset having no cost of acquisition, tax would not
arise. The facts of the case and applicable legal provisions should be
brought out very clearly in the development agreement so that the tax
liability is zero can be proved to the satisfaction of the authorities.

It is also possible for the Society and its members to self redevelop the
property by taking advantage of the surplus FSI and using TDR.
Transactions of sales of flats by the society to the members would be
covered by concept of mutuality. Members can keep the flats for
themselves or sell the flat at prevailing price. Banks and financial
institutions should be be quite comfortable and wiling to lend money to the
society undertaking self redevelopment as spending is required for
construction only by purchase of TDR. Redevelopment of its property
when undertaken by society itself or members themselves, whether from
society funds, whether from specific contributions by members, whether
from borrowed funds by the society or its members, or any combinations
thereof would not give rise to any taxable income under the Income Tax
Act, 1961. Cases of self-redevelopment by the society or its members
would be covered by the concept of mutuality which in a nutshell means
that one cannot trade with one’s ownself and therefore there is no taxable
income earned in the process. Raising of funds from outside is not a
transaction in between the members or between the society and its
members but it is not a transaction in which society or its members are
earning income. On the contrary it is a transaction which would give rise to
expenditure, deductibility whereof would depend upon whether the same is
incurred to earn taxable income or not. Even in such self developments,
issues would have to be sorted out with reference to service tax, VAT and
stamp duty applicable on the entry of work contracts. TDS requirements
would have to be complied.
The individual members may sell off such additional flats for which they
would be liable to tax in the usual manner. In a suitable case, the society
may decide to lease the flats that would arise out of additional construction
for rent and huge amounts may be collected as deposit refundable at the
time of transfer of tenancy. At the time of transfer of tenancy, similar
amount may be collected from the new tenants, once again as the
deposits. Such refundable deposits would be always out of the tax net.

The income tax department has been sending notices to housing societies,
which are in the process of redevelopment taxing the transactions either as
as business income on the reasoning that it is an adventure in the nature
of trade or business or as capital gains.

Before you appoint any builder for redevelopment you should have done
your homework in respect of the important terms and conditions of the
redevelopment and nothing should be left to chance. The terms and
conditions of redevelopment ultimately culminate into a redevelopment
agreement. Drafting of the redevelopment agreement should be by a
consultant appointed by the society.

It is imperative that all relevant points are not only considered but the
terms are decided in a manner that the safety aspect gets priority and the
society or its members are not subjected to the vagaries of construction
and property laws. More than the price you are getting, an important
aspect is the manner in which terms of the redevelopment agreement are
drafted and how and when you are getting the price.

The agreement should be drafted in a manner that it is legally enforceable

as well as practically tenable as in the slow-moving Indian judicial system,
one may not afford to approach the judiciary for getting the terms of the
agreement implemented. Therefore, the terms should be so drafted that a
wrong-doer suffers more and self-interest would prevail upon him to
sincerely implement the terms of agreement. Any delay after vacating the
premises, unless it is due to an action or inaction on the part of the society,
is attributable to the builder and therefore consideration should be
receivable unconditionally and not when the construction gets completed
as in that case it would be a reward for delay.

It should be remembered that many projects start well and thereafter may
go into difficulties and after vacating the premises the society and its
members may be subjected to endless wait to get the reconstructed
premises occupied.

One should be vigilant about the purchase and use of TDR. The
documents of purchase of TDR in whomsoever name should be properly
checked. Issues with regard to car parking spaces should be brought out in
clear terms in the agreement taking cognizance of the bye laws of the
society.

If the society appoints a developer for reconstruction and pays the charges
for the same to the developer, there cannot be any income to the society.
Then, the society may allot additionally constructed flats etc to its members
even for a market price or subscribed price or free of cost.

Amount paid by the developer to the members to meet the

damages/inconveniences would not be liable to tax under the Income-Tax
Act as the receipt for such personal inconveniences/damages would be a
capital receipt in the hands of the members.

In a redevelopment project, it is better that while conceiving and structuring

the scheme and while documenting the transaction, ownership rights of the
members are recognised although the property stands in the name of the
society. This will give better locus standi to members of their proportionate
rights in the redevelopment project. This will also go better with income-tax
and other taxes implications as presently although in many cases of
redevelopments, taxability of such projects has been decided in favour of
the society, but since all these matters are reaching to high courts, in a
possible situation if such transactions are considered taxable by the high
court, there will be substantial scope for exemptions if the income is taxed
in the hands of individual members rather than in the hands of a society.

Provisions of tax deduction at source under the Income-Tax Act, would not
apply either to redevelopment compensation or to rental compensation.

Provisions of Section 50C of the Income-Tax Act are attracted on transfer

of immovable properties in the nature of land or building or both held as
capital assets and consideration stated in the instrument of transfer is less
than the valuation adopted assessed or assemble by stamp duty
authorities and the said section in this context in a nutshell provides that in
such a case, stamp valuation would be treated as gross consideration for
such transfer and accordingly capital gains would be computed on higher
side. In a typical society redevelopment, provisions of Section 50C will not
apply for the reason that in such a redevelopment, only development rights
are transferred there is no transfer of land building. In the recent Bombay
High Court decision, petitioner had challenged the validity of provisions of
Section wherein he failed but applicability of Section 50C to society
redevelopment was not decided by the Hon’ble high court.

Unstamped flat agreement is no bar for redevelopment benefits.

Conveyance of the land or building does not stop because of non stamping
of some of the flat documents. Suburbs of Mumbai consist of equal
number of old buildings and in lacs of such properties conveyance has not
been executed. Without conveyance such properties cannot go for
redevelopment unless the landlords co-operate in redevelopment. In many
cases, the willing developer enters into a MOU with the societies without
conveyance under which the willing developer takes over responsibility to
obtain conveyance. Conveyance is obtained and redevelopment
agreement would be entered into. Tax implications in such cases would be
different because the ownership rights have been obtained recently and
therefore land is not a long term asset. One will have to be pragmatic in
documentation of such transactions so that the tax implications are not
adverse. Although the deemed conveyance rules have been quite diluted
than originally drafted, the rules have certainly opened expeditious
gateway for lacks of society buildings to go in for redevelopment.

Provisions of deemed conveyance have recently become operative, but

the law and procedure are yet to be fully understood.

Maharashtra Ownership Flats (Regulation of the promotion of construction,

sale, management and transfer Act,1963 (in this article referred to as the
Act ) popularly known as MOFA regulating promotion of construction, sale,
management and transfer of flats in the State of Maharashtra did have
onerous provisions inter alia for formation of a housing entity and
execution of conveyance in a time bound frame.

However, the Act did not have required teeth. Provisions of deemed
conveyance have recently become operative. However, law and the
procedure are yet to be digested. Here is an attempt to address some of
the issues involved.

First of all the provisions of deemed conveyance can be activated only

when the promoter (including builder/developer ) has failed to execute
conveyance within the prescribed time period. MOFA continues to provide
that only when no time period for conveyance has been agreed upon
between the flat purchasers and the promoter then the prescribed time
period of four months from the date of formation of the housing entity i.e. a
co-operative society, an association of apartment owners or a limited
company. In all likelihood, the promoter will mention a longer time period
for conveyance in new agreements thereby making the deemed
conveyance provisions inoperative during such agreed time period.

Buyers have little or no choice but to sign the flat purchase agreements
with the promoters on dotted the lines.

Although, the law continues to provide an option to form a society, an

association or a company and duty has been cast upon promoter to form
such housing entity within four months from the date of sale of minimum
60% of the flats, amended provisions provide expeditious process for
formation only society type of entity. Formation of a company would not
require a promoters involvement. Vaguely worded amended provisions
providing that if a promoter fails to form a society within prescribed time
period, then the Competent Authority may, upon receiving an application
from the persons who have taken flats from the promoter, direct the
concerned co-operative registrar to register a society, cannot mean that
the amended provisions require that all the flat purchasers must apply for
registration of society as only 60% or above would suffice. This is because
the Circular requiring that minimum 60% of flat purchasers can file
application for registration of society continues to be operative. Amended
provisions are only for facilitating expeditious registration of a society on
default by promoter. If a view is taken that all the flat purchasers would
have to apply for registration of a society then the very provisions enabling
expeditious registration of a society would get defeated as there may be a
flat purchaser being a relative of the promoter or a flat purchaser interested
in acting for the benefit of the developer for some reasons who may
decline to join in formation of the society.
In the matter of registration of society, Court has, even in the pre-amended
provisions, taken a logical and upright view that a builder/developer has no
locus standi to oppose such registration as his rights to sell his flats do not
in any manner get prejudiced by society registration.
The most important issue arises with regard to requirement of stamping
and registration of individual flat agreements. Amended provisions require
that application for deemed conveyance will be accompanied by the true
copies of the registered agreements for sale, executed with the promoter
by each individual member of the housing entity.
Such wordings have led to a view that the purchase agreements in respect
of all the flats have to be stamped and registered. Such a view appears to
be incorrect for reasons including that provisions enabling formation of a
society under an application by only 60% of the flats continue; amended
provisions are beneficial intending for expeditious formation of society;
wordings of the amended provisions refer to the members and not to flat
purchasers.
What will happen in a case when all the agreements including, chain of
agreements in cases of resales of flats, are either not fully stamped or not
registered Pre-amended provisions enabled societies to get conveyance
without reference to stamp duty payment and registration aspects of the
individual flat purchase agreements. Even if some of the flat purchase
documents are not stamped, the government does not lose revenue,
because government in any case collects stamp duty on present market
value of the entire property minus stamp duty paid on flat purchase
agreements with the promoter. Further, the government can always
enforce payment of stamp duty on unstamped or deficiently stamped
documents. The society can recover the loss due to defective documents
of members billing the members. If non-payment of stamp duty by a few
flat purchasers results into non conveyance, it would mean an advantage
to delinquent promoter.
Once a housing entity has been legally formed, conveyance should be an
automatic process as otherwise requirement of stamp duty and registration
by all the flat purchasers would tantamount loop holes against the spirit of
the amended beneficial provisions.
Under the pre-amended provisions we have court decisions directing
promoters to convey property in favour of a housing entity without going
into details, and very rightly and logically so, as to whether stamp duty and
registration requirements were complied with in respect of all flat
transactions or not. Under the law, if some flat agreements with promoter
are unstamped or unregistered, the promoter is more responsible if he has
collected more than 20% of the price of the flat.
A view is being propagated that for obtaining deemed conveyance
certificate, documents like building plans, commencement certificate,
occupation certificate, completion certificate, property cards, would be
required to be furnished by the society. Such a view seems grossly
misplaced as such requirements would be directly in contradiction to letter
and spirit of amended provisions relating to deemed conveyance which
even otherwise have not specified such requirements. Providing such
documents are the duty and obligations of the promoter unless he has
given the same to the housing entity. It seems, such additional
requirements are propagated so that non availability of such documents
can lead to unreasonable demands.

Competent Authority would only issue a certificate to Registration Authority

that it is a fit case for granting unilateral deemed conveyance in favour of
the housing entity.

Thereafter, the Registration Authority would serve summons to promoter to

show cause as to why unilateral instrument of conveyance should not be
registered as deemed conveyance. Apprehensions are being expressed as
to what kind of hearing will once again take place. It is submitted that the
Registration Authority cannot in any case review the decision already
taken by the Competent Authority that it is a fit case to grant unilateral
deemed conveyance. Powers of Registering Authority will have to be
confined to as provided in the Registration Act,1908 in respect of
verification of documents and identity of persons appearing before it. No
time limit has been specified within which Registration Authority would
have to act but in the absence of substantial powers and duties on its part,
unreasonable delay may not be possible.