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Housing Society as a 'Promoter' in a Redevelopment Project
16-May-2023 (In Property Law)
Dear Sir,
Ours is a registered Cooperative Society.We are the land owners.Our Society has appointed a Developer to re-develop our Society.The Developer will give the present flat owners a new flat with additional area & the balance flats will be sold by him.They have opined that we the Society are a "Promoter" as per the definition in Maha RERA.
The DA was signed in 2012.The gist of DA is as under,
1.The Society is the Owner of the piece of land.All the tenement are the Purchasers who have formed & registered Cooperative Housing Society.
2.The Society is entitled to develop & redevelop as they deem fit.
3.The redevelopment was awarded as per the tender.
4.Necessary permissions were received from the Registrars,BM etc.
5.The developer will be entitled usage of existing FSI + additional FSI as .
Is the statement correct that we are promoters or Co prometers.?In view of above please advise whether any Financial liability.
In an arrangement where the society is of the nature of Flat Owners Society, the capital gains accrue to the individual members, who are the beneficial owners of the land and building 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 terms and conditions and 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 objective can also be achieved by drafting an agreement in a different manner under which the members retain the FS1 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 retained by members in consideration of developer utilising 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 FSI 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.
Furthermore, in a typical redevelopment arrangement of a Flat Owners Society, some corpus fund or a lump sum amount is received by the members from the developer. This corpus fund or a lump sum amount, received directly, by the members from the developer becomes the absolute property of such member with complete right of disposition over such property. This property is received under the agreement for grant of development rights and therefore will form part of the consideration received for transfer of such rights.
In addition to above, the existing members are also provided alternative accommodation during the period of construction. Sometimes they are paid monetary reimbursement for the alternate accommodation hired by them. The said payment may be considered as compensation to individual members for the inconvenience caused to them during the construction period. The issue was considered by the Mumbai Tribunal in the case of Lohtse CHS Ltd. (51 lTD 608) wherein it had held that the amount received by way of compensation for personal inconveniences / damages would not be income but a capital receipt in the hands of members. Such amount may therefore, not be liable to tax in the hands of individual members. It will not be out of place to apply the spirit of the decision of the Supreme Court in Ms. Dhun Dadabhoy Kapadia Vs. CIT (63 ITR 651) wherein the Supreme Court considered the adverse impact of right issue of shares on the existing shareholders, the value of shares of whom diminishes with the increase in the share capital. It therefore, held that profit derived by the existing shareholders from sale of rights cannot be wholly brought to tax. Applying the same logic it can be said that apart from the inconvenience during the period of construction, the existing members face reduction in facilities enjoyed as a result of induction of more members and suffer financial loss by way of increased liability towards property tax etc. What is paid to them is thus a compensation and not a consideration. The decision of Kerala High Court in CIT Vs. Smt. M. Subaida Beevi 160 ITR 557 is also relevant.
Nevertheless, the department on the other hand may contest that the monetary reimbursement to the members for the alternate accommodation is a benefit that flows from the agreement for development and therefore apparently be construed as a part of the consideration and may be taxed as the capital gains.
5.Income Tax implications on members
of Plot purchased type society
As discussed above, in the case of Plot purchased type society, the land as well as the premises belong to the society and the individual members have mere right of occupancy. The development rights in the case of Plot purchased type society belongs to the society and gain, if any, arising from transfer of such development rights accrues to the society and not to the individual members.
Thus in the case of Plot purchased type society, where the legal title vests with the society, the cost incurred by the developer in reconstruction of existing area and cost of additional space together with monetary consideration received by the society from the developer will form part of the consideration received by the society for transfer of additional FSI. There is no transfer by the members and hence there will be no capital gain tax liability for members. In such a case capital gain arises to the society only. The society is eligible for exemption under section 54EC and not Section 54 and Section 54F of Income Tax Act.
Even in case of a Plot purchased type society, benefits do accrue to the individual member in an arrangement of redevelopment of such type of societies in various ways, some of which are as under :
(a)As per the terms of the agreement, the monetary consideration is payable to the members instead of the society.
(b)Members get additional constructed space by way of additional room(s) or in any other manner.
(c)Society having received the monetary consideration distributes the same, fully or partly, amongst the members of the Society.
(d)Society distributes the right to use TDR FSI amongst the members in proportion to the area occupied by them. Three years thereafter, the members join together to grant development rights to a common developer and receive consideration.
(e)Society lets out the additional space acquired as a result of redevelopment and the income from letting is used to pay the municipal tax and other liabilities otherwise borne by the members.
As explained earlier, the gains arising from development arrangement of a Plot purchased type society, is taxable in the hands of the society irrespective of the fact who initially or eventually receive the benefits. In case the consideration is received by way of additional space provided to the members as a result of utilization of unused FSI or right to load TDR FSI, the additional space is the Society’s property. In case, it is made available to individual members, it tantamounts to allotment of Society’s premises to individual members for occupation which is not a transfer within the provisions of law. The Society having paid tax on the value of additional construction treating it as part of consideration, there is no tax liability when the additional space is allotted to the members.
The issue, however, arises as to whether in situations where the consideration is received directly by the members from the developers or after receipt thereof by the Society, it is passed on to the members, the amount received can be taken to be the distribution of income / dividend by the society which under the Maharashtra Co-operative Society’s Act is restricted to 15% of the income. It is pertinent to note that Section 2(11) of the Maharashtra Co-operative Societies Act 1960 defines dividend as the proportionate amount paid out of profits of a Society to its members. It is a moot point as to whether the gain arising from transfer of a capital asset of the Society viz. development rights is profit for the purpose of dividend. The very fact that such gain is considered as income for the purpose of income tax may not necessarily, be taken as a profit for all purposes. If the term ‘profit’ is taken in the generally accepted sense, it is indicative of recurring nature of income with some sort of regularity or expected regularity from definite sources. A receipt of capital nature by way of realization of a capital asset viz. Development Rights in the generally accepted sense, does not amount to profit and in the absence of any clear provision for determination of profit of a society a view can be taken that gain from transfer of development rights is not profit within the meaning of Section 2(11) of the Maharashtra Co-operative Societies Act, 1960.
The view, however, is not free from doubt. A different stand may be taken by the department which may result in taxation of dividend from the Society in the hands of the individual members and as capital gains in the hands of the Society. A cautious approach, therefore, needs to be taken in such cases.
It can also be claimed that the amount paid to the members is by way of compensation to them for the inconvenience caused to them for sharing the amenities with more persons, for having more constructed area on the same piece of land and for higher financial liabilities by way of higher property taxes, etc. How far such an argument will be acceptable will always be a matter of uncertainty and will depend on the peculiar facts and circumstances of the case.
Many a times to avoid huge tax liability, such Plot purchased type society may resort to the practice of allocating the benefit of right to load TDR FSI available to it amongst the members who may join together to grant development rights to the developer. In such a case the income accrues to the members and they should be subjected to tax. However, it may be noted that Section 64 of the Maharashtra Cooperative Societies Act bars the Society from paying any part of the funds or the net profit of the society by way of bonus or dividend or otherwise distributing it among its members. The term ‘Fund’ has been defined to mean the stock or accumulation of money or other form of wealth available with the Society. Development rights available to the Society being a form of wealth forms part of the stock and validity of such distribution may be questionable. Nevertheless, from taxation angle the following issues arise in such an arrangement :
(a)Whether distribution of development rights by way of right to load TDR FSI amounts to transfer from the society to the members ?
(b)What will be the cost of acquisition of such development rights to the members ?
(c)What is the period of holding of the TDR FSI ?
The argument that can be advanced is that what the society holds is collective ownership of the assets of the members and therefore when the asset in the form or right to load TDR FSI is distributed, it is merely conversion of collective ownership into individual ownership and no transfer is involved. However, as mentioned before the development rights in a Plot purchased type society belongs to the society. The relationship between society and its members is that of licensor and licensee only. Members are therefore distinct from the society.
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 FSI 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.
Furthermore, in a typical redevelopment arrangement of a Flat Owners Society, some corpus fund or a lump sum amount is received by the members from the developer. This corpus fund or a lump sum amount, received directly, by the members from the developer becomes the absolute property of such member with complete right of disposition over such property. This property is received under the agreement for grant of development rights and therefore will form part of the consideration received for transfer of such rights.
In addition to above, the existing members are also provided alternative accommodation during the period of construction. Sometimes they are paid monetary reimbursement for the alternate accommodation hired by them. The said payment may be considered as compensation to individual members for the inconvenience caused to them during the construction period. The issue was considered by the Mumbai Tribunal in the case of Lohtse CHS Ltd. (51 lTD 608) wherein it had held that the amount received by way of compensation for personal inconveniences / damages would not be income but a capital receipt in the hands of members. Such amount may therefore, not be liable to tax in the hands of individual members. It will not be out of place to apply the spirit of the decision of the Supreme Court in Ms. Dhun Dadabhoy Kapadia Vs. CIT (63 ITR 651) wherein the Supreme Court considered the adverse impact of right issue of shares on the existing shareholders, the value of shares of whom diminishes with the increase in the share capital. It therefore, held that profit derived by the existing shareholders from sale of rights cannot be wholly brought to tax. Applying the same logic it can be said that apart from the inconvenience during the period of construction, the existing members face reduction in facilities enjoyed as a result of induction of more members and suffer financial loss by way of increased liability towards property tax etc. What is paid to them is thus a compensation and not a consideration. The decision of Kerala High Court in CIT Vs. Smt. M. Subaida Beevi 160 ITR 557 is also relevant.
Nevertheless, the department on the other hand may contest that the monetary reimbursement to the members for the alternate accommodation is a benefit that flows from the agreement for development and therefore apparently be construed as a part of the consideration and may be taxed as the capital gains.
5.Income Tax implications on members
of Plot purchased type society
As discussed above, in the case of Plot purchased type society, the land as well as the premises belong to the society and the individual members have mere right of occupancy. The development rights in the case of Plot purchased type society belongs to the society and gain, if any, arising from transfer of such development rights accrues to the society and not to the individual members.
Thus in the case of Plot purchased type society, where the legal title vests with the society, the cost incurred by the developer in reconstruction of existing area and cost of additional space together with monetary consideration received by the society from the developer will form part of the consideration received by the society for transfer of additional FSI. There is no transfer by the members and hence there will be no capital gain tax liability for members. In such a case capital gain arises to the society only. The society is eligible for exemption under section 54EC and not Section 54 and Section 54F of Income Tax Act.
Even in case of a Plot purchased type society, benefits do accrue to the individual member in an arrangement of redevelopment of such type of societies in various ways, some of which are as under :
(a)As per the terms of the agreement, the monetary consideration is payable to the members instead of the society.
(b)Members get additional constructed space by way of additional room(s) or in any other manner.
(c)Society having received the monetary consideration distributes the same, fully or partly, amongst the members of the Society.
(d)Society distributes the right to use TDR FSI amongst the members in proportion to the area occupied by them. Three years thereafter, the members join together to grant development rights to a common developer and receive consideration.
(e)Society lets out the additional space acquired as a result of redevelopment and the income from letting is used to pay the municipal tax and other liabilities otherwise borne by the members.
As explained earlier, the gains arising from development arrangement of a Plot purchased type society, is taxable in the hands of the society irrespective of the fact who initially or eventually receive the benefits. In case the consideration is received by way of additional space provided to the members as a result of utilization of unused FSI or right to load TDR FSI, the additional space is the Society’s property. In case, it is made available to individual members, it tantamounts to allotment of Society’s premises to individual members for occupation which is not a transfer within the provisions of law. The Society having paid tax on the value of additional construction treating it as part of consideration, there is no tax liability when the additional space is allotted to the members.
The issue, however, arises as to whether in situations where the consideration is received directly by the members from the developers or after receipt thereof by the Society, it is passed on to the members, the amount received can be taken to be the distribution of income / dividend by the society which under the Maharashtra Co-operative Society’s Act is restricted to 15% of the income. It is pertinent to note that Section 2(11) of the Maharashtra Co-operative Societies Act 1960 defines dividend as the proportionate amount paid out of profits of a Society to its members. It is a moot point as to whether the gain arising from transfer of a capital asset of the Society viz. development rights is profit for the purpose of dividend. The very fact that such gain is considered as income for the purpose of income tax may not necessarily, be taken as a profit for all purposes. If the term ‘profit’ is taken in the generally accepted sense, it is indicative of recurring nature of income with some sort of regularity or expected regularity from definite sources. A receipt of capital nature by way of realization of a capital asset viz. Development Rights in the generally accepted sense, does not amount to profit and in the absence of any clear provision for determination of profit of a society a view can be taken that gain from transfer of development rights is not profit within the meaning of Section 2(11) of the Maharashtra Co-operative Societies Act, 1960.
The view, however, is not free from doubt. A different stand may be taken by the department which may result in taxation of dividend from the Society in the hands of the individual members and as capital gains in the hands of the Society. A cautious approach, therefore, needs to be taken in such cases.
It can also be claimed that the amount paid to the members is by way of compensation to them for the inconvenience caused to them for sharing the amenities with more persons, for having more constructed area on the same piece of land and for higher financial liabilities by way of higher property taxes, etc. How far such an argument will be acceptable will always be a matter of uncertainty and will depend on the peculiar facts and circumstances of the case.
Many a times to avoid huge tax liability, such Plot purchased type society may resort to the practice of allocating the benefit of right to load TDR FSI available to it amongst the members who may join together to grant development rights to the developer. In such a case the income accrues to the members and they should be subjected to tax. However, it may be noted that Section 64 of the Maharashtra Cooperative Societies Act bars the Society from paying any part of the funds or the net profit of the society by way of bonus or dividend or otherwise distributing it among its members. The term ‘Fund’ has been defined to mean the stock or accumulation of money or other form of wealth available with the Society. Development rights available to the Society being a form of wealth forms part of the stock and validity of such distribution may be questionable. Nevertheless, from taxation angle the following issues arise in such an arrangement :
(a)Whether distribution of development rights by way of right to load TDR FSI amounts to transfer from the society to the members ?
(b)What will be the cost of acquisition of such development rights to the members ?
(c)What is the period of holding of the TDR FSI ?
The argument that can be advanced is that what the society holds is collective ownership of the assets of the members and therefore when the asset in the form or right to load TDR FSI is distributed, it is merely conversion of collective ownership into individual ownership and no transfer is involved. However, as mentioned before the development rights in a Plot purchased type society belongs to the society. The relationship between society and its members is that of licensor and licensee only. Members are therefore distinct from the society.
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Adv. Siddhant Sharma
Delhi | 500+ Answers
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