ITAT: Cash payment for improving the flat is allowed

By Fiona Mehta

 

The Income Tax Appellate Tribunal (ITAT)’s Mumbai bench, in a tax litigation over capital gains arising on the sale of residential flats, has allowed the NRI taxpayer to claim a significant portion of the costs of improvement, like fixing the tiles, or painting the walls, even though they were paid in cash.

 

Facts of the case: Non-resident Indians (NRI’s), Komal Gurumukh Sangatani and her husband, has filed an appeal with the ITAT in the financial year to which the dispute related was 2009-2010.

Komal Sangtani pleaded that the expenditures incurred were to make the flat habitable, which is very normal and would be incurred every citizen of the country who is purchasing a property from a builder. She further added that it is quite usual to make such payments in cash.

The bench observed that the taxpayer never carried on any business and was thus not liable for tax audit. Consequently, there was no bar in incurring certain expenditure towards the flat in cash, as long as the source of the cash payment was explained from her reported income. The bench, though, distinguished between expenditure that could be considered as cost of improvement and that which would be treated as personal effects.

Tax laws provide that the sale consideration minus the cost of acquisition and cost of improvement (both are adjusted by applying cost inflation index) determines capital gains. Higher the cost of those two components, lower is the taxable capital gains and consequently the tax outgo.

The cost of acquisition comprises the purchase of the flat, registration cost, and broker fees. The cost of improvement includes capital expenditure that increases the value of the property.

 

Order: As “personal effects” is not eligible for deduction, out of a total claim of Rs. 14.5 lakh by Komal Sangatani towards the cost of improvement, the ITAT allowed Rs. 9.7 lakh.

Clarification in respect of residency under section 6 of the Income-tax Act, 1961

By SRELJ Bureau

Section 6 of the Income-tax Act, 1961 (the Act) contains provisions relating to residency of a person. The status of an individual as to whether he is resident in India or a non-resident or not ordinarily resident, is dependent, inter-alia, on the period for which the person is in India during a year.

Various representations have been received stating that there are number of individuals who had come on a visit to India during the previous year 2019-20 for a particular durationand intended to leave India before the end of the previous year for maintaining their status as non-resident or not ordinary resident in India. However due to declaration of the lockdown and suspension of international flights owing to outbreak of Novel Corona Virus (COVID-19), they are required to prolong their stay in India. Concerns have been expressed that they may involuntarily end up becoming Indian residents without any intention to do so.

In order to avoid genuine hardship in such cases, the CBDT has decided vide circular no 11 dated May 8, 2020, that for the purposes of determining the residential status under section 6 of the Act during the previous year 2019-20 in respect of an individual who has come to India on a visit before 22nd March, 2020 and:

  • has been unable to leave India on or before 31st March 2020, his period of stay in India from 22nd March, 2020 to 31st March, 2020 shall not be taken into account; or
  • has been quarantined in India on account of Novel Corona Virus (Covid-19) on or after 1st March, 2020 and has departed on an evacuation flight on or before 31st March, 2020 or has been unable to leave India on or before 31st March, 2020, his period of stay from the beginning of his quarantine to his date of departure or 31st March, 2020, as the case may be, shall not be taken into account; or
  • has departed on an evacuation flight on or before 31st March, 2020, his period of stay in India from 22nd March, 2020 to his date of departure shall not be taken into account.

Further, as the lockdown continues during the Financial Year 2020-21 and it is not yet clear as to when international flight operations would resume, a circular excluding the period of stay of these individuals up to the date of normalisation of international flight operations, for determination of the residential status for the previous year 2020-21 shall be issued after the said normalisation.

80IB is applicable on entire project: ITAT Mumbai

By SRELJ Bureau

Clause (d) inserted in section 801B[10) with effect from April 1, 2005, is prospective and not retrospective and hence could not be applied for the period prior to April 1, 2005. Since deduction under section 801B[1Oj were on the profits derived from the housing projects approved by the local authority as a whole. ITAT held that once the project is approved by the local authorities, then deduction has to be allowed on the whole of the project .

INCOME TAX APPELLATE TRIBUNAL , MUMBAI ‘H ‘ BENCH

ITA No.7050/Mum/2010 – (Asst Year 2007-08)

The Income Tax Officer Vs Harsh Construction

Date of pronouncement 12th, March, 2012

ORDER

PER VIJAY PAL RAO, JM

This appeal by the revenue is directed against the order dated 22.7.2010 of the CIT(A) for the AY 2007-08.

2 We may point out that the assessment year has been wrongly mentioned in the Form no.36 as 2006-07 whereas the impugned order which is the subject matter of the appeal is for the AY 2007-08.

3 The revenue has raised the following grounds in this appeal:

1 “On the facts and in the circumstances of the case, the Id. CIT(A) erred in law in holding that the assessee is entitled to deduction u/s 801B(10) of Rs. 1,90,03,948I- by placing reliance upon the decision of ITAT Special Bench Punê (2009) 30 SOT 155, in the case of Mt Brahma Associates, which has not been accepted by the Revenue and Appeal has been preferred before the Hon’ble Bombay High Court on the question of law involved.”.

2 “On the facts and in the circumstances of the case and law, the Learned CIT(A) has erred in holding that the assessee is entitled to deduction uls.801B(10) of Rs. 1,90,03,948/- by placing reliance upon various decisions ignoring the facts that the legislative intention of providing incentive u/s 801B(10) is only on account of affordable residential dwelling units and that no commercial built up area was allowed prior to 01/04/2005

3 “On the facts and circumstances of the case the Id. CIT (A) erred in law in allowing the said deduction, for A.Y. 2007-08, even though the commercial built up area exceeded 2000 sq.ft., while the maximum permissible commercial built-up area is only 2000 sq.ft., which is clearly applicable in terms of clause (d) of section 8OlB(10) and effective from 01I04I2005”.

4 We have heard the ld DR as well as the ld AR of the assessee and considered the relevant material on record. At the outset, we note that the CIT(A) has decided the issue in favour of the assessee by following the order for the AY 2006-07 and particularly following the decision of the Tribunal in the case of JCIT v. Brahma Associates, which was upheld by the Hon’ble jurisdictional High Court reported in 330 ITR 289.

4.1 Since the issue is regarding the disallowance of the claim of the assessee u/s 80IB(10) on the ground of commercial establishment in the project, which is covered in favour of the assessee by the decision of the Hon’ble jurisdictional High Court (supra) as the pre-amended provisions of sec. 80IB(10) are applicable for the AY under consideration. The Tribunal in assessee’s own case for the AY 2006-07 has decided the issue in para 9 as under:

“9. We have considered the rival submissions carefully. We find that as far as the first objection raised by the Revenue regarding excess commercial area is concerned, the Hon’ble Bombay High Court in the case of CIT vs. Brahma Associates [supra] while reversing the decision of the Special Bench of the Tribunal in the case of Brahma Associates vs. JCIT 315 1TR (AT) 268 (PN) held as under:

‘Held that clause (d) inserted in section 801B[10) with effect from April 1, 2005, is prospective and not retrospective and hence could not be applied for the period prior to April 1, 2005. Since deduction under section 801B[1Oj were on the profits derived from the housing projects approved by the local authority as a whole,: the Tribunal was not justified in restricting the section 801B[10) deduction only to a part of the project. However, in the present case, since the assessee had accepted the decision of the Tribunal in allowing section 8016[10] deduction to a part of the project, the findings of the Tribunal in that behalf could not be disturbed.”

Thus, from the above, it is clear that once the project is approved by the local authorities, then deduction has to be allowed on the whole of the project and, therefore, following this decision, we reject this objection of the Revenue.”

5 Accordingly, respectfully following the order of the Tribunal as well as the decision of the Hon’ble jurisdictional High Court, in the case of Brahma Associates (supra), we decide this issue against the revenue and in favour of the assessee.

6 In the result, the appeal filed by the revenue is dismissed.

Order pronounced on this 12th, day of Mar 2012

Applicability of Chapter XXC of Income Tax to Housing Society, Additional FSI & TDR

By Vimal C. Punmiya, Chartered Accountant

1. Before delving into the applicability of provisions of Chapter XXC and Taxability of additional FSI and TDR it is a must to understand the concept of TDR.
The Bombay Municipal Corporation (BMC) entrusted with the task of making user of the available land as per the requirements and need felt by the citizens if required to make optimum utilisation of the scarce available land. For implementation of this task under overall development plan the plots are demarcated according to varying land use and for various public utilities under the various plan of the BMC. The Government publishes the priority list every year on the basis of which they demarcate lands / plots in different categories.
The BMC had to face great difficulties in implementing it’s target of using the plot for the purpose for which it is demarcated and meant.
Thus in order to overcome the difficulties faced by the BMC the concept of TDR (Transferable Development Rights) was introduced. This concept was first mooted in the development control rules of 1991. It allows a property owner the right to construct an additional 40 percent floor area over and above the permissible limits under the existing FSI (Floor Space Area). The owner (or lessee) of a plot of land which is reserved for a public purpose in the development plan and for additional amenities deemed to be reservation provided in accordance with these Regulations, excepting in the case of an existing or retention user or to any required compulsory or recreational open space, shall be eligible for the award of Transferable Development Rights (TDRs) in the form of Floor Space Index (FSI). Such award will entitle the owner of the land to FSI in the form of a Development Right Certificate (DRC) which he may use himself or transfer to any other person.
It gives the owner/lessee the right to transfer excess development potential from an ‘Originating Plot’ (which can be in the island city or the suburbs) to a ‘Receivable Plot’ (which is only in the suburbs and always north of the originating plot).
Originating Plots are those which fall under reservations like recreation grounds, playgrounds, schools, markets and roads in the development plan and are handed over to the BMC free of cost, in lieu of which FSI in the form of TDR, is granted and allowed to be used on the receivable plots. The FSI allowed is .4 against reservation and .4 against roads.
In short TDR is a form of FSI which entitles a land owner to construct additonal building on his land. Under TDR, reserved plots are surrendered to BMC for development. Further TDR can be availed only where the individual or corporate entity has a vacant plot of it’s own.
2. The main requisites for obtaining TDR are :
1. Identifying the land under reservation.
2. The land should be in the receiving zones.
3. Acquisition of the particular land by obtaining Development Right Certificate (DRC).
Until the court ruling last year the FSI could not exceed .4 on a receivable plot, however there was a court ruling that .8 FSI could be allowed (clubbing road and reservation TDR) on the same plot.
In a city like Mumbai, where space shortage is a major problem the concept of TDR is very much welcomed by the Builders, Developers and Landlords which are stipulated as under :
2.1 The owner (or lessee) of a plot of land which is reserved for a public purpose in the development plan and for additional amenities deemed to be reservations provided in accordance with these Regulations, excepting in the case of an existing or retention user or to any required compulsory or recreational open space, shall be eligible for the award of Transferable Development Rights (TDRs) in the form of Floor Space Index (FSI) to the extent and on the conditions set out below. Such award will entitle the owner of the land to FSI in the form of Development Right Certificate (DRC) which he may use himself or transfer to any other person.
2.2 Subject to the Regulation 1 above, where a plot of land is reserved for any purpose specified in Section 22 of Maharashtra Regional and Town Planning Act, 1966 the owner will be eligible for development Right (DRs) to the extent stipulated in Regulations 5 and 6 in this Appendix had the land been not so reserved, after the said land is surrendered free of cost as stipulated in Regulation 5 in this Appendix, and after completion of the development or construction as in Regulation in this Appendix if he undertakes the same.
2.3 Development Rights (DRs) will be granted to an owner or a lessee only for reserved lands which are retainable / non-retainable under the Urban Land (Ceiling and Regulations) Act, 1976, and in respect of all other reserved lands to which the provisions of the aforesaid Act do not apply and on production of a certificate to this effect from the Competent Authority under that Act before a Development Right is granted. In the case of non-retainable lands, the grant of Development Rights shall be to such extent and subject to such conditions as Government may specify. Development rights (DRs) are available only in cases where Development of a reservation has not been implemented i.e. TDRs will be available only for prospective development of reservations.
2.4 Development Rights Certificate (DRCs) will be issued by the Commissioner himself. They will state, in figures and in words, tjheFSI credit in square meters of the built-up area to which the owner or lessee of the said reserved plot is mentioned, the place and user zone in which the DRs are earned and the areas in which such credit may be utilised.
2.5 The built up area for the purpose of FSI credit in the form of a DRC shall be equal to the gross area of the reserved plot to the permissible FSI of the zone where from the TDR has originated.
2.6 When an owner or lessee also develops or constructs the amenity on the surrendered plot at his cost subject to such stipulations as may be prescribed by the Commissioner or the Appropriate Authority as the case may be and and to their satisfaction and hands over the said developed/constructed amenity to the Commissioner / Appropriate Authority, free of cost, he may be granted by the Commissioner, a further DR in the form of FSI equivalent to the area of the construction / development done by him, utilisation of which etc. will be subject to the Regulations contained in this Appendix.
2.7 A DRC will be issued only on the satisfactory compliance with the conditions.
2.8 If a holder of a DRC intends to transfer it to any other person, he will submit the DRC to the Commissioner with an appropriate application for an endorsement of the new holder’s name i.e. transferee on the said certificate. Without such an endorsement by the Commissioner himself, the transfer shall not be valid and the certificate will be available for use only by the earlier original holder.
2.9 A holder of a DRC who desires to use the FSI credit certified therein on a particular plot of land shall attach to his application for development permission valid DRCs to the extent required.
2.10 Irrespective of the location of the land in which they originate, DRCs shall not be used in the Island city. They may be used –
(a) On any plot in the same ward as that in which they have originated (neither ward being in the Island city), or
(b) On any plot lying to the north (wholly or partially) of the plot in which they have originated (but not in the Island city).
2.11 A DRC shall not be valid for use on receivable plots in the areas listed below :
(a) Between the tracks of the Western Railway and the Swami Vivekanand Road;
(b) Between the tracks of the Western Railway and Western Express Highway.
(c) Between the tracks of the Central Railway (Main Line) and Lal Bahadur Shastri Road;
(d) On plots falling within 50m. on roads on which no new shops are permitted as speified in Sub-regulation (2) of Regulation 52.
(e) Coastal areas and areas in No Development Zones, Tourism Development Zones, and areas for which the Bombay Metropolitan Region Development Authority or Maharashtra Housing and Area Development Authority is the Special Planning Authority.
(f) On plots for housing schemes of slumdwellers for which additional FSI is permissible under Sub-regulation (10) of Regulation 33;
(g) Areas where the permissible FSI is less than 1.0.
2.12 DRCs may be used on one or more plots of land whether vacant or already developed or by the erection of additional storeys, or in any other manner consistent with these Regulations, but not so as to exceed in any plot total Built Up FSI higher than that prescribed in Regulation 14 in this Appendix.
2.13 The FSI of a receiving plot shall be allowed to be exceeded by not more than 0.4 in respect of a DR available in respect of the reserved plot as in this Appendix and upto a further 0.4 in respect of a DR availanle in respect of land surrendered for road-widening or construction of new roads according to Sub-regulations (1) of Regulation 33.
2.14 DRs will be granted and DRCs issued only after the reserved land is surrendered to the Corporation, where it is Appropriate Authority, otherwise to the State Government as the case may be, free of cost and free of encumbrances, after the owner or lessee has levelled the land to the surrendering ground level and after he has constructed a 1.5m. high compound wall (or at a height stipulated by the Commissioner) with a gate at the cost of the owner, and to the satisfaction of the Commissioner, or the State Government (where the Corporation is not the appropriate authority). The cost of any transaction involved shall be borne by the owner or lessee.
2.15 With an application for development permission, where an owner seeks utilisation of DRs, he shall submit the DRC to the Commissioner who shall endorse thereon in writing, in figures and words, the quantum of the DRC proposed to be utilised, before granting development permission and when the development in complete, the Commissioner shall endorse thereon in writing, in figures and words, the quantum of the DRC proposed to be utilised, before granting development is complete, the Commissioner shall endorse on the DRC in writing in figures and words, the quantum of DRs actually utilised and the balance remaining thereafter, if any, before issue of occupation certificate.
2.16 A DRC shall be issued by the Commissioner himself as a certificate printed on bond paper in aan appropriate form prescribed by the Commissioner. Such a certificate will be transferable as “Negotiable Instument” after due authentication by the Commissioner. The Commissioner shall maintain a register in a form considered appropriate by him of all transactions etc. relating to grant of utilisation of DRs.
2.17 The surrendered reserved land for which a DRC is to be issued shall vest in the Corporation or the State Government, if the appropriate authority is other than the Corporation, and such land shall be transferred in the City Survey Records in the name of the Corporation or the State Government, as the case may be, and shall vest absolutely in the Corporation or the State Government. The surrendered land, so transferred to the State Government in respect of which the Corporation is not the appropriate authority, may, on application, thereafter be allotted by the State Government in favour of the concerned authority, which may be a State or Central Government Department, authority or organisation on appropriate terms as may be decided by the State Government.
2.18 The Commissioner / Appropriate Authority shall draw up in advance and make public from the time to time a phased annual programme (allowing a development) for utilisation of TDRs in the Form of DRs, frioritising revised (draft or sanctioned) development plan reservations to be allowed to be surrendered and indicating the areas for their utilisation on receiving plots. Notwithstanding this, in urgent cases, the Commissioner / Appropriate Authority, may, for reasons to be recorded in writing, grant DRs, as and when considered appropriate and necessary.
Though apart from the aforesaid regulations and the BMC insistance that light and ventilation and additional parking have to be duly provided in TDR Projects.
However, the plight of the common citizens who are faced with TDR problem are pathetic and needs serious considerations by the Government authorities.
Having given the exhaustive note on the TDR concept we now come to the applicability of provisions of Chapter XXC and taxability of TDR right.
I. Applicability of Provisions of Chapter XXC :
We are of the opinion that the provisions of Chapter XXC are not applicable in case of transfer of TDR rights because of the face that the provisions of Chapter XXC are applicable only where there is transfer of Immovable property as stated in Section 269UC which deals with restrictions on transfer of immovable property.
“… 269 UC – Notwithstanding anything contained in the Transfer of Property Act, 1882 (4 of 1882), or in any other law for the time being in force (no transfer of any Immovable Property in such area and of such value exceeding Rs. 75 Lacs, as may be prescribed) shall be effected except after an Agreement for transfer is entered into between the person to whom it is proposed to be transferred (referred to as Transferree) in accordance with the provision of SubSection (2) at least four months before the intended date of transfer…”.
The section clearly states that the provisions of Chapter XXC are applicable only in case of transfer of an immovable property. Whereas TDR is actual land / structure. So the concept of TDR does not fall within the definition of immovable property. So basically it is not transfer of an immovable property.
The concept of transfer of TDR can be correlated to the concept of surrender of Tenancy rights. In the case of surrender of Tenancy rights. In the case of surrender of Tenancy tights too the provisions of Chapter XXC are not applicable and the same principle apply in case of transfer of TDR, because in case of tenancy we are transferring right of occupation and even in TDR we are transferring the right to construct. Hence Chapter XXC provisions do not apply.
However, if the Income Tax Department apply the provisions of Chapter XXC the normally since majority of the transfer of TDR are for consideration less than Rs. 75 Lacs the provisions of Chapter XXC may not be applicable in Mumbai.
Applicability of Provisions of Capital Gains Tax
In this regard we are of the opinion that TDR is received against surrenderd of a portion of land as so the cost of land surrendered will be cost of the TDR. Therefore, in our view TDR surrender will be subject to either short term capital gain or Long Term Capital Gains depending upon the holding period of the land. If the land is held for less than 3 years then it will attract short term capital gains tax and it is held for more than 3 years then it will attract Long Term Capital Gains Tax. The Department can interpret the case as falling within the definition of Capital Asset and rely on the decision of the of the Bombay High Court in CIT, Bombay City I vs. Tata Services Ltd. Wherein provisions of Section 2(14), (47) 45 were interpreted. It was held U/s. 2(14) of the Income Tax Act a capital asset means property of any kind held by an assesse, whether or not connected with his business or profession. The word “property” used in S.2(14) of the Act is a word of the widest amplitude and the definition of “Capital asset”.
Another view can be taken that the surrender of land for TDR acquisition is completely exempt because in case of acquisition of TDR the land which is transferred is different and the TDR right received is different for which there is no cost of acquisition and so when the TDR rights are surrendered there is no capital gains tax liability. The courts have consistently been taking the view that any amount received by an assessee from the transfer of an asset for which no cost can be identified cannot be made eligible for tax.
To substantiate the above points we rely on the following judgements. Though these cases pertain to surrender of tenancy rights issue the facts can be correlated to the facts of the surrender of TDR rights.
1. In CIT vs. B.C. Srinivas Setty 128 ITR 294, the Supreme Court laid down the proposition that a gain arising from the trnasfer of an asset for which no cost could be identified would be outside the computation provisions of Section 48 of the Income Tax Act, 1961.
2. The Delhi High Court in the case of CIT vs. Merchandison Pvt. Ltd. (1990) 40 Taxman 68 , held thant no tax on Capital Gains could be levied in respect of the consideration received on transfer of a tenancy right.
3. Syndicate Bank Ltd. Vs. Addl. CIT (1985), 155 ITR 681 (Kar.)
4. B.G. Shah vs. CIT (1986) 162.
5. CIT vs. H.H. Maharaja Sahib Shri Lokendra Singhhi (1986) 162 ITR 93 (M.P.).
6. CIT vs. Kark 165 ITR 336 (A.P.)
7. Rajabali Nazarali & Sons. Vs. CIT (1987) 163 ITR 7 (Guj.).
8. Godrej & Co. vs. CIT (1959) 37 ITR 381.
9. CIT vs. Panbari Tea Co. Ltd. (1965) 57ITR 422.
Though the aforesaid cases related to surrender of tenancy rights since the facts can be correlated with surrender of TDR rights by applying the principle of no cost no gain in both the cases. Thus there can be one view that no capital gains tax is attracted. However, hereto the revenue authorities in view of the judgements in A.R. Krishna Murthy & Anr. Vs CIT reported in 176 ITR 417 (S.C.) and Cadell Weaving Mills Pvt.Ltd. vs. Asst. Commissioner of Income Tax reported in 55 ITD 137 (Bom. Trib.) may held the same to be taxable. However different view is taken in the case of J.C. Chandok vs. Deputy CIT (1999) 69 ITD 75 (Del) S.B.

No Capital Gain Tax On Society Redevelopment

By Legal Bureau

Kushal K. Bangia vs. ITO (ITAT Mumbai) – In principle, though the scope of “income” in s. 2(24) is very wide, a capital receipt is not chargeable to tax as income unless there is a specific provision to that effect. As the residential flat owned by the assessee in the society’s building was a capital asset in his hands, the compensation was a capital receipt.
The department’s argument that the cash compensation was a “share in profits earned by the developer” is not acceptable because it proceeds on the fallacy that the nature of payment in the hands of the payer determines the nature in the hands of the recipient. However, as the said receipt reduced the cost of acquisition of the new flat, it had to be taken into when computing the gains from a transfer thereof in the future
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
I.T.A No.2349/ Mum/2011 Assessment year: 2007-08
Kushal K Bangia
Vs
Income Tax officer
Date of pronouncement : 31 .01.2012
ORDER
Per Pramod Kumar:
1. By way of this appeal, the assessee has called into question correctness of CIT(A)’s order dated 9th December, 2010, in the matter of assessment under section 143(3) of the Income tax Act, 1961, for the assessment year 2007-08 on the following grounds:
“1. The ld CIT(A) has erred in confirming the addition at Rs.11,75,000 received by the assessee as cash compensation. He has further erred in confirming the said addition to the income under the head income from other source. The reasons assigned by him doing the same are wrong and insufficient. Provisions of the act ought to have been properly construed and applied. Regard being had to the facts and the circumstances of the case, the said addition ought to have been deleted, being in the nature of capital receipt.
2. Without prejudice to ground No.1, and as an alternative ground of appeal, the ld CIT(A) has erred in confirming the addition of rs.11,75,000 received by the assessee as cash compensation under the head income from other sources, instead of long term capital gain. The reasons assigned by him doing the same are wrong and insufficient. Provisions of the act ought to have been properly construed and applied. Regard being had to the facts and the circumstances of the case, the said addition ought to have been assessed as capital gains.”
2. The issue in appeal lies in a narrow compass of undisputed facts. The assessee before us is an individual and he had received a sum of Rs.11,75,000 on account of what he now terms as, ‘cash compensation’. It is taxability of this amount of Rs.11,75,000 which is in dispute before us, and it is, therefore, necessary to understand the back ground in which this amount was received. The assessee was member of a housing society by the name of Vile Parle Ramesh CHS Ltd. This housing society, alongwith it’s members, entered into an agreement with a developer, and, under the said agreement, the developer was to demolish the residential building owned by the housing society, and reconstruct a new multistoried building by using the FSI arising out of the property, and by utilizing outside TDR under Development control Regulations. Under this arrangement, the assessee, as a member of the housing society, received a slightly larger flat in the new building, which had an additional area of 173 Sq. ft, a displacement compensation of Rs.6,12,000, which was computed @ Rs.34,000 p.m. for the period of construction of the new building, and an additional compensation of Rs.11,75,000. On these undisputed facts, the Assessing Officer was of the opinion that the cash compensation of Rs.11,75,000 is required to be treated as ‘casual income’, and, accordingly, taxable in the hands of the assessee. The Assessing Officer also brought to tax estimated value of additional area in the new flat, but since CIT(A) has deleted the same and revenue is stated to be not in appeal against the same, we are not really concerned with the same. Aggrieved, inter alia, by this addition of Rs.11,75,000 on account of cash compensation, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is in further appeal before us.
3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
4. In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes “any capital gains chargeable under section 45”, and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon’ble Supreme Court in the case of Padmraje R. Kardambande vs CIT (195 ITR 877) has observed that “..,, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act….” This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon’ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), “the burden is on the revenue to establish that the receipt is of revenue nature” though “once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish”. The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of payment in the hands of payer also ends up determining it’s nature in the hands of the recipient. As observed by Hon’ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), “it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer”. The consideration for which the amount has been paid by the developer are, therefore, not really relevant in

Non-Occupancy charges received by Housing society not taxable

By Legal Bureau

Assessee has challenged the addition of Rs.30,914/- made by the Assessing Officer on account of non-occupancy charges as income from the business not covered under the principles of “mutuality”. Learned AR submitted that the assessee’s case is covered by the decision of the ITAT Mumbai Bench passed in ITA No.6325/Mum/06 for the assessment year 2003-2004 vide order dated 14-5-2009 in the case of the assessee itself. On the other hand, the learned Senior DR relied upon the findings of the Assessing Officer. We find that this issue is already covered by the decision of the ITAT in ITA NO.6325/Mum/06 for the assessment year 2003-2004 and also by the decision of the Hon’ble Jurisdictional High Court in the case of Mittal Court Premises Cooperative Society Limited Vs. ITO, reported in (2010) 320 ITR 414 (Bom), holding that non-occupancy charges will not be taxable on the ground of principle of “mutuality”. Accordingly, ground No.6 raised by the assessee is treated as allowed.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No.2102 /Mum/2010 – Assessment Year: 2007-2008

M/s Mahalaxmi Sheela Premises CHS Ltd. Vs. ITO

Date of pronouncement: 11th May 2012

O R D E R

PER AMIT SHUKLA (J.M.) :

The present appeal is arising out of the order dated 11-2-2011, passed by CIT(A)-28, Mumbai for the quantum of assessment determined under Section 143(3) for the assessment year 2007-2008 on the following grounds of appeal :- “1. The learned Commissioner of Income Tax and learned assessing officer erred in assessing the Total Income of assessee at Rs.29,65,410/- instead of 16,28,150/-.

2. The learned Commissioner of Income Tax erred in passing an ex-parte order and mentioning incorrect facts. The authorised representative had sought an adjournment which was granted by the office of the commissioner. It was only on the last date in 10th February 2011 that the AR cold not attend due to ill health.

3. The learned Commissioner of Income Tax and learned assessing officer erred in arriving at the receipts from Smt. Sudha Vora at Rs.29,67,394/- instead of Rs.23,97,356/- (Rs.24,29,296/-) less 32,606/- (Municipal Taxes) without giving any reasons in assessment order although the ledger copy was on record of the assessing officer.

4. The learned Commissioner of Income Tax and learned assessing officer erred in treating receipt from Smt. Sudha Vora as income from other sources instead of income from House Property. 5. The learned assessing officer erred in taxing Rs.17,101/- received by way of miscellaneous income from the sale of scrap as business income and learned Commissioner of Income Tax appeal erred in confirming the same. 6. The learned assessing officer erred in treating Rs.30914/- being non occupancy charges as income from Business and Profession and learned Commissioner of Income Tax appeal erred in confirming the same.

7. Without prejudice to the other grounds raised, the Learned Commissioner of Income Tax Appeal failed to consider the alternative arguments of the assessee for granting deduction u/s 57(iii) of Rs.6,15,846/-.”

2. At the outset, learned AR on behalf of the assessee did not press the grounds No.1 & 2. Accordingly, grounds No.1 & 2 are dismissed as not pressed.

3. With regard to grounds No.3 & 4, learned AR submitted that the same issue is covered by the decision of ITAT in the case of assessee itself vide order dated 30-8-2011 passed in ITA No.784, 785 &786/mum/2010 for the assessment years 2000-2001, 2001-2002 & 2002-2003. Learned Senior DR relied upon the findings of the Assessing Officer as well as the CIT(A).

4. We have heard the rival parties and also considered the orders of the Assessing Officer as well as of the CIT(A). The assessee is a cooperative housing society. The issue involved is the receipt of Rs.29,67,394/- from leasing out the portion of terrace of the building and the wall to one Smt. Sudha Vora for the purpose of fixing of hoarding, neon sign, etc. would be treated as Income from house property” or it should be taxed under the head “income from other sources”.

4.2. The Assessing Officer after referring to various clauses of the agreement entered into by the assessee and Smt. Sudha Vora, came to the conclusion that it is “income from other sources”.

The CIT(A) too has confirmed the finding of the Assessing Officer, though in an ex-parte order. However, this issue has come up for consideration in the earlier years also, wherein the ITAT Mumbai Bench after referring and relying upon several decisions has held the receipts to be taxed under “income from house property”. The relevant finding as a whole as given by the ITAT are reproduced herein below:-

“3. In the appeal for assessment year 2000-01, the sole issue raised by the assessee is, whether the income received by the assessee on lease of a portion of terrace of the building and a wall of the building to one Mrs. Sudha Vora, for the purpose of fixing of hoarding, neon sign, etc., is assessable under the head “Income From Business or Profession” or under the head “Income From Other Sources”. The Assessing Officer assessed the income under the head “Income From Other Sources” on the ground that the amount received by the assessee is not for letting of a building or terrace or any land appurtenant thereto but on account of allowing to display the advertisement of neon sign, illuminated hoarding, of a size of 60’ x 20’ on the terrace and also illuminated hoarding of size of 20’ x 50’ on a vertical wall of the building are facing Padder Road. 4. On appeal, the Commissioner (Appeals) rejected the contention of the assessee on the ground that the terrace is not let out to Mr. Sudha Vora, and she has been allowed to use the terrace only to set-up the hoarding and to display the hoarding. He also commented that she could use only a portion of the terrace and that the purpose of utilization is not for stay, etc. The Commissioner (Appeals) distinguished the decision of the Delhi Bench of this Tribunal relied upon by the assessee. Aggrieved, the assessee is in further appeal before the Tribunal.

5. Before us, the learned Counsel relied on the following case laws:-

ITO v/s Cuffe Parade Sainara Premises Co. Op. Society Ltd., ITA no.7225/Mum./2005, order dated 28.4.2008;

Dalamal House Commercial Complex Premises Co. Op. Society Ltd. v/s ITO, ITA no.2286/Mum./2008, 29.5.2009;

Sharda Chambers Premises Co. Op. Society Ltd. v/s ITO, ITA no.1234/Mum./2008, order dated 1.9.2009;

Matru Ashish CHS Ltd. v/s ITO, ITA no.316/Mum./2010, order dated 27.8.2010;

S. Sohan Singh v/s ITO, 16 ITD 272 (Del.); and

CIT v/s Bajaj Bhavan Owners Premises Co. Op. Society Ltd., Income Tax Appeal no.3183 of 2010 (Bom.)

6. In Bajaj Bhavan Owners Premises Co. Op. Society Ltd. v/s ITO, Mumbai “B” Bench of the Tribunal in ITA no.5048/Mum./2004, assessment year 2001-02 and ITA no.1433/Mum./2007, for assessment year 2002-03 and ITA no.1434/Mum./2007, for assessment year 2003-04, order dated 4th November 2009, has, at Page-16 / Para-36, brought out the facts as follows:-

“36. The brief facts of the above issue are that it was found by the Assessing Officer that the assessee has allowed M/s. Hutchison Max Telecom Ltd. to erect the tower on their terrace in consideration of an amount of ` 5,93,700 and claimed as income from house property subject to deduction under section 24 of the Act. However, the Assessing Officer while observing that the assessee’s society has not provided any house property to the company and it is only the open terrace which has been let out, treated the same as assessable under the head income from other sources without allowing any expenditure in this regard. On appeal, the learned CIT(A) while confirming the Assessing Officer’s action treating the income from other sources directed the Assessing Officer to allow 20% of the gross receipts as expenses to earn such income.”

7. The Tribunal, after considering rival submissions, at Pages-17 & 18, Para-39, held as follows:-

“39. After carefully hearing the submissions of the rival parties and perusing the material available on record, we find that the facts are not in dispute. We further find that in the case of Sharda Chamber Premises v/s ITO, in ITA no.1234/Mum./2008, dated 1.9.2009, for A.Y. 2003-04, in which JM was one of the party, on the similar facts, the Tribunal after considering the decision in ITO v/s Cuffe Parade Sainara Premises Co. Op. Society Ltd., ITA no.7225/Mum./2005, dated 28th April 2008, for A.Y. 2002-03 and also the decision in the case of S. Sohan v/s ITO (1986) 16 ITD 272 supra, has held vide Para-6 and 7 of its order dated 1.9.2009, as under:-

6. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. counsel for the assessee that in the case of M/s. Dalamal House Commercial Complex Premises Co. Op. Society Ltd., the Tribunal while admitting the additional ground being a legal issue has also held that the letting out of the terrace erection of antenna and income derived from letting out has to be taxed as “income from house property” and not as “income from other sources”. The Tribunal while deciding the issue has followed the order of the Tribunal in the case of M/s. Cuffe Parade Sainara Premises Co. Op. Society Ltd. supra.

7. In the absence of any distinguishing feature brought on record by the revenue, we respectfully following the order of the Tribunal (supra) and keeping in view the consistency while admitting the additional ground taken by the assessee hold that the letting out of terrace has to be assessed under the head “Income From House Property” as against “Income From Other Sources” assessed by the Assessing Officer and also allow deduction provided under section 24 of the Act and accordingly the additional ground taken by the assessee is allowed.

Respectfully following the order of the Tribunal supra, we are of the view that the letting out of the terrace has to be assessed under the head income from house property subject to deduction u/s 24 of the Act as against income from other sources assessed by the Assessing Officer. We hold and order accordingly. The grounds taken by the assessee are therefore allowed.” 8. The Hon’ble Jurisdictional High Court in Income Tax Appeal no.3183 of 2010, vide judgment dated 16th August 2011, confirmed the aforesaid findings of the Tribunal vide Para3, which reads as follows:-

“3. As regards question (c) is concerned, counsel for the revenue states that the ITAT has allowed the claim of the assessee by following its decisions in the case of Sharda Chamber Premises v/s ITO and ITO v/s Cuffee Parade Sainara Premises Co. Op. Society Ltd. Counsel for the revenue fairly states that the appeals against the said decisions have not been filed by the Revenue in view of the smallness of the tax effect. However, the counsel for the revenue is not in a position to point out any error in the orders passed by the ITAT. In this view of the matter, we see no reason to entertain the appeal on question (c). In the result, the appeal is dismissed with no order as to costs.”

9. Keeping in view of the aforesaid binding judgment of the Hon’ble Jurisdictional High Court, we set aside the impugned order passed by the Commissioner (Appeals) and allow this ground raised by the assessee directing the Assessing Officer to assess the income in question under the head “Income From House Property” 4.3

Thus, the finding has already been given by the ITAT in the earlier year, therefore, respectfully following the same, it is held that income in question is to be taxed under the head “income from house property” and accordingly the Assessing Officer is directed to compute the income under the head “ income from house property “. In the result, grounds No.3 & 4 are allowed.

5. In ground No.5, the assessee has challenged the taxing of the sum of Rs.17,101/- from sale of scrap as business income. The Assessing Officer has treated the sale of scrap as business income on the ground that it was with the intention of making gain and is not covered by the principle of “mutuality”.

The learned AR submitted that the assessee is not engaged in any kind of business as it is a cooperative housing society and in any way such a miscellaneous income will go to reduce the cost of renovation which the assessee was carrying out during the relevant year. Learned Senior DR strongly relied on the finding of the CIT(A) and the Assessing Officer.

6. After carefully considering the finding of the Assessing Officer as well as the contention of the parties, we are of the opinion that miscellaneous income by way of sales scrap cannot be treated as business income of the assessee as it is not carrying on any business activities of sale of scrap. The scrap has been generated on account of repairs and renovation which will go to reduce the cost of renovation as has been done by the assessee.

Therefore, such a miscellaneous income cannot be treated as business income of the assessee. Accordingly, ground No.5 is treated as allowed.

7. So far as ground No.6 is concerned, the assessee has challenged the addition of Rs.30,914/- made by the Assessing Officer on account of non-occupancy charges as income from the business not covered under the principles of “mutuality”. Learned AR submitted that the assessee’s case is covered by the decision of the ITAT Mumbai Bench passed in ITA No.6325/Mum/06 for the assessment year 2003-2004 vide order dated 14-5-2009 in the case of the assessee itself. On the other hand, the learned Senior DR relied upon the findings of the Assessing Officer.

8. We find that this issue is already covered by the decision of the ITAT in ITA NO.6325/Mum/06 for the assessment year 2003-2004 and also by the decision of the Hon’ble Jurisdictional High Court in the case of Mittal Court Premises Cooperative Society Limited Vs. ITO, reported in (2010) 320 ITR 414 (Bom), holding that non-occupancy charges will not be taxable on the ground of principle of “mutuality”. Accordingly, ground No.6 raised by the assessee is treated as allowed.

9. Both the parties have fairly agreed that ground No.7 will be rendered infructuous if the grounds No.3 & 4 are decided by holding that the income should be charged under the head “income from house property”. Since, we have already held that income from hoarding should be treated as “income from house property”.

The alternative claim for deduction under Section 57(iii) will become purely academic and, therefore, ground No.7 is dismissed as having been rendered infructuous.

10. Resultantly, the appeal filed by the assessee is partly allowed.

Order pronounced on this 11th day of May, 2012.

No Capital Gain Tax On Housing Society Redevelopment

By Legal Bureau

Kushal K. Bangia vs. ITO (ITAT Mumbai) – In principle, though the scope of “income” in s. 2(24) is very wide, a capital receipt is not chargeable to tax as income unless there is a specific provision to that effect. As the residential flat owned by the assessee in the society’s building was a capital asset in his hands, the compensation was a capital receipt.

The department’s argument that the cash compensation was a “share in profits earned by the developer” is not acceptable because it proceeds on the fallacy that the nature of payment in the hands of the payer determines the nature in the hands of the recipient. However, as the said receipt reduced the cost of acquisition of the new flat, it had to be taken into when computing the gains from a transfer thereof in the future

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

I.T.A No.2349/ Mum/2011 Assessment year: 2007-08

Kushal K Bangia

Vs

Income Tax officer

Date of pronouncement : 31 .01.2012

ORDER

Per Pramod Kumar:

1. By way of this appeal, the assessee has called into question correctness of CIT(A)’s order dated 9th December, 2010, in the matter of assessment under section 143(3) of the Income tax Act, 1961, for the assessment year 2007-08 on the following grounds:

“1. The ld CIT(A) has erred in confirming the addition at Rs.11,75,000 received by the assessee as cash compensation. He has further erred in confirming the said addition to the income under the head income from other source. The reasons assigned by him doing the same are wrong and insufficient. Provisions of the act ought to have been properly construed and applied. Regard being had to the facts and the circumstances of the case, the said addition ought to have been deleted, being in the nature of capital receipt.

2. Without prejudice to ground No.1, and as an alternative ground of appeal, the ld CIT(A) has erred in confirming the addition of rs.11,75,000 received by the assessee as cash compensation under the head income from other sources, instead of long term capital gain. The reasons assigned by him doing the same are wrong and insufficient. Provisions of the act ought to have been properly construed and applied. Regard being had to the facts and the circumstances of the case, the said addition ought to have been assessed as capital gains.”

2. The issue in appeal lies in a narrow compass of undisputed facts. The assessee before us is an individual and he had received a sum of Rs.11,75,000 on account of what he now terms as, ‘cash compensation’. It is taxability of this amount of Rs.11,75,000 which is in dispute before us, and it is, therefore, necessary to understand the back ground in which this amount was received. The assessee was member of a housing society by the name of Vile Parle Ramesh CHS Ltd. This housing society, alongwith it’s members, entered into an agreement with a developer, and, under the said agreement, the developer was to demolish the residential building owned by the housing society, and reconstruct a new multistoried building by using the FSI arising out of the property, and by utilizing outside TDR under Development control Regulations. Under this arrangement, the assessee, as a member of the housing society, received a slightly larger flat in the new building, which had an additional area of 173 Sq. ft, a displacement compensation of Rs.6,12,000, which was computed @ Rs.34,000 p.m. for the period of construction of the new building, and an additional compensation of Rs.11,75,000. On these undisputed facts, the Assessing Officer was of the opinion that the cash compensation of Rs.11,75,000 is required to be treated as ‘casual income’, and, accordingly, taxable in the hands of the assessee. The Assessing Officer also brought to tax estimated value of additional area in the new flat, but since CIT(A) has deleted the same and revenue is stated to be not in appeal against the same, we are not really concerned with the same. Aggrieved, inter alia, by this addition of Rs.11,75,000 on account of cash compensation, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is in further appeal before us.

3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

4. In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes “any capital gains chargeable under section 45”, and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon’ble Supreme Court in the case of Padmraje R. Kardambande vs CIT (195 ITR 877) has observed that “..,, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act….” This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon’ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), “the burden is on the revenue to establish that the receipt is of revenue nature” though “once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish”. The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of payment in the hands of payer also ends up determining it’s nature in the hands of the recipient. As observed by Hon’ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), “it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer”. The consideration for which the amount has been paid by the developer are, therefore, not really relevant.

 

Consideration for permission to use TDR / FSI not chargeable to tax: ITAT Mumbai

By Legal Bureau

The assessee co-op housing society gave permission to a developer to construct 2 floors and 8 flats on the building belonging to the society by using the TDR / FSI available to the developer. In consideration, the developer paid Rs. 26 lakhs to the assessee and Rs. 66 lakhs to its members aggregating Rs. 92 lakhs. The AO took the view that the assessee had relinquished its right “to load TDR and construct additional floors” and as there was no cost of acquisition, the entire consideration of Rs. 26 L was assessable as long-term capital gains. On appeal, the CIT (A) took the view that even the amounts received by the Members were assessable in the assessee’s hands. He accordingly enhanced the assessment and directed that the consideration be taken at Rs. 92 L. On appeal by the assessee, HELD reversing the CIT (A):

The assessee – society and its members had no right to construct additional floors on the existing building as they had exhausted the right available while constructing the flats in the building. The TDR was not obtained by the assessee and sold to the developer. Accordingly, the assessee had not transferred any existing right to the developer nor any cost was incurred / suffered prior to permitting the developer to construct the additional floors. In the absence of a cost of acquisition, the judgement in B. C. Srinivasa Setty 128 ITR 294 (SC) applied and the consideration was not assessable as capital gains.

See Also: Lotia Co.op Hsg. Soc. (ITAT Mumbai) & New Shailaja CHS (ITAT Mumbai) where the same view was taken. In Jethalal D. Mehta vs. DCIT 2 SOT 422 (Mum) it was held that the receipts on sale of TDRs were not chargeable to tax even in the hands of the Members. For a full review of the law see Treatise on the law of Real Estate Development Contracts.

Source:- Om Shanti Co-op Society vs. ITO (ITAT Mumbai) , ITA No. 2250/MUM/ 2008

 

Taxability of the transfer fees in Society

By Vimal Punmiya, Chartered Accountant

The importance of society has been increased from last 25 years ever since there has been growing needs of an urban community necessitating its accommodation in proximity to cities and towns, due to restrictions under various rent legislation’s.

The concept of co-operative society in the sector of housing industry has been introduced after Partition. Before Partition there were two types of systems which prevailed commonly namely.

  1. Landlord System or,
  2. Tenant System

But, soon after Partition the concept of Co.op. Societies have been introduced and has gained importance. In the year 1978, the offices at Nariman Point were available @ of Rs. 150/- per sq.ft. and the flats at Malabar hill, are available @ of Rs. 200/- per sq.ft., but, due to scarcity of office at Nariman Point and over population today, the value of office at Nariman Point is available @ of Rs. 7000/- per sq.ft. and flats at Malabar hill, are available from the rate of Rs. 10,000/- per sq.ft.

Due to such high increase in the prices of property in commercial and residential sector, the societies formed, have started charging the transfer fees from such transaction which is commonly prevailing as a matter of practices from Rs. 50 to 500/- per sq.ft. or which even varies from 1% to 5% in exceptional cases.

 

As regards legally, in Mumbai, Society can charge transfer fees upto the extent 2.5% of the agreement value or Rs. 25,000/- only, whichever is less and on other  places it varies from Rs.5000/- to Rs.20,000/-  respectively.

 

As, of today, the Co-op hsg. Society in our country is playing a very special and prominent role in catering to the housing needs of our people, There are many societies who have not paid  Income – Tax on the Transfer fees under the understanding that the society is not liable to pay the same on the basis of the principles of Mutuality.

 

The concept of Mutuality is based on the principle that no man can make profit out of himself.  So, when more then one person combine

themselves for some common  purpose of mutual benefits and contribute for such common purpose and if the surplus is left out and the same is returned to those contributors, then the same does not  amount to income tax seeks to tax income and not the savings……..”

 

If, the society is a voluntary association created for the mutual concern without any profit motive then no tax is being charged on the income

Of such society, on the principles of Mutuality, the concept of Mutuality is the foundation on which the entire superstructure of the theory of non-taxability of the transfer fees under the act is built-up.

The primary condition of Mutuality between Co-op. Hsg. Society and its members is that the Co-op. Society which collects money from its members, must apply the same for their benefit not as shareholder having any interest in its profit but as persons themselves who have put up the fund of contributing to it.

The identity of the recipient with the contributor is a condition precedent to enable the benefit of Mutuality.

NOTICE DATED : 09-8-01, : – While transferring the flat of the member of the Co-op. Hsg. Society and also transferring the flat of the member of the co.op. Hsg. Society and also transferring his shares and rights in the share capital/property of the society to another person, rate of premium decided by the General Body Meeting of the society, in any circumstances should not be more than 25,000/- in respect of Municipal Corporation and authority area. It was stated that this step was taken by the Government to arrest the profit earning qua the Co-op. Hsg. Society.

In many cases, the Honourable Tribunal has taken a view that, if a amount received from the transferor, it is not taxable upto the extent of Rs. 25,000/- in few judgements it has taken a view that if the amount received from Transferee it is taxable, thereby in view of above contradicting and conflicting views of various benches being constituted over a single issue of “Transfer Fee”, a special bench was constituted in Mumbai, before Shri M.K. Chaturvedi, Vice President, Shri R.V.Easwar Judicial member and Shri Satish Chandra, Account member of the Honourable Tribunal in the case of M/s. Walkeshwar Triveni Co-op. Housing Society Ltd. Mumbai (Appellant)

Vs.

Income-tax Officer, ward 7(7), Mumbai.

Assessment year 1997-98

Appellant by : Shri V H Patil / Shri Vipul B Joshi / Mrs Jyothi N. Dadlani

Respondent by : Shri Girish Dave / Shri Ajit Korde

Facts : The member of the co-operative society being transferor had paid Rs. 12500/- and the transferee not being the member of the society received Rs. 25000/-.

Resultantly, the amount received from the Transferor is not eligible to tax whereas the amount from the transferee is eligible to tax, vide order dated 4.7.03.

Taxability of an amount would depend on the nature and character of the receipt at the initial stage. The true nature and character of the transactions have to be ascertained from the covenants of the contract in the light of the surrounding circumstances.

The aforesaid case was decided by taking the following factors into consideration from the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97(SC) wherein it was held that were a member of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit and there must be a complete identity between the contributors and the participators.

ANDHRA PRADESH HIGH COURT in the case of CIT v. Merchant Navy Club…

The Principles of Mutuality that emerge from the decided cases may be stated thus : No person can trade with himself and make an assessable profit. If instead of one person, more than one person combine themselve into a distinct and separate legal entity, then the resulting surplus is to be refunded to the members.

The aforesaid facts can also be supported by landmarking judgements in :

CIT v. Adarsh Co.op Hsg. Soc. LTd. 213 ITR 677 (Guj) : Where the assessee was found to be a mutual concern and the income which it receives from its members is not liable to tax, and the same was not taxed on the principle that no one can make a profit by transacting with oneself.

Reference was also made to the decision fendered in the case of STYLES v. New York Life Company 2 Tax Case 460 : –  Wherein the cardinal requirement was construed that there must be complete identity between the contributors and participators, and the receipt of mutual concern was not eligible to tax, whereby there has to be an absence of any profit motive.

CIT v. Apsara Co.op. Hsg. Society Ltd. 204 ITR 662 : – wherein it was held that the taxability of the transfer fee realised by the society for transfer of flats. It was noted that the persons have to become first the members of the society before they can be entitled to get flats transferred in their names or become liable to pay transfer fees. Court found that the transfer fee so realised is for the benefit of the members of the society.  As such, it was held to be a mutual concern and the transfer fee was not liable to tax.

Shiv Shanti Bhuvan Co.op. Hsg. Society v. ITO 78 ITO 403 : – It was held that it is not every payment from a member to the association of which he is a member which would per se be governed by the principle of Mutuality.

CIT v. Madras Race Club 105 ITR 433 : – In this case, while considering the principle of Mutuality, for exemption of subscription collected from the members, Court held that Sine Qua Non to bear in mind two concepts. The first concept is that the principle of Mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a dozen persons gather together and agree to purchase certain commodities in bulk and distribute them amongst themselves in accordance with their individual requirements, they may collect a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it, ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselve a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent the Savings and not Income. The Income-Tax seeks to tax the Income and not Savings, if this principle is borne in mind then it would be easier to understand the decisions rendered on this point.

From the above discussion, it is clear that the Transfer Fee received by a society from its member on the Transfer of his flat is nothing but a form of construction for the mutual benefit of the society. If the Department attempts to encroach upon the Transfer Fe and tries to take a slice out of the same by way of Income – Tax, the societies would be unable to meet the increasing cost of repairs, maintenance and renewabless in the building and such building would become a public burden and may endanger the life of many residing in those buildings. Therefore, it would be wiser on the part of the department not to be revenue mindedly pursue the matter of taxation on the Transfer Fee which would be legally as well as morally quite unjustified and also unreasonably burden on the members of the Society.

We hope, that although there are number of litigations relating to this issue which is pending before the Commissioner of Income-Tax (a). Income-Tax Appellate Tribunal and after going through the above discussion there would be an end to litigation relating the taxability of the transfer fees and also not tax any amount from the transferor over and above the sum of Rs. 25,000/- to hoodwink the law premium which is worded under different names viz., DONATION, WELFARE FUND, COMMON AMENITIES FUND, etc, etc…

No TDS is to be deducted on the amount reimbursed by the Developer to the Society

By Legal Bureau

TDS on receipt.
Whether tax shall be deducted at Source (TDS) from Corpus Money, Allowances, Compensations, Reimbursement of Fees of Consultants and other Expenses, Rent for Temporary Alternative Accommodation and Deposits or any other form of receipt in the hands of the hands of the Society/ its individual members.
Ans. As per the Income Tax Act, 1961, no TDS is to be deducted on the amount reimbursed by the Developer to the Society or the Individual Members or on other items such as Corpus Money, Allowances, Compensations, Reimbursement of Fees of Consultants and other Expenses, Rent for Temporary Alternative Accommodation and Deposits or any other form of receipt.
However, when the Society makes payments such as Professional Fees, Contractor, etc, the Society is to Deduct Tax at Source at the rate given herebelow and pay the same to the Income Tax Department and file the Quarterly Returns:
Contractor 1% in the case of individual/HUF
2% in the case of others u/s 194C

Rent 10% u/s 194I
Professional Fees 10% u/s 194J
Commission & Brokerage 10% u/s 194H

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