By K K Ramani & Co
Frequently Asked Questions
Q-1. The building was constructed 25 years ago and the Co-operative Society was registered 20 yrs ago. In spite of its members best efforts the builders have not given conveyance of property to the Society. The Society wants to use TDR. Can the Society use TDR-FSI ?
Ans. No, till the Co-operative Society obtains conveyance of the property in its name.
Q.2. Journalists are members of Patrakar Co-op Hsg. Soc. Ltd. Society is formed by a group of individuals to construct flats and to manage its affairs. The land was allotted to the society by the government with the direction to allot the flats to journalists. The Society constructed the building and allotted flats to various journalists who had applied for membership.
Who is entitled to the unutilised FSI in Patrakar Co-op Hsg. Soc. Ltd — the society or the members?
Ans. Such societies are called plot purchased type Societies being sub-category of Tenant Copartnership Hsg. Soc. Ltd. In case of plot purchased type society, the legal ownership of the land and the building vests in the Society. Members have occupancy rights only. Hence, the unutilised F.S.I. belongs to the Society and not to the Members.
Ref : Ramesh H. Shah Vs. Harsukh J. Joshi (AIR 1975 S. C. 1470)
Q.3. Flats were purchased individually by different persons from the builder. All the purchasers of the flats formed flat owners Co-op Hsg. Soc. 25 yrs ago. The conveyance of land with building was given to the society by the builders 4 yrs ago. The society wants to demolish the old building and reconstruct a new building by utilising FSI of the plot and also by procuring TDR FSI. A Developer has offered to pay some corpus to the Society and 25% extra space to each member in the new building. If a development agreement is executed. Who is entitled to the consideration from the Developers – the Society or the members?
Ans. Such society is called flat owners society. The flat owners society is formed by purchasers of flats under MOFA agreements with Builder As per Central Board of Direct Taxes Circular F. No. 4/28/68 WT dt. 10-01-1969 & dt. 27.01.1969, in a society like this which is Flat Owners society where the members had individually purchased the flats from a builder, and after receiving possession of the flats joined together to form the C.H.S and obtained conveyance in the name of the society, the legal ownership vests in individual members themselves and not in the Co-operative Society and consequently the members and not the society should have the legal rights to use the available T.D.R.- FSI and the additional space provided to them should also be treated as belonging to them in their own rights.
Instructions [F. No. 4/28/68-WT, dated the 10th January 1969 ]
by CBDT regarding OWNERSHIP FLATS IN SOCIETIES
1. Exemption under section 5(1)(iv) of the Wealth-tax Act, 1957-Instructions regarding ‘Attention is invited to the instructions contained in the Board’s Circular No.4/30/66 – WT, dated 29-9-1967 advising that the exemption under section 5(1)(iv) of the Wealth-tax Act, 1957, would not be available to the members of a co-operative society of the tenant co-partnership type where the ownership over the flats vested with the Society and not with the individual members.
2. It has since been represented to the Board that the Societies are usually only lessees of the flats, the legal ownership of which really vests with the individual members. The normal procedure in such cases is that an agreement is entered into between the builder and each purchaser of flat in the building proposed to be constructed. The purchaser pays the entire cost of the flat in instalments spread over the period of construction. As soon as the building is completed the builder gives possession of the flats to various purchasers who then join together to form a co-operative society. The builder who had originally taken the land on lease or freehold transfers the land and the building thereon to the co-operative society. The society then allots the tenancy in the flats to members in such a way that each member gets the tenancy rights over the flats which he has purchased.
3. The Board are advised that under this arrangement the legal ownership in the flats vests with the individual members and that the exemption under section 5(1) (iv) of the Wealth Tax Act would be available to the member of such a society. The cases of tenant co-partnership societies should be carefully scrutinized to see that the co-operative society is only a lessee and the individual members are the real owners. If it is found that is so the owners of the flats should not be denied exemption u/s. 5(1)(iv) of the Wealth Tax Act, 1957.
4. The instructions contained in the Circular referred to earlier may be taken as modified to this extent. (F. No. 4/28/68-WT, dated the 10th January 1969).
OWNERSHIP FLATS IN CO-OPERATIVE SOCIETIES
[F. No. 4/28/68-WT, dated the 27th January 1969 ].
1. Exemption under section 5(1)(iv) – Instructions regarding —
Under the existing instructions, the Wealth – tax Officers, do not allow the exemption under section 5(1)(iv) of the Wealth-tax Act, 1957, in the cases of members of Co-operative Societies of the tenant Co-partnership type, on the ground that the legal ownership over the flats vests with the Society and not the individual members. It has been represented to the Board that these Societies are usually only lessees of the flats, the legal ownership of which really vests with the individual members. The normal procedure in such cases is that an agreement is entered into between the builder and each purchaser of flat in the building proposed to be constructed. The purchaser pays the entire cost of the flat in the building proposed to be constructed. The purchaser pays the entire cost of the flat in instalments spread over the period of construction. As soon as the building is completed, the builder gives the possession of the flats to the various purchasers, who then join together to form a co-operative society. The builder who had originally taken the land on lease or free-hold, transfers the land and the building thereon to the co-operative society. The society then allots the tenancy in the flats to the members in such a way that each members gets the tenancy rights over the flats which he has purchased.
2. The Board are advised that under this arrangement the legal ownership in the flats vests with the individual members and that the exemption under section 5(1)(iv) of the Wealth-tax Act would be available to the member of such a society. The cases of the tenant co-partnership societies would be scrutinized by the Wealth-tax Officers to see that the co-operative society is only a lessee and the individual members are the real owners. If it is found that this is so, the owners of the flats would not be denied exemption under section 5(1)(iv) of the Wealth-tax Act, 1957. [F.No.4/28/68-WT, dated the 27thJanuary 1969].
Q.4. A landlord of building is having tenants. The FSI of the plot was fully consumed in 1971-72. As per Development Control Regulations for Greater Bombay, 1991 (DC Regulations), he became entitled to construct additional floors by procuring TDR FSI. He assigned these development rights to a Developer for consideration. Whether the consideration is taxable?
Ans. Income Tax Appellate Tribunal (ITAT) Mumbai Bench in the case of Jethalal D. Mehta Vs. DCIT (2005) 2 S.O.T 422 (Mumbai) has held that there was no cost of acquisition of (TDR) rights to the owner of the receiving plot. Therefore as per ratio of the Supreme Court’s Judgement in C.I.T. Vs B. C. Srinivasa Shetty (128 ITR 294), the receipt is not subject to tax of capital gains under Income Tax Act. The assessee did not part with the land or building. The Assessing Officer may however, take the view that such rights are not without cost which can be ascertained proportionate to the total F.S.I. cost (original FSI and TDR FSI) by taking the cost of total FSI as equal to the land cost. The issue is debatable. A contrary decision is found in the case of Shakti Insulated Wires Ltd. Vs. JCIT (Mum) 87 ITD 56 where development rights were held as capital asset and A.O. was directed to make reference to V.O. to determine cost on the basis of their value as on 01-04-1981. In the absence of any authoritative pronouncement, a more probable and sustainable view seems to be that right to load TDR FSI is a capital asset and its transfer will result in taxable capital gains.
Q.5. Flat Owners Co-operative Society was formed by purchasers of flats from a builder. The Society executed Development Agreement with a builder. As per the arrangement, each member will surrender the existing flat and get a new flat, which will have one more room. Is the member required to pay capital gains tax on surrender of the old flat in exchange for a new flat?
Ans. In an arrangement where the society is of the nature of flat owners society, the capital gains accrue to the individual members, who are owners of the land, 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 manner in which the agreement is drafted. There may be an agreement under which the members transfer the entire development potential consisting of original F.S.I. 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 object could also be achieved by drafting an agreement in a different manner under which the members retain the FSI 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 + TDR retained by members in consideration of developer acquiring 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 rights 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.
Q.6. What will be the position if in the question No.5 the land belonged to the society and building was also constructed by it?
Ans. Where legal title vests in the societies, the cost incurred by the Developer in reconstruction of existing area and cost of additional space 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.
Q.7. Whether Society has to pay capital gains tax on the basis of market value determined by the Stamp Duty Authority as per provisions of Sec. 50-C of I. T. Act?
Ans. Section 50-C is attracted if the capital asset involved in transfer is land or building or both. The transfer of right to load TDR is not transfer of land and/or building or both. Under the Development Agreement, the land with building continues to remain vested in the society or the members as the case may be.
Hence provisions of Section 50C of the Income-tax Act cannot be made applicable to the capital gain arising from the grant of right to load TDR.
Q.8. Where a Flat Owners society distributes the unutilized FSI among the existing members in proportion to the area occupied by them and give them the right to develop their share with or without the assistance of a builder, whether the distribution will make Society liable for taxation? In such a situation, whether the compensation received from the builder will be the taxable income of the member? Whether it will be treated as dividend from the society?
Ans. Such distribution in the case of Flat Owners Society would be of the nature of conversion of collective ownership into individual ownership and will not amount to transfer. However, when the members transfer their rights to a builder, it may result in short term or long term capital gain. The members may take advantage of Sec. 54-F or 54-EC. (Benefit of Sec.54 may be doubtful as transfer of TDR may not be treated as a transfer of residential house). As the TDR rights already belonged to the member, though collectively, it should not be taken as distribution of dividend.
A different view is, however, possible in case of plot purchased type society. Allocation of FSI to members may not be taken as distribution of asset held collectively.
Q.9. Plot purchased type society enters into a development agreement with a builder giving him the right to demolish and reconstruct the building by utilising the existing FSI and loading TDR so as to compensate the members with 20% additional space and pay to the society an agreed amount. Whether there will be tax implications for the Society or for the individual members who will get additional space. If yes, how will the gain be determined? Whether in such a case, it is permissible to avail of the benefits of Section 54 of I. T. Act. ?
Ans. Since it is a plot purchased type society where land and building belong to the co-operative society, the gain, if any on grant of right to load TDR FSI will accrue to the society and not to the individual members and it is the society which will be subjected to tax on capital gains. This view finds support from the ITAT decision in ITO vs. Bhagwandas J. Lakhiani in ITA No.7054/MUM/2005 dated 30-3-2005. For this purpose, the cost incurred by the developer on reconstruction of existing area with additional 20% including the cost of acquisition of TDR space will be the consideration and gain is to be computed by deducting from it the indexed cost of acquisition of the capital asset.
Q.10. Where in a redevelopment agreement members are provided temporary accommodation by the builder or inconvenience/disturbance compensation for finding an alternate accommodation, during period of construction of new building will such compensation be deemed to be part of the consideration received by the society and taken into account in working out the taxable gains? Can it be offered to tax by the members? Or, no tax liability arises in respect of such income
Ans. The benefit provided by way of rent-free accommodation pending construction or the cash amount provided is of the nature of compensation and not in the nature of income in the hands of the members. In a case decided by ITAT, Mumbai in Lohtse Co-operative Housing Society Vs. 7th I.T.O. 051 ITD 0608, it was held that use of TDR injuriously affects the rights of existing occupants and, therefore, what is received is compensation for the injury caused.
Q.11. Where in a development agreement, the builder agrees to provide additional facilities by way of gymnasium, club house or swimming pool and makes such facilities available to the existing as well as new members, does profit arises to the society by such an arrangement? What, if it levies charges for the use of such facilities?
Ans. The Club house etc. will become of the property of the Society. The purchasers of flats from the developer will pay for the cost of Club house etc. to him. The existing members will get the benefit to use these facilities without any cost. The proportionate cost of Club house etc. attributable to area occupied by existing members is the consideration received by the Society. After induction of new members, old as well as new members will form the membership of the society. Charges levied from members are not subjected to tax in the hands of the society on principle of mutuality.
Q.12. Is it permissible for the Society to avail of the benefits of Section 54-EC?
Ans. Yes.
Q.13. In case the consideration money under a redevelopment agreement or the proceeds of investment are deposited u/s. 54-EC and on maturity distributed amongst the members, will it amount to distribution of dividend and hit by Sec. 67 of the Maharashtra Co-op. Societies Act restricting such distribution to 15% only ?
Ans. As per Sec. 2 (11) of Maharashtra Co-operative Societies Act, 1960 (MCS Act), the Dividend means amount paid out of profits of a Society to a member in proportion to shares held by him. Whether the amount of capital gains arising as a result of development agreement can be termed as ‘profit’ for this purpose is debatable.
If it is taken as profit, the amount required to be invested under Section 54EC is the amount of capital gain. Had it been distributed at initial stage it could have been termed as dividend within the meaning of Section 2(11) of M.C.S. Act. Investment deferred such distribution. The view that redemption amount of bonds is of the nature of profit cannot be ruled out. It may, therefore, be advisable to seek prior approval of the Registrar before doing so.
Q.14. In an arrangement where the redevelopment work is undertaken by the Society itself with funds provided by the members, will there be any tax implication?
Ans. There being no transfer involved in such a case, there is no gain and hence no tax implication at the stage of redevelopment. However, if flats are sold by the society there would be tax liability.
Q.15. How to compute Long Term Capital Gain on the grant of right to use TDR by the owner of a building?
Ans. At the outset, it is clarified that there is no authoritative pronouncement on this aspect. Different assessing authorities are taking different view as to taxability as well as computation of such gains. A cautious view which can be supported by reasoning, therefore, needs to be taken.
For computation of capital gains, the questions that are relevant are —
(i) period of holding of the capital asset
(ii) computation of full value of consideration and
(iii) cost of acquisition of capital asset
The view can be taken that the concept of TDR in Mumbai came into existence w.e.f. 25-03-1991. Unless the land itself was acquired after this date, the rights came into existence on that date (i.e.25/3/1991). In case of land was acquired after 25-03-1991, the date of acquisition of TDR loading right will be the date when land was acquired. This will determine whether the Development Rights transferred are short-term or long-term asset.
In answer to next question, the issue of full value of consideration in different scenario has been examined. Briefly stated, the amount paid to the owner together with the cost incurred by the developer in constructing the space for the owner, including cost of acquiring TDR (FSI), if any, for owners’ portion proportionate cost of construction of amenities, facilities for owners portion, proportionate cost of expenses incidental to development in getting approvals and sanction constitute the full value of consideration.
That brings us to the question of cost of acquisition. An extreme view taken by the I.T.A.T., Mumbai Bench in Jethalal D. Mehta vs. DCIT (2005) 2,-SOT 422 was that there is no cost of acquisition. For this they applied the ratio of decision in CIT Vs. Srinivasa Shetty (128 ITR 294) and held that no capital gain arises from transfer of TDR-loading right. The view taken is highly debatable and may not be acceptable to other Benches of the same or different Tribunals.
A reasonable view seems to be to workout the total available FSI (including the TDR-FSI) and spread it over the cost of the land from which the rights emanate. This system of proportionate cost has found approval of assessing / first appellate authorities in a few cases. A dispute may, however, arise as to the cost of land to be adopted for the purpose. What should be taken as cost if the land was acquired prior to 1-4-1981? Should it be indexed from 1-4-1981 or from March 1991 when the D.C. Regulations came into effect?
It seems logical, even though not agreed to by assessing officers and the first appellate authorities, that the cost of land should be indexed with reference to 1981-82 as the base year and not 1991-92. The rights attached to the land, including the right to develop, existed from the very beginning. It is a different matter that the rights were enhanced in 1991. The original as well as additional rights emanate from the land and the value is determined with reference to land cost. The indexation should, therefore, be from the date of acquisition of land (if acquired/purchased after 1-4-1981) or 1-4-1981 (if acquired/purchased prior to 1-4-1981) regardless of the fact that Transferable Development Rights were created by D.C. Regulations from 1991. The view finds support from Kerala High Court decision in Commissioner of Income-Tax Vs. Subaida Beevi (M) (Smt.) 160 ITR 557 holding that in case an asset became a ‘capital asset’ after the date of acquisition, it is the original cost and not the value on the date where it became ‘capital asset’ that determines capital gain. Reference in this connection is also invited to the decision of Mumbai Tribunal in Shakti Insulated Wires Ltd. Vs. JCIT 87 ITD 56.
An alternate method for computing consideration based on the practice of valuation for stamp duty purposes is sometimes suggested. Under the Guidelines for Stamp Duty Ready Reckoner, 2008 for Mumbai, land capable of utilizing TDR in MumbaiCity and Suburbs is to be valued at 1.4 times the land value of plot as per the Stamp Duty Ready Reckoner keeping in mind that the rate is for one FSI. In other words the value of Transferable Development Rights is taken as 40% of the value of developable land.
Stamp Duty Related
Q. 16. As a recipient of extra constructed area being retained by the members/ society and constructed by the developers, will a member of the society be liable to pay any stamp duty on either the extra constructed area, or on the entire newly re-constructed flat?
Ans. The Member of the Society shall not be liable to pay any stamp duty on either the extra constructed area under the Development Right Agreement or on the entire reconstructed flat for following reasons.
There is no transfer involved in the transaction, as far as the Member is concerned, since the extra area to the Member is due to grant of right to use TDR which already belongs to the Society. The Developer simply acts as the contractor for the construction of the entire area of the Members’ flat.
The Developer has to pay stamp duty on the development right agreement to be executed between the Society, the Members and the Developer @ 1% of the market value estimated by stamp duty authorities, which will include cost of construction of the Members’ Flats and the market value of TDR/loading rights being transferred to the Developer.
Q. 17. By any chance, will the society be required to pay any stamp duty towards the re-construction of the building?
Ans. The Society is not liable to pay any stamp duty towards the reconstruction of the building. The reconstructed building will consist of flats/car parking for the existing members of the Society and the balance flats/car parking spaces for sale by the Developers to prospective purchasers.
The stamp duty for the balance flats/car parking spaces to be sold by the Developers shall be paid later on by the prospective purchasers on the ownership agreements to be executed between the Developers and prospective purchasers. As regards the flats of the existing members of the Society in proposed building are concerned, the Society is not liable to pay any stamp duty on the same as discussed in reply to Question No.16 above.
Q. 18. Please advise us the position of stamp duty in the following case :
As per development agreement, Member ‘X’ is entitled to 1000 square feet of flat area, including 200 square feet of extra area offered by the developer. Now, if such a member, wishes to retain a flat that is smaller than what is due, say one flat of 700 square feet, and use the balance area of 300 square feet for another flat, say 700 square feet, by buying the extra area from another member who may wish to give up his area, then what will be the incident of stamp duty in such a case ?
Ans. In this case there should be a proper agreement between the two members for transfer / exchange of FSI which will attract stamp duty at the prevailing rates under Stamp Act on the area so transferred.
Q. 19. Whether stamp duty is payable if a member of a society purchases additional area from the Developer after the execution of Development Agreement?
Ans. The member in this case falls in the category of prospective purchaser in respect of additional area for which there will be proper purchase agreement which will attract stamp duty.
Q.20. How is Stamp Duty computed on Development Rights Agreement executed between the Society/Members and the Developers involving use of TDR FSI on plot of society by the Developers and wherein the Developer has agreed to provide flats in the new building to members with increased carpet area and also agreed to pay corpus to the Members/Society in consideration of permission to utilize balance TDR entitlement?
Ans. As per Article 5(g-a) of Schedule I of Bombay Stamp Act 1958, stamp duty is charged @1% of market value in case of Development Rights Agreement. In the case of Development Rights Agreements with society, the Development Rights agreed to be transferred is in the nature of right to load TDR FSI on plot of the society. DRCs are acquired by the Developer at his own cost for consideration. In the instant case, a portion of TDR loading right is retained by the society/members for providing increased area to the members and balance TDR entitlement is agreed to be transferred to the Developers for exploitation. For computation of market value for the purpose of Stamp Duty, it is necessary to know the quantum of TDR entitlement of members / society that passes on to the Developer. The guidelines are issued by the Stamp Duty Authorities for computing the market value for levy of Stamp Duty. As per Stamp Duty Ready Reckoner 2008, plot capable of utilising TDR should be valued at 1.4 times the land value of that plot as per ready Reckoner. For this, permissible FSI of plot is first determined and the same is increased by 40%. From this total FSI consumed in the construction of flats for members in the new building is deducted and balance FSI is valued at the rate of Land FSI in Ready Reckoner for the locality. This market value is further checked with the apparent consideration mentioned in the agreement, which is equal to the monetary consideration agreed to be paid to the society/members and the cost of construction of new flats for members and proportionate cost of construction of amenities / facilities for society. Higher of two figures is adopted for levy of stamp duty @1%.
Conveyance and Share Certificate Related
Q. 21. What is the position of the conveyance in the scheme of redevelopment with respect to the additional area offered to the society/flat owners by the developer?
Ans. The Society is already the owner of the plot in all the government records including the records of City Survey Office. The area of plot does not change due to construction of additional area on account of consumption of TDR FSI. Hence there is no need to have fresh conveyance.
Q. 22. What is the position with respect to the issuance of 2 share certificates instead of 1, in case a member purchases additional flat in the same society?
Ans. As per bye-law No.62 of model bye-laws of co-operative societies issued by the Govt. of Maharashtra individual member of the society may hold more than one flat in the building of society in his name or in the name of the members of his family. Additional flat could be taken in the Co-operative Housing Society on the grounds that can be inferred from the prescribed form at Appendix 29 of the bye-laws of the Co-operative Societies (form of application for permission to hold more than one flat) as under :
Large family.
Business activities are such as need special arrangement to accommodate visitors coming for business.
Any other convincing reason.
An existing member purchasing another flat/unit in the same society will get the share certificate of outgoing member transferred in his/its name. This share certificate will bear a number different from the one already issued to the existing member;
On transfer of such share certificate by the society in favour of the existing member, he will be holding two share certificates in the society;
As per section 28 of Maharashtra Co-operative Societies Act, 1960, in any society, no member can hold share capital more that prescribed and in no case it should be more than 1/5 of the total share capital of the society. If we assume there are 100 shares issued by the society, then a member can hold upto 20 shares as per section 28 of Maharashtra Co-operative Societies Act, 1960;
From the above, it can be inferred that the member can hold more than one share certificate provided holding of additional share certificate doesn’t infringe the section 28 of Maharashtra Co-operative Societies Act, 1960.
However, one member can exercise only one although he may have two share certificates. In case associate members recorded in both the certificates are two different persons yet the vote can be given by only one person as may be decided by them.
Miscellaneous
Q.23. How is it to be ensured that in the scheme of redevelopment of society’s new members (the ones that are newly introduced by the developers) do not stake claim with respect to the corpus received by the society, and interest thereon?
Ans. The following clause may be incorporated in the Development Rights Agreement between the Society, the Members and the Developers so that incoming members may not stake a claim with respect to the corpus received by the society.
“In all the Agreements with the prospective purchasers of the Flats/car parking spaces in proposed building, the Developers will lay down a condition that the prospective purchasers of flats/car parking spaces are aware that the capital / funds of the Society on the date of occupation of proposed building shall belong to the Members of the Society in occupation of the flats in the existing buildings and the prospective purchasers of flats/car parking spaces in proposed building shall not claim any interest in the same. The prospective purchasers of flats/car parking spaces in the proposed building shall have proportionate interest in respect of the deposits received by the Society pursuant to this Agreement.”
Q.24. In connection with Development Rights Agreement, what documents are required by Developers from Co-operative Housing Society for checking/investigating the title of the Society/members?
Ans. (a) Copy of Conveyance Deed in favour of Society.
(b) Latest Property Card, showing area of Plot with plan of plot.
(c) Latest Municipal assessment bill in respect of Society’s property
(d) Mortgage Deed and Re-conveyance Deed
(e) Approved Plans of the existing building
(f) Search report for past 30 years from Property investigator.
(g) Copies of share certificates of existing members
Q.25. What documents should accompany the Development Rights Agreement (D.R.A.) ?
Ans.
1. Property Card showing area of Plot along with plan of the plot.
2. List of Members including Associate Members showing the carpet area/ built-up area of flats in their occupation in existing building before the execution of Development Rights Agreement.
3. Details of proposed carpet areas to be provided to the Members in the new building
4. Details of car parking facilities to be provided to the existing Members.
5. Specifications to be provided in the new flats of proposed building for Members
6. Plans of the new flats for members.
7. Resolutions passed by the society in connection with grant of development rights.
Q.26. A developer in a development agreement with the Plot purchased type society makes payment/incurs expenditure of the below mentioned nature. Please indicate which of these will form part of consideration received by the society to be accounted for computation of capital gains —
(i) Corpus amount paid/payable to society
(ii) Amount paid/payable to individual members for permitting the society to redevelop
(iii) Cost of construction to be incurred in providing space equal to the existing space to the existing members in the new building
(iv) Cost of construction to be incurred in providing additional space in the new construction to existing members.
(v) Cost of construction to be incurred in providing club-house and/or other amenities in the new building.
(vi) Expenses Cost to be incurred in providing alternative accommodation to existing members during the period of construction whether directly or through reimbursement.
(vii) Expenses to be incurred in obtaining required permissions/approvals, etc.
Ans. The position in regard to different payments / expenses incurred by the developer which are treated as consideration in the hands of the society are is as under :-
(i) Corpus amount is consideration. Sometimes it is termed as corpus donation. Whatever be the term used, it may be difficult to establish a bonafide gift, hence that would be treated as the part of consideration.
(ii) Whether payment is made to members or the society, since the land from which development rights emanate belongs to the society, it will be treated as consideration received by the society.
(iii) The cost of construction to be incurred will form part of consideration.
(iv) Same as answer to (iii) above
(v) The cost of amenities to be provided to existing as well as new members to be inducted by the builder will have to be apportioned between existing and new members. To the extent it is attributable to existing members, it should form part of consideration.
(vi) This being of the nature of compensation for inconvenience to existing members, is a matter between builder and individual members. It should not be taken as part of consideration unless it can be established that the same was a consideration in disguised form.
(viii) Proportionate expenses pertaining to society portion will be added to the total cost and hence be part of cost incurred in space provided to existing members.
Q.27. Whether Housing Societies are liable to pay Service Tax on various charges, fees and other amounts collected from the members?
Ans. Yes. As per the clarification given by Jt. Commissioner of Service Tax, Mumbai under Ref. No.V/ST/HQ/Tech/Ref-25/06/1956. The amounts liable for Service Tax are as under:-
(i) Common Electricity
(ii) Repairs Maintenance of lifts
(iii) Service Charges
(iv) Car parking charges
(v) Insurance
(vi) Charges for health club, swimming pool, etc.
(vi) Use of terrace, etc for functions to non-members
(vii) Sale of terrace space and compound for hordings
The following amounts are not liable for Service Tax Payments :
(i) Property Tax
(ii) Water/Sewerage Tax
(iii) Contribution to Repairs & Maintenance Fund
(iv) Major Repair Fund
(v) Contribution to Sinking Fund
(vi) Interest on defaulted charges
(vii) Repayment of loan and interest
(viii) Non-occupancy charges
(ix) Lease Rent
(x) Non-Agricultural Tax
(xi) Admission / Entrance Fees
(xii) Issue of shares
(xiii) Deposits
(xiv) Premium on transfer
(xv) Voluntary donations
Q.28. What are the Implication of Works Contract Tax under MVAT Act in case of redevelopment of buildings owned by the Housing Societies.
Ans. When the members of Society redevelop the property for their own self whether Works Contract Act applies or not is an important issue. This question has assumed importance after the Apex Court decision in K. Raheja Development Corpn M/s. Vs. State of Karnataka AIR 2005 SC 2350. The ratio of this case must be understood with reference to the facts of that case. Therefore much depends on the intention of the parties as evident in the contract for redevelopment.
To make it simple, if the owners are redeveloping property for themselves say by appointing a contractor, then it can be a clear case of awarding construction contract. The employers i.e. the owners would be liable for deducting TDS as per provision of MVAT Act (explained in attached article) and the contractors would be liable for payment of tax. There cannot be any payment of stamp duty by the owners in such cases as there is no transfer of immovable property.
There can be situation where the owners sell the development rights with the extra flats which the developer can utilize to construct additional flats or floors. The developer under such circumstances would allot flats to the original owners. The intention of the owners is to get new flats constructed for an old flats, whether they receive premium from developers or not. Here the intention is to redevelop and there are chances of application of decision of K. Raheja to such facts. The decision of Apex Court stands, till reversed. If the Apex Court reexamines or reviews the Judgment of K. Raheja there can be possible different view. Therefore presently applying the ratio of K. Raheja, to the second situation, the owners shall be deemed to have entered into the Works Contract with developers.
As far as the allotment of new flats by developers to prospective purchasers is concerned, it is pure and simple sale. Here also situation can be judged based on the agreement entered into between the parties. The payment of advance towards flat by the buyers will not alter the legal situation. The buyer will be liable for payment of stamp duty on allotment of flats.
If the owners become liable for payment of tax under works contract, the liability for registration automatically arises and the other provisions of MVAT applies. The contractor can opt to pay 5% composition as per notification.
