By Legal Cell 

1. As discussed, the capital gains on transfer of development rights to the developer arises :

• to the society in case where the society is of the nature of Plot purchased type society; and
• to the members in the case of Flat Owners

2. The relevant provisions under the Income Tax Act for planning of the tax liability on transfer of development rights held for a period of more than 36 months are discussed hereunder :

Section 54

The aforesaid section inter alia provides that in case the assessee, who is individual or HUF, derives long-term capital gain from transfer of building or land appurtenant thereto and purchases or constructs another residential house within a specified period, the capital gain to the extent of cost of purchase or construction of that another house is not charged to tax. The aforesaid exemption is subject to the conditions that the newly acquired/constructed property is held for minimum three years.

The specified period within which the residential house is required to be purchased is one year before or two years after the date of transfer and if constructed, three years from the date of transfer.

The judicial authorities have laid down the principle that under the provisions of section 54, if an assessee sells more than one residential house and reinvests the capital gains arising therefrom in a new residential house, then also he shall be able to claim the benefit of exemption under section 54, irrespective of the ownership of other house properties.

Section 54F

The aforesaid section inter alia provides that if the long term capital gain arises from transfer of any asset, other than the residential house and the assessee being an individual or HUF acquires / constructs within the specified period a resi- dential house, the long-term gain is not charged to tax in the year of transfer subject to following limits :

• If the cost of purchase/construction of the residential house is equal to or more than the net consideration received on transfer, the entire amount of capital gain is not charged to tax.
• However, if the cost of purchase/construction of the residential house is less than the net consideration received, only the proportionate amount of capital gain is not charged to tax. The aforesaid exemption is subject to the condition that the assessee does not have more than one residential house as on the date of transfer. Furthermore, the exemption is withdrawn if within one year of the date of transfer, the assessee pur- chases any residential house other than the new house or within three years constructs another house property, other than the new house.

The specified period within which the residential house is required to be purchased is one year before or two years after the date of transfer and if constructed, three years from the date of transfer.

Section 54 EC

This provision exempts any long-term capital gain arising to any assessee including a society if the amount of capital gain is invested in the following bonds within a period of six months from the date of transfer of capital asset. The gain is exempted to the extent of investment in the bonds and maximum investment that can be made in the eligible bonds is restricted to Rs. 50,00,000/- per financial year. In case the amount invested is less than the amount of gain, only the proportionate gain is not charged to tax.

The specified bonds are

• Bonds redeemable after 3 years issued by the National Highway Authority of India; and
• Bonds redeemable after 3 years issued by the Rural Electrification Corporation

In case the bonds are transferred or converted into money at any time within a period of three years from the date of acquisition, the amount of capital gain that was exempted will be deemed to be income chargeable under the head ‘capital gains’ relating to long term capital assets of the year in which such transfer / conversion takes place.

3. Applying the above three provisions, the position that emerge is as under :

(a)Where a member of a Flat Owners Society is chargeable to tax, he being an individual is entitled to avail benefit of Section 54F because the gains arises to him from transfer of development rights. The gain is deemed to have been invested in a residential house which is made available to him by the developer. This is subject to the provision that he does not own more than one residential house as on the date of transfer of development rights.

He is also entitled to the benefits of Section 54EC. Benefit of Section 54 will not be available to the member of a Flat Own- ers Society as the gains arises to him not from transfer of residential house, but from transfer of development rights. (b)Where gains arises to a Plot purchased type society, the only provision which is available to the society is to avail the benefit of exemption in Section 54EC as the other provisions are applicable to individual/HUF only.