Income-tax Act, 1961 (hereinafter referred to as ‘The Act’) is the only legislation of our country which refers 92 Central Acts and various State Legislations. To understand the various taxation issues relating to Real Estate Transactions, it is very essential to know the provisions of general law with special reference to Transfer of Property Act, Registration Act, Stamp Act, Development Control Regulations, etc. In this paper, we have made an attempt to discuss some of the very important taxation issues relating to Real Estate Transactions.

2. Development Rights

2.1 Capital Assets.

Section 2(14) of the Act defines “capital asset” mean “property of any kind”, held by the assessee whether or not connected with his business or profession, but specifically excludes ‘stock in trade’. In CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom.) and CIT vs. Vijay Flexible Containers (1990) 186 ITR 693 (Bom.), the court has held that the right to obtain conveyance of immoveable property is a capital asset on the same principle the Development rights are capital assets.

2.2 Development Rights – Who are entitled – Societies or members ?

In respect of Tenants co-partnership cooperative societies, which are of the nature of “Flat Owners Societies“ in which the flats are acquired by the society from the builder on ownership basis and thereafter Society is formed, and land is conveyed to the society and individual members acquire ownership rights over the building and underneath the development rights. This concept has been recognized under Bombay Stamp Act as on the conveyance in favour of the housing societies, stamp duty paid by the purchasers of flats on ownership agreements is deducted from the stamp duty payable on the market value of the property transferred in favour of the society as per proviso to Article 25 of schedule 1 of Bombay Stamp Act. Circular no F.N.4/ 28 /68- WT dt. 10th January, 1969 and 27th January, 1969 explaining the provision of section 5(1)(iv), the Board clarified that flats vest with individual member of society and wealth tax exemption will be available to individual members. The same principle may be applicable to income tax proceedings and hence members are entitled for the Development Rights. Westwind Realtors P. Ltd. vs. DCIT (2006) 9 SOT 572 (Mum) – The common medium of ownership of residential apartments is co-operative societies. But there is no hitch if the same activity is carried out by a company either. The Income Tax Law itself has recognized the locus standi of a company through section 27(iii) to legally hold properties and at the same time allot the de facto ownership to its members. In case of Tenants co-partnership co-operative societies which are of the nature of “Plot purchased type society” i.e. in which land is acquired by the society and the building is constructed by it for allotment to members for occupation , the development rights belong to society and society may be entitled to Development Rights.

3. Redevelopment

3.1 Apex Court in case of Jayant Achyut Sathe v Joseph bain D’Souza & Ors. (2006) 6 SCC 11 has held that all those buildings which were constructed prior to 1940 whether or not they are dilapidated, Regulation 33(7) of the Development Control Regulations, 1991 (DCR) would apply, hence, more than 19,000 buildings in Mumbai would qualify for redevelopment. As most of these buildings are owned by landlords, the redevelopment transactions would raise number of taxation issues in the assessment of landlords, societies, tenants and developers. Sale of TDR /FSI

3.2 In Jethalal D. Mehta vs. DCIT (2005) 2 SOT 422 (Mum.), following the judgment of Apex Court in CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), it was held that TDR granted by DCR, 1991 qualifying for equivalent F.S.I having no cost of acquisition, sale thereof gives no rise to capital gains. In ITO vs. Lotia Court Co-operative Housing Society Ltd (2008) 12 DTR (Mumbai) (Trib ) 396, it was held that the assignment of the TDRs to the developer and in turn the additional floors to be constructed and also repairs / renovation of the building to be carried out, does not entail accruing of any income in the hands of the assessee society, who is not the owner of the plot. Even in the case of flat owners who owned the individual flats in the respective names, there is no question of taxability of receipt on account of sale of additional floor space index received by the assessee by virtue of transfer of TDRs under the Development Control Regulation for Greater Mumbai, 1991. Receipt on sale or assignment of rights to receive TDRs is not liable to tax. In New Shailaja CHS vs. ITO (ITA NO 512/M/2007. BENCH B dated 2nd Dec 2008 (Mumbai) – www.itatonline.org) where the assessee, a Co-op Housing Society became entitled, by virtue of the Development Control Regulations, to Transferable Development Rights (TDR) and the same were sold by it for a price to a builder and the question arose whether the transaction of sale receipt could be taxed. It was held that though the TDR was a ‘capital asset’, there being no ‘cost of acquisition’ for the same, the consideration could not be taxed.

3.3 In Shakti Insulated Wires Ltd vs. Jt. CIT (2003) 87 ITD 56 (Mum.) it was held that development rights embedded in the ownership of the land are recognized as distinct from the land as per DCR and therefore constitute capital asset and FMV of development rights as on 1-4-1981 should be taken as cost of acquisition for indexation. This decision of the Tribunal has not been considered by the Tribunal in any of the subsequent judgments referred above.

3.4 Bombay High Court in Chheda Housing Development Corpn., a Partnership firm vs. Bibijan Shaikh, Farid & Ors. (2007) (3) MHLJ 402 (Bom.),Dealing with specific performance of Agreement for use of TDR, held that FSI/TDR are benefit arising from the land consequently must be held as immovable property.

The Court observed that an immovable property under the General Clauses Act, 1897 under Section 3(26) has been defined as to include benefits arising out of land. Therefore, any benefit arises out of the land, then it is immovable property.

3.5 Therefore, if TDR / FSI are considered as immovable property being part and parcel of land, can it be said that cost of TDR /FSI is nil ? Issue for consideration.

4. Transfer – S. 2 (47)

4.1 If the agreement of development enables the passing of domain and control of the immovable property by grant of an irrevocable authority or license, then even the date of agreement of development will constitute the date of transfer of the capital asset. Chaturbhuj Dwarkadas Kapadia vs. CIT (2003) 260 ITR 491 (Bom.)

4.2 Conversion of Capital Asset into stock in trade. As per section 45(2), if a capital asset is converted into stock in trade, the capital gain is taxable in the year such stock is sold, and the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of the transfer.

4.3 Conversion of Stock-in-trade into Capital Asset CIT vs. Bright Star Investments (P) Ltd (2008) 24 SOT 288 (Bom.), it was held that there is no provision similar to section 45(2) with respect to conversion of stock in trade to capital asset. It was further held that holding period is to be considered from the date of acquisition.

Kalyani Exports & Investment (P) Ltd. & Ors. vs. Dy. CIT (2001) 78 ITD 95 (Pune)(TM)(139 & 140) However, in Splendor Constructions (P) Ltd. vs. ITO (2009) 27 SOT 39 (Delhi), it was held that the period to be considered is from the date of conversion to investment. This decision has not considered the decision of the Mumbai Tribunal in Bright Star (supra).

Piecemeal Transfer

4.4 In Ajai Kumar Sah Jagati vs. ITO (1995) 55 ITD 348 (Del.) and M/s G. G. Dandekar Machines Works Ltd. vs. JCIT, ITA No. 181/Mum/2001, Bench – F, dated 28th February, 2007, possession of only a part of property was transferred against proportionate consideration received during the relevant assessment year. It was held that capital gains arising only on the said proportion amount of consideration could be charged in the relevant year and not on the entire consideration stipulated in the sale agreement.

4.5 Valuation as on 1-4-1981

Reference to the DVO can be made under s. 55A only when the A.O. is of the opinion that the value of the capital asset claimed by the assessee is less than its fair market value and not when he was of the opinion that the fair market value of the property on 1st April, 1981, as shown by the assessee was more than its actual fair market value.

CIT vs. Daulat Mohta HUF ITA No. 1031 of 2008 dt. 22-9-2008 (Bombay High Court)

Daulat Mohata vs. ITO ITA No. 322/m/2007 Bench ‘D’ Dt. 23-7-2008.

ITO vs. Smt. Lalitaben B. Kapadia (2008) 115 TTJ 938 (Mum.) Patel India (P) Ltd. vs. Dy. CIT (1999) 63 TTJ 19 (Mum.)

Sajjankumar M. Harlalka vs. Jt. CIT (2006) 100 ITD 418 (Mum.)

Mrs. R. M. Kazeram vs. Jt. CIT (2004) 91 ITD 429 (Mum.) (TM)

Smt. Krishnabhai Tingra vs. ITO (2006) 101 ITD 317 (Pune)

5. Consideration

5.1 Generally the consideration received is two fold i.e., partly in cash and partly in kind i.e., by way of property in the redeveloped property. Hence, it becomes important to ascertain the full value of consideration. Such transactions are thus a combination of sale and exchange. The Supreme Court in CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 (SC) held that in case of an exchange, the money’s worth of the property received in exchange constitutes the consideration for the property parted in exchange.

6. Block of Assets – S. 2(11)

6.1 Where land and building transferred were used for business, an important issue arises as to whether the new constructed area received can be added to the block of assets. The new constructed area will not be a building used for the purpose of the business. If it is not an asset which will be used as a “building” for purpose of the business it may not become a part of the block of assets. If the property is let out and income is chargeable under the head “income from house property“, can it be said that the building is used for the purpose of business and can be considered as part of block of asset? Issue for discussion.

6.2 The concept of block of assets in the scheme of the Act is vis-à-vis allowing depreciation in the computation of business income. If an asset is not put to use for the purposes of the business, depreciation may not be allowed. The new constructed area may be held as an “investment”, which may not be eligible for depreciation.

6.3 For the purposes of redevelopment the old building has to be demolished. Such building may be a part of block of assets. Issue arises as to whether indexed cost of structure can be deducted to arrive at the long term capital gains on sale of land. Indexation u/s. 48 is allowed only in respect of cost of acquisition or cost of improvement of the capital asset transferred. Therefore, one may contend that only the land is transferred and not the building, which will be demolished to enable the development of land, hence the cost of structure can not be taken in to consideration and only index cost of land will be considered. Issue for consideration.

6.4 The argument in favour of the proposition that the building is also transferred is that it cannot be said that the landlord remains the owner of the building after it is inferred that it has transferred the land to the developers under the development agreement. He is considered the owner, then he has the right to sell the building to anybody else as it is its ‘owned’ property therefore for seller he is entitled for apportionment towards the building.

6.5 The argument to the contrary is that he transferred only the land and merely permitted the developer to demolish the building to enable the developer to develop the vacant land and hence he cannot apportion the cost to the building. Issue for consideration.

6.6 Capital Gains – Depreciation has been claimed and allowed – S. 50, 54E.

Fiction created in sub-ss. (1) and (2) of s. 50 is restricted only to the mode of computation of capital gains contained in ss. 48 and 49 and does not apply to other provisions and therefore an assessee is entitled to exemption under s. 54E in respect of capital gain arising on the transfer of a long-term capital asset on which depreciation has been allowed.

CIT vs. ACE Builders (P) Ltd. (2006) 281 ITR 210 (Bom.) / ACE Builders (P) Ltd. vs. ACIT (2001) 76 ITD 389 (Mum).

CIT vs. Assam Petroleum Industries (P) Ltd. (2003) 262 ITR 587 (Gau.)

CIT vs. Legal Heirs of late Dr. (Mrs. S. R. Pandit ITA No. 144/2007 dt. 30-8-2005 (Bombay High Court)

7. Expenditure S. 37 & 48

7.1 Compensation paid to tenants/lessee can be reduced from full value of consideration In CIT vs. A. Venkataraman and others (1982) 137 ITR 846 (Mad.) and Naozar Chenoy vs. CIT (1998) 234 ITR 95 (AP) it was held that the compensation paid to tenants to enable handing of vacant possession of property transferred were allowable as deduction. Similarly, compensation paid to hutment dwellers on assessee’s land to enable sale of vacant land was allowed as deduction in computation of capital gains in CIT vs. Miss Piroja C. Patel (2002) 122 Taxman 752 (Bom.)

8. Conversion of tenancies into ownership

8.1 Whenever redevelopment of the tenanted properties take place tenants prefer to convert their tenancies into ownership basis by paying 100 months rent. In Dr. D. A. Irani vs. First ITO (1984) 7 ITD 160 (Bom.) (SB), Assessee was initially in occupation of flat as a tenant. Later he acquired it by purchase from the original owners with all the rights and interest therein including occupancy right. There was a union of the interests of the lessor and the lessee and tenancy was extinguished. It was held that Flat sold within 4-5 months thereafter was short-term capital gain.

8.2 A tenancy for tenancy is a transfer by way of ‘exchange’ and the moneys worth of the new tenancy received in exchange constitutes the consideration for the old tenancy parted in the exchange. In CIT vs. D.P. Sandu Bros Chembur (P) Ltd ( 2005) 273 ITR 1 (SC) the apex court held that tenancy right is a capital asset as the cost of acquisition being nil no capital gain tax could be charged. After the amendment to section 55(2) w.e.f. 1-4-1995 if the tenant has not paid any cost for acquiring the tenancy the cost will be nil. In case the tenant gets alternative accommodation on ownership basis he may be liable to capital gains tax on the value of the ownership rights which he gets. In case if he is not owning any other house property he may be entitled to the benefit of section 54 F of the Income-tax Act subject to other conditions.

9. Housing Projects – S. 80IB(10)

9.1 The expression “housing projects” has not been defined in section 80IB.

The Concise Oxford Dictionary, Sixth Edition, gives its meaning in noun form as a “plan, scheme, planned undertaking.”

As per Chamber’s Twentieth Century Dictionary (Revised edition) project means “a scheme of something to be done; a proposal for an undertaking; an undertaking.”

From a reading of the above, it emerges that a project must be a planned affair or a scheme of something undertaken to be done.

Since the housing project is required to be approved by a local authority, it would be fair to construe that the scheme or plan of the housing project must be in keeping with schemes laid down by the approving local authority. If there is convenience shops within the project, same can be considered as Housing Project.

The view taken by us also finds support from CBDT circular F. No. 205/3/2000/ITA II dt. 4-5-2001. This circular is the reply given by the CBDT to a query posed by the Maharashtra Chamber of Housing Industry in a representation made by it to CBDT. Here the CBDT has clarified that “any project which has been approved by a local authority as housing project should be considered as adequate for purpose of Section 80IB(10)”.

9.2 One of the issues for consideration is whether assessee must be the owner of the land on which the housing project is constructed is now settled by the Special Bench in Radhe Developers & Ors. vs. ITO & Ors. (2008) 23 SOT 420 (Ahd). In this case, land was not registered in assessee’s name. Contention of the Revenue was that in order to claim deduction under S. 80IB(10) the assessee must be the owner of the land on which the housing project is constructed. It was held that there is no such condition in the provisions of S. 80IB(10). Deduction under S. 80IB is allowable to an undertaking developing and building housing project, whether it is developed by it as a contractor or as an owner. It was also held that the term ‘contractor’ is not contradictory to the term ‘developer’.

In this case another important issue before the bench was whether the profit earned by assessee including sale of Extra-FSI which was unutilised, was eligible for deduction. It was held that there is no condition as to FSI under the scheme of S. 80IB(10) It is not mandatory requirement to fully utilize permissible FSI. In the facts of the case, it was held Development agreement with the land-owners makes reference to land area only. Also, sale deeds executed in favour of buyers of the residential houses are for sale of plot of land. In both the documents assessee has not acquired or relinquished rights with reference to FSI. There is no question of selling unused FSI to the individual buyer or calculating profitability on FSI as the same is not contemplated under S. 80IB(10).

Calculation given in the approved plan is for the maximum permissible FSI. By giving such calculation it is not mandatory to make construction to the fullest extent of maximum permissible FSI. Therefore, deduction could not be denied to the assessee on the ground that the profits earned by the assessee are not for developing and building housing project done but for sale of extra FSI which has not been utilized for developing and building the housing project.

9.3 However, an issue may arise in a case where an undertaking developing and building housing project is engaged as a sub-developer and all the sanctions are obtained by the developer whether the sub-developer would be eligible for the deduction or main developer or both. In Saroj Sales Organisation vs. ITO ( 2008 ) 115 TTJ 485. the tribunal held that the sub-developer is eligible for deduction.

9.4 Another issue which arises is whether the benefit of extension of the date of completion of project upto 31st March, 2003 were applicable to the Asst. Year 2001-02 and subsequent years only. In Dy. CIT vs. Ansal Properties & Industries Ltd. (2008) 22 SOT 45 (Del.) it was held that the Contention of Revenue that the amendments made in S. 80IB(10) by the Finance Act, 2000 extending the date of completion of project upto 31st March, 2003 were applicable to the Asst. Year 2001-02 and subsequent years and the assessee in the instant case for the Asst. Year 2000-01 was not eligible to avail the benefit of the said amendments is not acceptable.

9.5 Many times developers under a single sanctioned plan construct separate wings for houses for higher strata of the society (which do not fulfill necessary conditions) along with low cost houses. Whether the assessee would lose deduction on eligible units due to ineligible units This issue came to be decided in Saroj Sales Organisation vs. ITO (2008) 115 TTJ 485 (Mum.) / (2008) 3 DTR 494 (Mum) wherein it was held that Assessee having completed the construction of various wings of the building under the approved plan in two different blocks under different certificates of commencement, was eligible for deduction under S. 80IB(10) in respect of one block in respect of which claim for deduction was made and which satisfied the requirement of S. 80IB(10); claim could not be denied by clubbing the two blocks especially when the second block had been kept separate by the assessee and for which deduction under S. 80IB(10) was not claimed.