One of my clients recently reached out to me with a unique situation. His inquiry was primarily around Capital Gains Tax in Redevelopment
His case details as follows:
My father had purchased a pagdi room in the 1968 in Mumbai suburbs. Building went into redevelopment and we got a 1 BHK flat in lieu of the same.
We purchased extra carpet area from the Builder and paid Rs 18 lacs for the same. During the period of redevelopment, my father passed away, and me [I am the only son, no siblings], along with my mother inherited the flat.
Recently we sold the flat.
My query is as follows: 1) What would be the Capital Gains Tax in Redevelopment? and how it will be calculated? 2) Both me and my mother are Senior Citizens and do not have any other source of income, What would be the amount of tax in our case?
Below was my response to his query:
Where a capital asset has been inherited, the period of holding of the capital asset by the previous owner also needs to be taken into consideration in computing the number of years of holding.
As the date of acquisition falls prior to 1 April 2001, he has a choice to consider the Fair Market Value (FMV) of the property as on 1 April 2001 as his acquisition cost. It is advisable to get the FMV / Valuation of the property as on 01-04-2001 done from a registered valuer. Government-approved valuers follow a standard process for the valuation and provide a detailed report.
“Assumptions of any type for consideration of value shall not be entertained by the income tax department. In case of any enquiry, the department will consider the value stated in the valuation report from a registered valuer,"
In this case since the period of holding is more than 36 months, it will be classified as Long Term Capital Gain form sale of House Property. The capital gain will be taxed at 20.8%. Ofcourse, he can save tax by investing the sale amount in a new house or purchasing 54EC capital gain bonds.
Further, Capital Gains would be distributed between both of them as they both are legal heirs of that property. As mentioned above, it will be a long term capital gain so they both will be eligible to get benefit of indexation.
Now lets move to other situations in a Redevelopment project and the Income Tax implications of Redevelopment.
Income Tax implications of Redevelopment
Who is Entitled to the Development Rights – Society Or Members?
In respect of Tenants co-partnership co-operative 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. 10.0.1969 AND 27.01.1969 explaining the provisions of section 5(1)(iv), the Board clarify that flats vest with individual members of society and wealth tax exemption will be available to individual members.
1 - What is the Liability of Capital Gain Tax on Additional area in the hands of individual members? Basically on Additional Area expected at Redevelopment
Answer: As per Section 54 of the Income Tax Act, 1961, if any residential property which was held for a period of more than 3 years is sold or given for redevelopment and the new flat is purchased or acquired within a period of 1 year before or 2 years after the sale or constructed within 3 years after the sale then capital gain arising on the transfer of the old flat will be exempt to tax u/ s. 54 of the Income Tax Act, 1961 to the extent of the cost of such new flat.
In the case of redevelopment, the new flat to be acquired is treated as "constructed" for the purpose of the Section 54. Thus, if the new flat is acquired by the owner within a period of 3 years from the surrender of the original flat then the capital gain arising from the sale of the original flat can be claimed to be exempted u/ s. 54 of the Income Tax Act.
If the new flat is not acquired by the owner within a period of 3years then the Assessing Officer at his discretion can disallow the same at any time during the assessment.
However, allotment of a flat or a house by a cooperative society, of which the assessee is the member, is also treated as construction of the house [Circular No. 672, dated 16-12-1993].
Further, in these cases, the assessee shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit. [ Sashi Varma v CIT (1997) 224 ITR 106 (MP)]. Delhi High Court has applied the same analogy where the assessee made substantial payment within the prescribed time and thus acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period. [CIT v R.C. Sood (2000) 108 Taxman 227 (Del)].
Hence, relying upon the above judgments, even if in the case of development, the new flat is acquired by the owner after a period of 3years from the surrender of the old flat, an assessee can claim exemption u/ s. 54.
If the new flat acquired (& claimed exemption u/ s. 54) is sold within a period of three years from the date of purchase then the capital gain exemption claimed earlier would become taxable in the year the new flat is transferred.
Thus, in case, the Receipt of extra carpet area over and above the existing area could be claimed as exemption u/ s. 54 of the Income Tax Act, 1961.
Further, we would like to state that under the definition of “Transfer” according to Sec 2(47) Income Tax Act, 1961, transfer, in relation to a capital asset, includes sale, exchange, or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.
An exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. Hence, the acquisition of new flat would be considered as exchange and would be considered as transfer for the purpose of capital gain.
Argument could not be made that no cost is incurred by any member for the acquisition of the new flat and hence capital gain cannot be computed and the case does not fall within the ambit of Section 55(2). The member is forgoing his rights in the old flat. And hence, it would be considered as the cost of acquisition of the new flat.
However, if the residential flat is held for a period of less than 3 yrs than the receipt of extra area by the individual members would be taxable in the hands of the individual members.
2 - What is the Liability of Capital Gain Tax on Cash compensation received upon surrender of entitled additional area?
Answer: If the Individual member is surrendering a part of the existing area then the Individual member would be liable to pay Capital Gain Tax. The sale consideration would be calculated as per Section 50C of the Income Tax Act , which is as follows:
“Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48 , be deemed to be the full value of the consideration received or accruing as a result of such transfer.”
However, if the Individual member is surrendering a part of the additional area then the Individual member would not be liable to pay any income tax or capital gain tax on the same.
Receipt Of Cash Compensation By An Assessee On The Redevelopment Of A Housing Society Is Not Taxable – Income Tax Appellate Tribunal, Mumbai
3 - What is the Liability of Capital Gain Tax on Society for receiving amenities and facilities for the common use of its members and their families.
Answer: If the Society is receiving the amenities and facilities for the common use of its members and their families then the same is not taxable in the hands of the Society or the Individual members as there is no cost of acquisition of the same.
In deciding the case of JETHALAL D.MEHTA V. DY. CIT [(2005) 2 SOT 422 (MUM.), Hon.
Income Tax Appellate Tribunal mainly relied upon Supreme Court decision in the case of CIT V. B.C.SRINVASA SHETTY 128 ITR 294 in which it was decided that if there is no cost, then no capital gain can be worked out; hence amount received is to be treated as exempt receipt.
4 - What is the Liability of Capital Gain Tax on Corpus Money received by the individual members from the Developer in lieu of surrender of part entitlement of FSI/Development rights?
Answer: If the Individual member is receiving an area which is same or more than the present area then the Individual member is not liable to pay capital gain tax on the same.
If however, Individual member is receiving an area which is less than the present area than the Individual member is liable to pay Capital Gain Tax as per Section 50C of the Income Tax Act, 1961.