• This FAQ presents key income tax points that every resident of a housing society, whose building is proposed to be redeveloped, should know when navigating the redevelopment journey. Author has used his experience to anticipate situations and provide answers.

eSamskriti earlier shared A Framework for Redevelopment of Housing Societies in Mumbai and a briefly Income-tax issues on Redevelopment. This one is more detailed. 

Author is a senior based Chartered Accountant & former President of Bombay Chartered Accountants’ Society. We are very grateful to him for selfless sharing.

Redevelopment is reshaping Mumbai's skyline, offering a chance to transform aging buildings into modern marvels. Amidst the excitement, humdrum, profits and the intricate web of regulations, an important aspect often gets side lined- income tax implications.

In this FAQ key income tax considerations that every participant should know, whilst navigating the redevelopment journey, are placed in a Question and Answer format. It has answers to lot of practical questions that society members may wish to know. Where needed it refers to Development Control Regulations.

In this case, the society does not transfer development rights inherent in the land it owns. Instead, the Developer procures FSI/TDR from the open market, and the society merely grants permission to the Developer to use that FSI for constructing additional area (including for housing existing members and new flats for the Developer to sell).
No Capital Gains should arise since there is no “transfer” of a capital asset by the society as per Section 2(47). The society is not transferring ownership or development rights over the land - it is permitting the use of externally sourced FSI. 
As noted, neither the land nor the rights therein are transferred. The right to construct or load additional area has a reason on account of change in the Development Control Rules, 1991 as far as the state of Maharashtra is concerned for no additional cost or payment. Such rights arise without any cost of acquisition and therefore the computation of capital gains under section 48 on the grant of permission to construct is not possible in the absence of the cost of acquisition.
In computing the capital gains, it is essential to have two components i.e. full value of consideration and the cost of acquisition of the rights or permission to construct additional area.

In the given case no cost of acquisition is ascribed or paid for acquiring the FSI or TDR and therefore one of the components for computing capital gains is not available and with that there is a failure of computation mechanism. Considering the facts the Bombay High Court in the case of Sambhaji Nagar CHSL, 370 ITR 325, following the decision of the Supreme Court in the case of BC Srinivasa Shetty 128 ITR 294 held that the consideration received on grant of permission to acquire TDR or FSI and construct a building was not taxable. The aforesaid position in law confirmed by the courts is sort to be changed by the Finance Act 2023 with an amendment in section 55(2)(a) and 55(1)(b) w.e.f 01.04.2024 i.e. A.Y 2024-25.
The amendment has changed the definition of the cost of acquisition and the cost of improvement for the purposes of Section 48 and 49 by providing that the Cost of Acquisition of a capital asset being any ''other right'' or any other "intangible asset" shall be taken to be Nil unless any actual payment is made for acquiring such right. The memorandum explaining the amendment has clarified that section 55 is amended to cover the cases of FSI and TDR arising on account of change in goods and regulations, besides many other cases of similar nature. 
In cases where the consideration is received in cash by the members for grant of permission to construct on the basis of changes in DCR 1991, the position in law would be same as has been explained for the receipt by the society. 
2. Will the answer be different where the society grants development rights in respect of the unutilised FSI pertaining to the plot of land owned by it in lieu of the Developer agreeing to construct new building for housing the members of the society besides the payment of monetary consideration by using the unutilised?:
Unlike the facts in the first case, there is no right created on account of any change in rules and regulation like DCR 1991. Instead, in this case the society had acquired the land with the right to construct thereon. There has been no change in such a right and no new rights have been acquired with or without cost. It had not consumed the rights in its full potential.
Such unconsumed rights are capital assets and transfer thereof results in capital gains taxable under the Income Tax Act. This is a clear case of capital asset transfer under Section 2(14) and Section 2(47), where the society transfers the right to develop unutilised FSI, which is a valuable right embedded in the land ownership. The transaction would be regarded as a transfer of a capital asset. Capital Gains will arise in the hands of the society under Section 45.-The full value of consideration includes monetary payment + cost of construction borne by the Developer for housing the members.  Please see Bhatiya Nagar premises cooperative society Ltd 80 taxmann.com 33 Bombay. 
3. When a member of a society gets the new premises admeasuring 1000 sq.  in lieu of the existing premises admeasuring 1000 sq. , as permanent alternative accommodation under an  agreement labelled as PAAA would that be considered as ‘Transfer’ under the Income-Tax Act ? 
The transaction is usually documented in an agreement called permanent alternative accommodation agreement (‘PAAA’). 
The usual clauses of PAAA provide for surrender of rights and also the handing over of possession of the existing premises in lieu of allotment of new premises to be constructed by the builder/developer.
The acquisition of a redeveloped flat in exchange for an old one is considered a "transfer" under Section 2(47) of the Income Tax Act, 1961. This holds true even if the flat's area remains unchanged, as the original asset is relinquished in exchange for a new one. 
The definition of "transfer" under income tax law is broad to encompass sale, exchange, compulsory acquisition under law, relinquishment of an asset, and extinguishment of rights in the asset. Alternatively, in rare cases the ownership of the existing premises and the rights pertaining to such premises is retained by the owner and the developer is asked to construct new premises on behalf of the owner in lieu of the owner granting the developer the permission to utilise the balance FSI if any or acquire it from market and utilise the same on the plot of land. Even in the alternative case there would arise a transfer of the balance FSI but not the transfer of the premises.

4. If yes, will the resulting gains be treated as a long-term capital gains? If yes, will such gains be liable to tax? 
A ‘flat’ is defined under MOFA/ RERA to mean and include a unit of premises, residential or commercial or industrial or otherwise. A flat being residential premises is a ‘capital asset’ under the Income tax Act. Its transfer, as discussed above is subject to capital gains tax. If the flat has been held for more than 24 months, the gain is treated as long-term; otherwise, it is short-term. Such gains would be subjected to tax at a concessional rate of tax in case of long-term gains. 
However, if the redeveloped flat is acquired within two years of the transfer or it is constructed within 3 years of the date of transfer, the capital gains are exempt under Section 54 or Section 54F (in case of tenancy rights) of the Income Tax Act subject to fulfilment of other conditions. The short-term capital gains will not be eligible for the benefit of reinvestment in new house and would be taxed at regular rates. Please also refer to the answer to the next question 
5. Is there a way by which tax on such long-term capital gains can be saved? If yes, what are the conditions for saving such taxes? 
Yes, tax can be saved on reinvestment of the Long-term capital gains as explained in answer to the above question subject to fulfilment of the prescribed conditions.
Taxpayers can avail exemption under Section 54 or 54F (for tenancy rights)  of the Income Tax Act, by investing the capital gains in a new residential property within the stipulated time frame. Alternatively or additionally, one can claim exemption up to Rs.50 L under section 54EC by investing the sale proceeds into specified bonds within six months from the date of transfer.  
The new residential house property should be acquired within the two years after the date of transfer. In the case of constructing a new house, the assessee is given an extended time period to construct a house, i.e., within three years after the date of transfer or sale.  

a. The house property that is bought should be situated in India. 
b. The residential premises so acquired should be held for the period of three years.
c. One of the conditions of Section 54 or 54F is that the sale consideration and/or purchase consideration in excess of Rs. 10 crores is to be ignored in computing the benefit of Section 54 F of the Act. 

6. When a member of a society gets the new premises admeasuring 1400 sq.  in lieu of the existing premises admeasuring 1000 sq., as a permanent alternative accommodation under an agreement labelled as PAAA, will the additional area of 400 sq. feet be subjected to any form of tax under the Income Tax Act? Will this additional area offered to the occupant be taxable in the hands of members as no consideration has been paid for the same? (Section 56(2) (x) of the Income Tax Act, 1961.) mso-add-space:auto;text-align:justify;text-justify:inter-ideograph;line-height:
In the context of property redevelopment in Mumbai, Section 56(2) (x) of the Income-tax Act, 1961 should not be applicable to society members or tenants who receive larger premises, as such transactions are not gratuitous but based on valid contractual consideration.  

Members or tenants surrender their old flats, consent to redevelopment, temporarily relocate, and forgo rights and conveniences—all of which amount to valuable non-monetary consideration. The additional area is, therefore, not a gift but compensation, aligning with the concept of “consideration” under Section 2(d) of the Indian Contract Act, 1872. Judicial precedents and administrative practices support that Section 56(2) (x) targets only transactions that are either without consideration or clearly undervalued. Furthermore, the safe harbour rule allows a variation of up to 10% in stamp duty value versus consideration, shielding minor discrepancies.

Redevelopment is fundamentally a case of exchange rather than a monetary sale, and in such exchanges, it is presumed that the values match unless proven otherwise. The agreement to provide larger premises to all members uniformly is an outcome of commercial negotiation and not an act of generosity. Developers offer additional space as compensation for the inconvenience, hardship, and loss for the members and tenants-such as demolition of old premises, relocation to Temporary Alternative Accommodation (TAA), loss or damage to furniture and fixtures, emotional and financial cost of shifting, increased living expenses, and dislocation challenges. These intangible yet significant components form part of the consideration.

Moreover, under Development Control Regulations, specifically Rule 33(7) of the DCPR 2034, while a minimum area for rehabilitation is mandated, no maximum cap is prescribed, leaving room for negotiation. As such, area differences between projects-even under the same developer—are legitimate outcomes of distinct negotiations, and are not evidences of undue benefit. Stamp duty authorities also treat the surrender of old premises and associated rights (like FSI and development rights) as equivalent in value to the new premises received, reinforcing the position that no excess benefit arises to attract Section 56(2)(x).  Fitwel Logic Systems Pvt. Ltd.’s case supports the view that this anti-abuse provision cannot apply in the absence of concrete evidence of undervaluation.

To mitigate any possible future dispute, it is strongly advised that all elements of consideration—particularly non-monetary ones like development rights, relocation liabilities, and lifestyle disruptions—be transparently documented in the Development Agreement and the Permanent Alternate Accommodation Agreement (PAAA). This comprehensive documentation will support the position that the transaction is at arm’s length and with adequate consideration, keeping it outside the purview of Section 56(2) (x).

7. Developer has offered additional 3000 sq. ft. which can be bought by members- at a fixed price of Rs. 60,000 per sq. ft. (payment to be made as per payment schedule agreed with the developers).  This price can be lower than the Circle rate / ready reckoner rate applicable at the time of signing of the sale agreement for the additional area. Will this difference be taxed as income in the hands of members or tenant as benefit for which full consideration not paid? Also, what if the circle rate / ready reckoner rate is lower than Rs.60,000 per sq. ft charged by developer to members? Does it have any impact if builder is selling flats to outsiders at price higher or lower than Rs.60,000 per sq. ft?  
The offer by the Developer to a member or tenant  for sale of additional area at a rate lower than the Circle rate/ready reckoner rate is as per the written agreement between Developer and the society or owner  and is on account of the negotiations between the parties for grant for development rights and is based on commercial considerations.
The process involves an offer by one party and the acceptance thereof by the other party resulting into an enforceable contract under the Indian Contact Act – 1872, the basis whereof is the consideration to grant development rights and the consent to redevelop the building. Once a consideration is moving based on commercial negotiations, it cannot be held to be ‘inadequate’ even where the same is found to be less than the Circle rate/ready reckoner rate. 

The issue is to be examined in the context of Section 56 (2) (x) and determine whether the said provision is applicable where an additional area is offered to a member or tenant. As noted in reply to an earlier question, the consideration for moving   from the member or tenant for obtaining the new premises comprises of several factors and the aggregate value thereof is matching, if not more than the Circle or  Ready Reckoner Rate. In the circumstances, the consideration offered by the member or the tenant cannot be considered to be less than the stamp duty value of the new premises.

In a case where the Circle rate/ready reckoner rate is lower than the price paid, the consideration moving from a member cannot be termed as ‘inadequate’ for the purposes of s.56 (2)(x).

The fact of the Developer offering the flats to a rank outsider at a price higher than the Circle rate/ready reckoner rate has no relevance to the adequacy of consideration agreed to be paid by a member or tenant which is defined by the commercial negotiations and the adequacy of the value of the development rights granted to it.  For the purposes of s. 56 (2) (x) the relevant factor for its attraction is whether the consideration moving from the member or tenant is matching the Circle or Ready Reckoner Rate for levy of stamp duty. If yes the charge for tax is not attracted.

Again, for the member or tenant, the issue has relevance for determining the application of s.56 (2) (x) of the Act. The said provision is benchmarking the consideration paid by the member or tenant with the stamp duty of the new premises. The value at which the member or tenant is offering the premises in the same building to a non-member has no relevance for determining the compliance of s. 56(2)(x) as long as his consideration for the new premises matches the Circle or Ready Reckoner Rate for the new premises.
8. Where a member of the society sells the new premises, post redevelopment,   whether the entire sale proceeds for transfer of new premises admeasuring 1400 sq. feet be considered for determination of long-term capital gains? Will such gains be treated as the short term capital gains or long-term capital gains? 

The exemption from tax under section 54 or 54F is conditional and one of the conditions requires the tax payer to hold the new house for a period of three years from the day of its purchase or construction failing which in computing the capital gains on transfer of the new house the cost of acquisition of such a new house would be reduced by the amount of capital gains for which the benefit was claimed in the year of transfer of the then existing premises which will have the result of taxation of higher capital gains in the year of transfer of the new house. 

For example, where the long term capital gains of Rs. 1 crore on transfer of old premises is reinvested in acquiring/constructing new premises valued at Rs 1.50 crore and the new premises are transferred within a period of 3 years for Rs. 2 crores then in such an event the resulting capital gains u/s 54 would be computed at Rs. 1 crore (Rs 2 crore - 1 crore) and not Rs. 50 lakhs (2 crores - 1.50 crores).
In other words, the long-term capital gains of Rs 1 crore on transfer of the old premises not taxed in the first instance is being taxed on in the second instance of transfer. In a case where the benefit is claimed u/s 54F, the capital gains for which the exemption was provided would be brought to tax in the year of transfer of the new premises.
9. Members of society or the tenants under PAAA usually receive from the Developer, the rent for shifting to the alternative accommodation once they vacate their flats for the period ending with the possession of new flat in the redeveloped building. Whether the rent received is Rs 2,00,000/ per month, be taxable? 
The tax treatment of cash compensation received for rent during redevelopment—over and above the new premises allotted—can be approached in three primary ways. 
One view considers it as part of the ‘full value of consideration’ under section 48 of the Income Tax Act, arising from the transfer of the old property. In such a case, the compensation enhances the long-term capital gains, which may be eligible for exemption under section 54 or 54F, provided the amount is reinvested in one residential house in India. However, the exemption would not be made available/apply if the rent compensation is used to purchase a second property, though it may be allowed if the amount is used for extension or improvement of the new house. Alternatively, the taxpayer can invest the compensation in section 54EC bonds or pay tax at the concessional rate under section 112 on long-term capital gains. 
A contrasting view treats the rent compensation as independent income, unrelated to the transfer, and hence taxable under the head "Income from Other Sources". Tribunal decisions in cases like Jitendra Kumar Soneja, Jatinder Kumar Madan, and Milan M. Patel support this view. In such cases, the rent amount received is taxed separately, although deduction for actual rent paid may be allowed. In certain instances, it has also been taxed annually upon receipt. 
Yet another view, backed by the recent judicial developments, hold that such rent should be equated with the hardship compensation and should not be taxed at all. There is an arguable position that such compensation may be non-taxable if it is construed as being received for enduring personal hardship during redevelopment. 
Given the mixed interpretations, a member or tenant may opt to treat the rent compensation as part of capital gains and invest in additional area, bonds under section 54EC, or pay concessional tax under section 112 or claim exemption form tax. At the same time, they should explore claiming a deduction for rent paid under section 48, considering it an expenditure essential to the transfer process. However, the department may challenge this treatment and tax the compensation under “Income from Other Sources.”  
10. Where the rent paid by the Member for occupying a temporary alternative accommodation is say Rs. 1.8 lakhs per month out of the rent received from Developer of Rs 2 lakhs, whether the excess of Rs. 20,000 be taxable? Whether any deduction for the rent actually paid will be allowed as a deduction? Under which head of income, the gross or net rent will be taxable? Will such receipt be treated as a capital receipt and not taxable irrespective of whether the same is spent or not?  
In the context of property redevelopment, the cash compensation received by a member for Temporary Alternative Accommodation (TAA) may be taxed either as part of capital gains or as income from other sources (IFOS) or as exempt from tax altogether, depending on how the law is interpreted, as explained in the previous answer.
Where the compensation is seen as part of the consideration for the transfer of the old premises, it forms a component of the ‘full value of consideration’ under section 48 for computing capital gains. If the gains qualify as long-term, the member may claim exemption under section 54 by investing in a new residential property, subject to conditions, or under section 54EC by investing in specified bonds. 
Exemption under section 54 is allowed only for one house in India, and acquiring another house using the rent compensation would not qualify. However, if the compensation is used to extend or improve the new house, that portion may still be eligible under section 54 or 54F of the Act.

Alternatively, the compensation may be viewed independently, detached from the transfer of the original flat, and taxed under IFOS, based on several tribunal decisions (e.g., Jitendra Kumar Soneja, Jatinder Kumar Madan, Milan M Patel). In such a case, members may claim a deduction for actual rent paid under section 57(iii). If rent paid is more than the compensation received, no tax is payable. If rent paid is less than the compensation received, the difference is taxable. In situations where no rent is paid, the entire compensation is taxable under IFOS.

However, if the member treats the rent compensation as part of capital gains and reinvests it in acquiring or improving the new property or in eligible bonds, even the unspent portion may not be taxable under IFOS. There is also a possibility of claiming that the compensation is not taxable at all as explained in the answer to the previous question. Thus, members must carefully structure and document their position to optimize tax treatment.

11. Will Developer deduct at source tax (TDS) on payment of compensation for Temporary Alternative Accommodation to the members?  
The payment by the Developer to a member or tenant is not a rent but is a compensation for shifting to Temporary Alternative Accommodation and could not be subjected to TDS u/s.194IA of the Income Tax Act as ‘rent’. However, it is possible that the payment is subjected to TDS at 1% of the amount paid u/s.194IA of the Income Tax Act subject of course that the said provision is found to be applicable.

The member independent of the above two possibilities of treating the receipt of full valued of consideration or Income from Other Sources  may explore the possibility of claiming that such a compensation is a hardship compensation paid to alleviate the hardship caused on amount of redevelopment.  Please see Shanish Construction Ltd., ITA no.6087 & 6088/MUM/2014 and Sahara Dwellers Ltd. And Sarfaraz S. Furniturewalla ’s cases  

Please refer to answer to above questions which suggest that the rent received would be considered as an allowance or bearing with the hardship caused by redevelopment and therefore would not be taxable. Please see the decision of Bombay High court in the case of Sarfaraz S. Furniture Walla 166 taxmann.com 425 irrespective of the amount of rent paid.

However, in the case where the Income Tax Department try to tax the rent received, the case of the member would be better off by claiming the actual rent paid and offer the excess for taxation.

12. A member or tenant has been paid some other allowances for shifting the furniture, for damages to the furniture etc. say Rs. 1,00,000 per person  for meeting relocation cost of furniture & belongings at the time of vacating the flats and moving in when new building is ready.  Actual expenses incurred can be lower or higher than the amount received from the developer. What is the tax treatment of the same in the hands of members or tenants? Do members or tenants have to keep some proof of payment of actual expenditure incurred to show the tax authorities?

An allowance or a receipt to meet the expenses of reallocation of the personal furniture and belongings of the members, for tax purposes, should be treated on the lines of any other receipt, other than hardship allowance and when brought to tax, the possibility of claiming a deduction for the actual expenditure in computing the income or to claim the entire receipt as not taxable should not be ruled out.
The member or tenant is advised to keep the proof of expenditure incurred on hand. For detailed discussion please see answers in respect of the compensation for rent of the TAA.    
13. Members of a society under PAAA usually receive from the Developer an amount labelled as ‘corpus allowance’ based on the area occupied by the members. Is such corpus allowance be taxable in the hands of the members? 
It is important to gather the actual purpose or basis of the "corpus fund" granted by the developer to the members. It is generally assumed that such a corpus is a hardship allowance given to compensate members for inconvenience and displacement due to redevelopment (like shifting homes, changing schools, etc.). 
The advice is that the nature and purpose of the corpus fund must be clearly mentioned in redevelopment agreement and PAAA. If the corpus is indeed a hardship compensation, it should be treated as a personal receipt for inconvenience and not taxable, since it is not related to ownership or cost of the property.  
While some tribunal decisions suggest reducing the cost of acquisition of a new house by the amount of such receipt, this view is disagreed with, arguing that a reasonable hardship compensation should be fully exempt from tax and not adjusted against asset cost. Please see Kushal K. Bangia, Jethalal D. Mehta, Pradyot B. Borkar, Jitendra Kumar Soneja, Deepak S. Shah, Ramkumar Malhotra, Delilah Raj Mansukhani, Rita Sunil Manaktala, Sunil O. Manaktala, Paranugraha CHS Ltd.

The general industry practice is to grant an appropriate allowance for meeting with and bearing with the hardship caused to the members and their families on account of displacement and inconvenience due to redevelopment involving shifting for a long period to a new place in a new locality and perhaps to a new school.

It is advised to clarify the nature and the purpose of ‘corpus fund’ in drafting the agreements. 

A hardship allowance if paid to a member for putting up with the hardship caused during the redevelopment period on account of relocation and inconvenience caused to the member and his family is a receipt that should be treated as received for facing the personal inconvenience and should not be liable to be taxed.  Such a receipt is unrelated to the ownership of the premises and its acquisition cost. Please see Kushal K. Bangia, 18 taxman.com 31 (Mum.), Jethalal D. Mehta, 2 SOT 422 (Mum.), Pradyot B. Borkar, ITA NO. 4070/ MUM/2016, Jitendra Kumar Soneja, 72 taxman.com 318 (Mum.). However, the Tribunal has ordered that such receipt though not to be taxed should be adjusted from the cost of acquisition of the new house. We respectfully disagree with such a view of the Tribunal and hold that a hardship compensation of a reasonable amount commensurate with the pain suffered should be not taxable without any adjustment to the cost of the asset. Please see the cases where receipts were found to be not taxable in view of the fact that there was no cost of acquisition of asset transferred. Deepak S Shah, 29SOT 26(Mum.), Ramkumar Malhotra, ITA no.48,43/MUM/2009, Delilah Raj Mansukhani, ITA no.3526/MUM/2017, Rita Sunil Manaktala, ITA no.5271/MUM/2012, Sunil O Manaktala, ITA no. 72/MUM/2012, Paranugraha CHS, 39 CCH042 (Mum.).

14. For some members (original allottee & early buyers) the cost of flat in their books will be far lower than compensation offered as ‘corpus fund / hardship allowance’.  What will be tax implication in such a situation? Will the answer be different if the compensation towards ‘corpus fund’ is offered in aggregate for all members directly to society instead of giving it to individual members? If some or all members decide to take additional area in their new flats in lieu of receiving this allowance, what will be the tax treatment?  
In view of the fact that a ‘corpus fund’ of a reasonable amount for hardship is not taxable, the issue should not arise even in a case where the hardship compensation amount is higher than the cost of the old/new premises. In any case, the issue does not arise where the corpus fund, higher or lower, is reinvested in acquisition of an additional area in a new house or for its improvement or in bonds as per s.54 and/or s.54EC of the Income Tax Act.

Payment to the society, by the Developer, of hardship allowance or any other payment related to the members is inconceivable in as much as the hardship is caused to the members and their families and not to the society. Where society receives and holds payments for members, it would do so only as a custodian and the tax implications would be no different for members than those explained in answer to a question above. However, society would be subjected to tax where it appropriates the amount received for itself by not passing it over to the members.

Hardship allowance as noted earlier, is a personal receipt not liable to tax. Having said that when the amount received is treated as the part of the Long-Term Capital Gains and is reinvested in acquiring the additional area in the new house, the said gains would be eligible for exemption u/s.54 or 54F of the Income Tax Act on the lines discussed in Q3 above.

15. Where the Society receives corpus amount instead of its members, directly into its bank account, will the Society be taxable?  
It is important to gather the purpose and the nature of corpus paid by the developer directly to the society. It is also important to understand the end use of the corpus received by the society. In the absence of the information, it may be assumed that the amount received by the society as "Corpus" is nothing, but the consideration received for transfer of the rights or the permission to construct a new building. 
Unlike the corpus received by members, the amount received by the society is not for the bearing with the hardship caused to the society on account of redevelopment of the building. It may be assumed that the society has a right to receive the "corpus" which as noted earlier is received for transfer of some rights perceived to be belonging to the society. 
Accordingly, the receipt of corpus by the society would be taxable as capital gains and where such rights are held by the society for more than 24 months then the resulting gains would by taxable as the Long-term capital gains. The position in law might change where the corpus received by the society is received as a conduit for and or behalf for the members.  
16. Society has approx. Rs. 2 Crore plus in its sinking fund / other reserves.  There is a possibility of collecting pro rata amounts from new members (to whom premises built are sold by Developer).  In that case, all members become eligible owner of the Fund/Reserve in proportion of the area occupied.  In case, new members do not contribute towards sinking fund, the amount lying in society’s books can be distributed to existing members.  What is the tax treatment of such distribution if made in the hands of members? 
The society may ascertain that under the society laws it is possible for itself to collect an amount from an incoming member for bringing a parity in his share in the sinking fund or reserves with the other members. It may also ascertain that under the Maharashtra Co-operative Societies Act, 1960 it is possible for the society to distribute the sinking fund amongst the members. In the event it is found that the society would be able to distribute the sinking fund or even reserves, then the amount received by a member would be construed to be a ‘dividend’ to the extent statutory permissible in his hands and would be taxable in his hands under the head Income from Other Sources. 

What is the tax implication of this in hands of members in either situation? What is tax implications for receipt of 50 % of existing garage carpet area as additional area in their new flats? What is the implication for receipt of the Cash compensation @ Rs. 55,000/- per sq. ft. for 50 % area of the existing garage carpet area?

Ordinarily, a garage is a part of the residential premises and the tax treatment on transfer of the old premises should equally apply to the transfer of garage. However, in the event where a garage is treated as a separate asset and is so disclosed in the books of account and tax reports and a separate agreement for transfer thereof is made then in such an event the capital gains thereon would be separately treated and will be dealt with as per the regular provisions of the Income Tax Act including for computation of capital gains and the exemption u/s 54F on reinvestment in the new premises and/or u/s 54EC on reinvestment in bonds.

The Long-term Capital Gains on transfer of garage would be eligible for exemption u/s.54F on reinvestment in the additional area in the new house or improvements therein provided the other conditions of s.54F are complied with.

Receipt of cash compensation on transfer of garage would be subjected to taxation at a concessional rate u/s.112 where taxed as a long term capital gains. The member may also consider the possibility of reinvestment of gains in acquiring bonds prescribed u/s.54EC of the Income Tax Act or an additional area in the new premises or in improvement thereof as per s. 54F of the Act.

18. There may be members who occupy Jodi (joint) flats.  These Jodi flats could either have been purchased together or at different points in time.  Members may opt to take two new Jodi flats or one large flat in lieu of two Jodi flats held by them. Different situations possible for such Jodi flats:

The golden rules governing the ownership and taxation of the two adjoining premises, held in joint names, are as under;

a. Usually two premises approved as such by the local authority (acquired under separate agreements and shown as such in the records of the society including by issue of separate share certificates and maintenance bills, two entrances and electric meters) are treated as separate residential premises.

b. The abovementioned first golden rule is subject to a change where the separate premises are used as one house with one entrance and a common kitchen and an electric meter with the permission of the society and the local authorities and the fact of the premises being used as one house is disclosed in the income tax records of the owner/co-owners.

c. For the purposes of income tax, generally the ownership of a person is established with reference to his title in the property and equally important with reference to employment of funds by him which are duly disclosed in the tax records by declaring the person as the owner of the premises or as a co-owner of the premises.

d. A share of a co-owner in the premises is usually determined with reference to his monetary contribution in acquisition of the premises.

e. Placement of his name and the order thereon either in the Agreement or on the share certificate or any other records does not make him a superior or inferior owner. Important thing is that a person should have contributed for the ownership and his name should appear in the title to the premises.

Keeping the above rules in mind the different situations are addressed hereafter.

18a. If members (holding the flats in the same sole name or same joint names and in same order of joint names) take one large flat in lieu of two flats (Jodi) occupied by them, will it have any tax implications? Will this change if the flats are held in the same joint names, but the order of joint names is different in both flats i.e. A and B in flat 1 and B and A in flat 2?

Acquiring one larger house in lieu of two houses shall be eligible for exemption u/s.54 in the hands of the owner/co-owners. Acquiring two houses in lieu of two houses with a change in the order of the names in which they appear would not be a material factor in eligibility of the co-owners for tax exemption as long as they continue to be the co-owners of the new premises. Long term capital gains for sale of two houses can be utilised for acquiring two new houses for claiming separate exemption u/s 54 for each of the two.

18b. If Jodi flats are held in two different names (first holder not same in both, but some member’s name/(s) could be common across both flats) and if they choose to take one large flat, will it have any tax implications?

Where two houses are exchanged for one common house the benefit of s.54 of the Income Tax Act would not be denied even where the order of names as they appear in the title deeds is changed. However, the position will change materially where one of the names of the co-owners is excluded in the title deeds of the new house.

18c. If Jodi flats held in different names (no common names between the 2 flats) but owners belong to same family and may opt for one larger flat in lieu of two Jodi flats occupied by them?

The benefit of tax exemption u/s 54 of the Income Tax Act would be available even where two houses belonging to two different persons are exchanged for one new house to be held jointly by them as co-owners.

18d. If Jodi flats are purchased at different points in time (say one in the year 2000 and other in 2010), and if they choose to take one larger flat, are there any tax implications?

Acquisition of two houses at different points in time and exchange thereof for one new house shall not deter the member, the owner of two houses, from claiming exemption u/s.54 of the Income Tax Act where the capital gains in cases of both the houses is long term gains. It is advised in all situations to narrate and recite the facts and the agreements clearly in the PAAA and in the records of the local authorities and the society.

19. Some of the flats have been transferred by way of transfer to Nominee on death of a member. In such situation, a nominee member may opt to take cash in lieu of garage owned by the deceased member. Can it be paid to a nominee member who may not be a final beneficiary? (not sure if this is a subject matter of income tax)

A nominee for the purposes of Maharashtra Co-operative Societies Act, 1960, is a representative of the deceased member and is entitled to deal with the society as such.  
Such a nominee when in receipt of cash consideration for garage, the amount so received is held by him as a representative for the benefit of the legal heirs of the deceased. The receipt would be taxed in the hands of the legal heirs in proportion in which they are entitled to the estate of the deceased. A nominee is the representative of the heirs of the deceased member and the receipts by him are in law received for and on behalf of the heirs represented by him and therefore the legal heirs would be responsible for the taxation of such receipts on the lines discussed here before.

20. Developer will deduct TDS on all payments made to members (including rent, shifting allowance and hardship allowance) and the same will be reflected in form 26AS. The opinion says all the payments received can be treated as received against transfer of old premises and if reinvested cannot be taxed. If we treat it like compensation for transfer of old premises (which is reinvested in new premises) will ITO grant credit against TDS so deducted or will reject it saying, there is no corresponding income offered in return of income?mso-add-space:auto;text-align:justify;text-justify:inter-ideograph;line-height:
As per the law of Income tax Act, in particular s. 199 read with relevant Rules, mainly Rule 37EA, a person is entitled to claim credit for the TDS by the payer. 
In the case of the member or tenant, the payments are first included in the income of the member or tenant and thereafter the deduction or exemption is claimed in computing total income. Accordingly, there should not be any difficulty in claiming the credit of TDS by the Developers on payment to members or tenants where such credit otherwise is duly reflected in 26AS of the member.  

eSamskriti wishes to express gratitude to Mr P Kapasi and his Team for such a detailed FAQ.  
 

Disclaimer – This paper is an introduction to make society members aware of possible income-tax issues on redevelopment. Neither Mr P Kapasi nor esamskriti is responsible or liable for any decisions that you take after reading this. Readers are requested to consult a Chartered Accountant or Tax Advisor or Lawyer with their specific case. This paper is only a form of SEWA. 

This piece should not be republished without written approval of www.esamskriti.com  . Copyright Mr P Kapasi.

Also read

1. Tax Implications – Redevelopment of Society

2. Taxability of Fund received from the builder     
3. Redeveloped Flat not taxable as Income from Other Sources   
4. Development Agreement and Tax Implications