ITAT Ruling Favors Housing Societies in Redevelopment Cases
The Income Tax Appellate Tribunal (ITAT) has delivered a verdict that will significantly impact the redevelopment landscape in Mumbai. The tribunal declared that money paid by builders to housing societies or private individuals for property redevelopment is not subject to taxation. This decision is anticipated to stimulate redevelopment activities in Mumbai, where over 35,000 buildings are earmarked for this process.
Previously, the income-tax department had issued notices to housing societies undergoing redevelopment, demanding tax payments on the sums received from builders. This practice created considerable uncertainty among housing societies.
Case Study: New Shailaja Co-operative Housing Society
One such society, New Shailaja Co-operative Housing Society in Ghatkopar (east), Mumbai, challenged a similar notice. After failing to secure relief from the Commissioner (Appeal), the initial appellate body for tax matters, the society approached the ITAT, the second appellate authority on tax issues.
The ITAT's decision in favor of the society provides much-needed relief to property owners, including housing societies and individuals involved in redevelopment projects.
"This order will be of immense help to those living in over 35,000 buildings in greater Mumbai, seeking redevelopment. This order gives a clarity on the issue of taxation in such cases," stated Pujit Aggrawal, chief spokesperson and general secretary of the Property Redevelopers’ Association.
The tax demand on the New Shailaja Co-operative Housing Society was approximately ₹1 crore. The society's three-story building was transformed into a seven-story structure after the redevelopment.
Legal Arguments and Tribunal Observations
Tarun Ghia, counsel for New Shailaja Co-operative Housing Society, successfully argued before the ITAT. Mr. Ghia emphasized the Development Control Regulations provide the society the right to utilize transferable development rights (TDR) for additional construction. Mr. Ghia noted that despite the transfer of rights to additional floor space index (FSI), the building and the land itself remain under the ownership of the housing society. The ITAT acknowledged that the society continued to own both the land and the building before and after the development agreement.
Furthermore, the society’s legal advisor contended that since the development rights in this case had no associated “cost of acquisition,” there was no basis for calculating any capital gain. The Tribunal agreed with this contention.
This ruling establishes that development rights do not necessarily entail a "cost of acquisition", which could have significant implications for future redevelopment projects in the city.