top of page

Gains derived from sale of Additional FSI/TDR in Redevelopment is taxable after April 2023

Gains derived from sale of Additional FSI/TDR in Redevelopment is taxable after April 2023

Old Position

Redevelopment of housing societies is being carried out generally through some Developer. Hence, a Development Agreement is executed between the Society and the Developer. Under this agreement, the Society transfers development rights [Floor Space Index (F.S.I)] to the Developer. In turn the Developer constructs a new building, gives some corpus, rent to all the members, etc. The consideration paid by the Developer in various forms may be assessable in the hands of the Society/members as Capital gains. An issue arises whether the gain arising to the Society/members is taxable or not.

The Hon’ble Supreme Court in CIT vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) held that if the asset does not have any ascertainable cost, the computation mechanism fails and hence no capital gains can be computed. Hence, on a transfer of an asset which has no cost or which has no ascertainable cost, there would not be any liability for Capital Gains Tax. Based on ratio of this decision of Srinivasa Setty, the Hon’ble Bombay High Court in the case of Sambhaji Nagar Co-operative Housing Society Ltd. [ITA No. 1356 of 2012] held that on sale of self-generating FSI rights in the case of Redevelopment, there would be no liability to capital gains.

TDR which was generated by the plot/property/land and came to be transferred under a document in favour of the purchaser would not result in the gains being assessed to capital gains. Gains are derived from the sale of Transferable Development Right (TDR) of the Cooperative Housing Society which was a property by itself. Additional FSI/TDR is generated by change in the D. C. Rules. A specific insertion would therefore be necessary (Now made in Budget 2023) so as to ascertain its cost for computing the capital gains.

Old Stand: No capital gains tax on sale of TDRs in absence of cost of acquisition

Sale of transferable development rights did not attract capital gains tax since the cost of acquisition for the same did not exist. Transferable development rights (TDRs) arising out of an existing land was an immovable property, the transfer of such TDRs amounted to transfer of a long term capital asset, and hence assessee was liable to be taxed for the consideration received on them under the head “Capital gains.”

It was held that in CIT versus Shambhaji Nagar Cooperative Housing Society Ltd. (2014), the sum received on transfer of TDRs which did not have any cost of acquisition could not be charged to tax under the head “Capital gains”. A capital asset that was capable of having an acquisition cost would fall within the purview of Section 45, however an asset whose acquisition cost could not be conceived could not be taxed under Section 45.

Budget 2023 changes

On 1st February, 2023, section 55 of the Income Tax Act is proposed to be amended by the Finance Bill, 2023 w.e.f. 1st April, 2023. The effect of this amendment may be construed that any development agreement executed on or after 1st April, 2023 transferring FSI rights, may attract Capital Gains Tax liability as now the cost of such FSI rights will be deemed to be Nil. In other words, the proposed amendment seeks to nullify the ratio of the decisions discussed in the earlier paragraph. In our view, the amount of Capital Gains Tax liability will be substantial.

Defining the cost of acquisition in case of certain assets for computing capital gains-Budget 2023

The existing provisions of the section 55 of the Act, inter alia, defines the ‘cost of any improvement’ and ‘cost of acquisition’ for the purposes of computing capital gains. However, there are certain assets like intangible assets or any sort of right for which no consideration has been paid for acquisition. The cost of acquisition of such assets is not clearly defined as ‘nil’ in the present provision. This has led to many legal disputes and the courts have held that for taxability under capital gains there has to be a definite cost of acquisition or it should be deemed to be nil under the Act.

Since there is no specific provision which states that the cost of such assets is nil, the chargeability of capital gains from transfer of such assets has not found favour with the Courts.

Therefore, to define the term ‘cost of acquisition’ and ‘cost of improvement’ of such assets, it is proposed to amend the provisions of sub-clause (1) of the Clause (b) of the sub­section (1) and clause (a) of sub-section (2) of section 55 so as to provide that the ‘cost of improvement’ or ‘cost of acquisition’ of a capital asset being any intangible asset or any other right ( other than those mentioned in the said sub-clause or clause, as the case may be) shall be ‘Nil’. This amendment is will take effect from the 1st day of April, 2024 and shall accordingly; apply in relation to the assessment year 2024-25 and subsequent assessment years.

Impact of Budget 2023 Changes

Transferable development rights (TDRs) arising out of an existing land was an immovable property, the transfer of such TDRs amounted to transfer of a long term capital asset, and hence assessee is liable to be taxed for the consideration received on them under the head “Capital gains.”

Gains derived from sale of Additional FSI/TDR in Redevelopment is taxable as LTCG after April 2023

CA Harshad Shah, Mumbai harshadshah1953@yahoo.com


Comentarios


bottom of page