ITAT Mumbai rules redevelopment consideration in real estate projects taxable in hands of individual members, not the co-operative society

 The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has recently delivered an order in the matter of RBI Employees Bhagvati Co-operative Housing Society Ltd., deciding on taxability of consideration received on redevelopment projects and clarifying whether capital gains arising from transfer of development rights are taxable in the hands of the co-operative housing society or its individual members.

The matter involved taxability of redevelopment receipts in the hands of the Society which entered into a redevelopment agreement with a developer on behalf of its individual members. During the assessment stage, the tax department levied short term capital gains tax on the Society on account of transfer of development rights to the developer applying Section 2(47)(v) read with Section 50C of the Income-tax Act, 1961. The Society received a favourable order from the CIT(A) on appeal which was then further appealed by the tax department before the ITAT.

While deliberating on the above matter, the ITAT made the following key observations:

·       The Tribunal noted that the Society had acted merely as a representative of its members for execution of the redevelopment agreement and that the real ownership of flats and corresponding property rights vested with individual members, as supported by CBDT Circular No. 9 dated 25.03.1969.

·       The ITAT upheld that the consideration arising from the redevelopment transaction was payable directly to the members and not to the Society; thus, taxing the same in the Society’s hands was unjustified.

·       Relying on the decision of Mumbai ITAT in the case of Raj Ratan Palace Co-operative Housing Society Ltd. v. DCIT (2011), the Tribunal confirmed that any benefits received (including additional area, transit rent compensation or monetary consideration) are taxable in the hands of the respective flat owners.

·       The Tribunal also observed that the Society had only received a refundable security deposit of INR 10,00,000, which did not constitute consideration for transfer of development rights.

In view of the above conclusions, the ITAT upheld deletion of the entire addition made by the Assessing Officer. As the quantum addition forming the basis of penalty did not survive, the Tribunal also confirmed deletion of penalty levied under Section 271(1)(c).

This decision reinforces that, in redevelopment arrangements of co-operative housing societies, taxability of consideration and capital gain arising from redevelopment benefits vests in individual members and not in the Society, where the Society merely facilitates execution of development agreements as a representative entity. It further reiterates that refundable security deposits or interim compensation cannot be treated as taxable consideration in the hands of the Society. It is worthwhile to note that proper documentation would play a key role in substantiating the mutual role of the parties.