Income Tax Liability on Re-Development Carried from 31st March 2023

Income Tax Liability on Re-Development Carried out in Societies from 31^st March 2023

• Normally, housing societies Re-development are being carried out through some Developer. A Development Agreement has to be executed between the Developer and Hosing Society. By virtue of this agreement, the Housing Society transfers development rights [Floor Space Index commonly known as F.S.I] to the Developer.
• In return of consideration, Developer undertake construction of a new building, gives some corpus, rent to all the members, other benefits, etc. The consideration paid by Developer in various forms may be assessable in the hands of the Housing Society or members of the housing Society as Capital gains. An issue arises whether the capital gain arising to the Housing Society or members of housing society is income tax taxable or not taxable.
• Hon’ble Supreme Court held that if the asset does not have any ascertainable cost, the income tax computation mechanism fails and hence no capital gains can be computed. Hence, on a transfer of such asset which has no cost or you can say which has no ascertainable cost, there would not be any liability for Capital Gains Tax arise thereon.  {CIT vs. B.C. Srinivasa Setty (SC)}Based on ratio of this decision of Srinivasa Setty,
• Hon’ble Bombay High Court in the case of Sambhaji Nagar Co-operative Housing Society Limited. held that on sale of self-generating FSI rights in the case of Re-development, there would be no Income tax liability under the head of capital gains
• However, On 1st February, 23, Income tax section 55 is proposed to be change by Finance Bill, 2023 from 1.04.2023. The effect of above saud income tax Change may be construed that If any development agreement executed on or after April 1, 2023 transferring FSI rights to the developer, the cost of such FSI rights transfer will be deemed to be Nil or Zero.You may say that Proposed amendment seeks to nullify the ratio of the Supreme Court decisions discussed in the preceding paragraph.
• In other words, the proposed amendment efforts to invalidate the ratio of decisions by the Supreme Court stated in the previous section. The amount of Capital Gains Tax obligation attracted, in our views, will be overall. If you or your housing society intend to redevelop a building in the near future, it is best to execute and register the Development Agreement on or before March 31, 2023.

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