Capital Gains on TDR and Redevelopment: ITAT Mumbai Holds Rs. 2.28 Crore Not Taxable in Hands of Society

1. Background of the Dispute

The case concerns Colombia Co-operative Housing Society Limited vs ITO before the ITAT Mumbai, arising from reassessment proceedings for AY 2015-16 initiated under Section 147 of the Income Tax Act 1961.

The assessee is a co-operative housing society registered under the Maharashtra Co-operative Societies Act, 1960. The core controversy is whether a sum of Rs. 2,28,00,000 received from a developer in a redevelopment/TDR utilisation transaction is taxable as capital gains in the hands of the society, or whether:

  • It is not taxable at all due to absence of cost of acquisition of additional FSI/TDR; and/or
  • If taxable, it is taxable only in the hands of the individual members who actually received the money.

Alongside this central issue, the appeal also involved:

  • Validity of reopening under Sections 147 to 151A,
  • Denial of deduction under Section 80P,
  • Assessment in the wrong status (AOP instead of co-operative society), and
  • Levy of interest under Sections 234A to 234D.

2. Facts in Brief

2.1 Nature and Constitution of the Society

  • The assessee is a co-operative housing society formed by 40 flat owners in Mumbai.
  • The building “Colombia” stands on land bearing Survey No. 183/184, admeasuring 2817.45 square yards (approximately 2355 square meters).
  • The building was constructed around 1970. The original 40 members or their predecessors:
    • Paid full consideration to the original builder for the flats, and
    • The builder later conveyed the land and building to the society for no monetary consideration.

The society exists essentially for managing, maintaining and administering the property for the benefit of its members.

2.2 Trigger for Reassessment

  • The assessee had not filed a return of income under Section 139.
  • Based on information flagged under the CBDT’s Risk Management Strategy (RMS) through ITBA (under “NMS”), the department noted that the assessee was involved in a transaction relating to “sale of immovable property” of Rs. 2,28,00,000.
  • On this basis, reassessment proceedings under the new regime were initiated:
    • Notice under Section 148 was issued on 31.03.2022.
    • In response, the assessee filed a return on 06.06.2022 declaring NIL income after claiming deduction of Rs. 4,35,084 under Section 80P on interest income.

2.3 Original Development Agreement (2002)

With the coming into force of the Development Control Regulation for Greater Mumbai, 1991 (DCR 1991), as amended on 15.10.1997:

  • Additional construction became permissible on existing buildings by utilisation of Transferable Development Rights (TDR), up to 100% of the plot area.
  • This additional FSI/TDR benefit pertained to the 40 existing members.

A registered development agreement dated 07.10.2002 was executed between:

  • The assessee society, and
  • Developer Kamala Landmark Construction Private Limited.

Key terms:

  • The developer was allowed to construct additional area in the existing building by loading TDR at its own cost.
  • For this right, the developer agreed to pay Rs. 1,37,00,000 to the 40 original members.
  • This amount was distributed among the members; the society did not receive this amount.
  • This consideration was not taxed in the hands of the society.

2.4 Pending FSI and Supplementary Agreement (2014)

Despite the 2002 agreement, construction on an FSI portion of 230 square meters remained incomplete due to non-approval of plans. Later, when the plans were sanctioned, the parties executed:

  • A supplementary agreement dated 11.04.2014, and
  • A deed of confirmation dated 27.01.2015,

in continuation of the 2002 development agreement.

Under these documents:

  1. The developer and the society resolved the dispute regarding incomplete work.
  2. In lieu of allowing completion of construction on the remaining FSI of 230 square meters, it was agreed that:
    • The developer would pay a further sum of Rs. 2,28,00,000 to the original 40 members.
    • The breakup of the payment to each member was specified in Annexure “B” to the supplementary agreement.
  3. Additionally, as per para 3(1)(b) of the supplementary agreement, the developer was to provide an interest-free refundable security deposit of Rs. 36,00,000 (Rs. 18,00,000 each on two dates) to the society for stilt parking.

Significantly:

  • The sum of Rs. 2,28,00,000 was paid directly by the developer to the 40 members via individual cheques dated 15.03.2014.
  • No part of this Rs. 2,28,00,000 was credited to the society’s bank account.

2.5 Important Clauses of Supplementary Agreement

Clause (1) of the supplementary agreement clearly records that:

the Developers agree to pay to each of the 40 Members of the Society named in column 2 of Annexure “B” hereto amounts shown opposite their respective names in column 3 of Annexure “B” hereto aggregating to Rs.2,28,00,000/- … The Developers have agreed to give these further amounts to the original 40 members for damages, Inconvenience and sufferings.

Further, Clause (2) states:

Each of the 40 original members of the Society have agreed to pay to the Society 5% out of the monetary consideration (received towards damages, inconvenience & sufferings) by way of contribution of the member to the fees and expenses of Architects, Advocates, and other professionals appointed by the Society…

2.6 Resolution of Members

In a General Body Meeting held on 22.09.2013, the members passed a resolution accepting the developer’s offer. The resolution expressly records that: