Re-Development Carried on After 31st March 2023 and Income Tax Liability Thereon

Generally, the Re-development of housing societies are being carried out through some Developer. A Development Agreement has to be executed between the Hosing Society & the Developer. 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, the Developer undertake construction of a new building, gives some corpus, rent to all the members, other benefits, etc. The consideration paid by the 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 taxable or not.


The Hon’ble Supreme Court in the case of  CIT vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) 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. 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 Re-development, there would be no liability to capital gains under Income Tax Act, 1961. 


On 1st February, 23, section 55 of the Income Tax Act, 1961 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 if any development agreement executed on or after 1st April, 2023 transferring FSI rights to the developer, may attract Capital Gains Income Tax liability as the cost of such FSI rights transfer will be deemed to be Nil or zero. In other words, the proposed amendment seeks to nullify the ratio of the decisions of Supreme Court as discussed in the earlier paragraph. In our view, the amount of Capital Gains Tax liability attracted will be substantial. In the event that you or your Housing society are planning to redevelop a building in near future, it would be advisable to execute and register the Development Agreement on or before 31st March, 2023.


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