S. 2(14) and S. 45 : Amount received by a member of the housing society from a developer who constructed additional floors in a building owned by the housing society not liable to capital gains tax

20 Deepak S. Shah v. ITO

ITAT ‘D’ Bench, Mumbai

A.Y. : 1995-96. Decided on : 16-6-2008

Counsel for assessee/revenue : Arvind Sonde/

Virendra Ojha

The assessee derived income from salaries, dividend, etc. He
was a member of the housing society (‘the Society’). There was an estate
developer (‘the Developer’) who was in possession of TDR, and was looking out
for properties, whereon it could utilise the TDR. In March, 1995, the Society
and the Developer entered into an agreement whereunder the Society gave
permission to the Developer to utilise its TDR in raising the superstructure on
the existing building of the Society. In consideration thereof the members of
the Society, including the assessee, received the aggregate sum of Rs.1.21
crores from the Developer, wherein the share of the assessee was Rs.5.8 lacs.

According to the assessee, the said sum of Rs.5.8 lacs
received by him from the Developer was not taxable. However, according to the
Assessing Officer, the Society through its members had transferred the
development rights to the Developer for the aggregate consideration of Rs.1.21
crore and the same was taxable in the hands of the members of the Society.

On appeal before the CIT(A), he opined that the assessee and
the other members had drafted an agreement with the Developer to make believe
that the compensation receivable was for the hardship caused to the members on
account of construction activity. However, in effect and in reality it was the
benefit that each member was given corresponding to the valuable right that he
possessed in the land and building of the Society. Accordingly he held that the
assessee and other members of the Society had transferred a capital asset within
the meaning of S. 45 and therefore, capital gain was chargeable thereon. In
arriving at the conclusion, the CIT(A) also relied on the Supreme Court decision
in the case of A. R. Krishnamurthy and another.

Before the Tribunal the Revenue relied on the orders of the
lower authorities and also on the decision of the Gauhati Tribunal in the case
of Md. Nasser Ahmed.

The Tribunal noted that neither the Society nor the members
owned or possessed any TDR. The TDRs were owned and possessed by the Developer
and in terms of the regulations framed by the Municipal Corporation, it was
permissible for the building to utilise the said TDR in or with respect to the
prescribed area, including the land and building owned by the Society. The
members of the Society had consented to suffer the hardships and in terms of the
regulations of the Society or otherwise or in law the members did not have any
say in the matter once the Society decided to give its consent. According to the
Tribunal, the members of the Society had paid for purchase of the flat, which
conferred very limited rights and ‘right to grant permission for additional
construction’ as such did not form part of any rights; but it arose on account
of the volition or voluntary desire of a person. Such permission could not be
obtained by enforcing any rights or obligation arising from the agreement to
purchase the flat and/or the regulations of the Society. Accordingly, the
voluntary consent given by the members cannot constitute or form part of the
bundle of rights which were owned or possessed by the member in or with respect
to the tenure of the flats granted to the member by the Society. The area
occupied by the members was only a ‘measure’ in quantitative terms inasmuch as
the extent of hardship which may be faced cannot be quantified; When an
additional construction was made, the location of the flat, as such, was of no
significance or importance, since everyone suffered the hardship and the extent
could not be determined through any ‘measurer’. It further observed that the
members had not transferred any rights in or with respect to the flat or
suffered any deficiency or limitation in or with respect to the rights in the
flat; in fact they had added the risk of adding load to the building.
Accordingly, it held that the cost of flat cannot be any measure for the purpose
of finding out the cost of the alleged ‘capital asset’ and the alleged
‘transfer’ of such asset.

According to the Tribunal, the decisions relied on by the
CIT(A) as well as the Revenue in its submission, both were distinguishable on
the facts. It further observed that the assessee was neither holding any capital
asset, nor was there any transfer of capital asset. Accordingly it held that S.
45 of the Act was not attracted and the assessee was not liable to capital gain
tax u/s.45 of the Act.