Taxable entity isn’t the society but its members

In a redevelopment, amounts are received by the society as corpus and by the members as consideration/compensation from the developer. Who would be taxed? If TDR is bought in the name of society, what safety precautions may be needed? —Amit Kalkar
In transactions of redevelopment, like in any commercial transaction, legal aspects are more important. In redevelopment, the developer is the business risk taker and therefore no risk should fall upon the society or its committee members and the development agreement should reflect this position. The redevelopment agreement should be drafted by the society’s consultant and besides being legally tenable, it should take due precaution against practical irregularities and defaults happening in redevelopments so that a wrongdoer suffers more than the honest. Further, for safety of the members, in addition to development agreement, a separate agreement with each individual member should be entered into. Documentation should be done on due consideration of the provisions of the Transfer of Property Act, 1882, MOFA, 1963, Maharashtra Co-operative Societies Act, 1960, various construction laws and regulations, eligible FSI, TDR - FSI and the possible increase in FSI or TDR entitlements after development agreement is signed. Rights of existing members and the incoming members would have to be balanced on consideration of property laws and the society laws. Mere purchase of TDR in the name of the society is not sufficient as the same should be properly documented in municipal records before the building is vacated and stamp duty aspects should be complied with; or the society and its members may have to suffer at a later stage.

The manner in which a transaction is structured and documented would have impact on taxability under various laws. Income tax department would insist that taxable entity is the society and not the members. However, in an appropriately structured and documented transaction, it is possible to contend that the taxable entity is not the society but its members. This would provide double safety from income-tax point of view as it can be contended firstly, that the tax liability is nil and secondly, that individual members are entitled to various exemptions.

Recently, in the case of Auro Villa CHS, where the members had in aggregate received Rs 10.26 crore in redevelopment, the Mumbai Income Tax Appellate Tribunal ruled that members are the taxable entities and not the society on the reasoning inter alia that society is only ostensible owner and in reality flat owners own the land and building. While structuring the deal, one should also strive to keep the burden of service tax and VAT liabilities away from existing members of the society. In appropriately structured transaction, stamp duty would be attracted only on the development agreement and the same can be avoided on individual agreements.

The writer is a chartered accountant and can be contacted at
ghiatarun@rediffmail.com