Co-op society might go into re-development

Unstamped flat agreement no bar for redevelopment benefits

 

Non-payment of stamp duty on flat purchase document and non-registration thereof cannot in any manner affect your entitlement to a new unit under a redevelopment project.
A residential property was purchased in Mumbai in 1985. The sale deed is on a Rs5 stamp paper. Does that mean stamp duty is already paid on that property or stamp duty is not yet paid? In case the flat is not registered, is it mandatory to register the flat purchased from the builder in 1985? The co-op society might go into re-development. If the property is not registered what will be the legal consequences? Can that property be re-sold without registration?
—Akbarali Beddingwala
You have stated that property was purchased in 1985 but you have not stated the date of purchase.

With effect from December 10, 1985, where in case of an agreement to sell an immovable property, the possession thereof is transferred or agreed to be transferred to the purchaser, before the execution or at the time of execution or after the execution of such agreement, then such an agreement to sell is deemed as conveyance and stamp duty thereon is leviable accordingly.

Before the said date, agreement to sell was not considered as deemed conveyance and therefore such agreement was liable to stamp duty as applicable to a normal agreement, which was Rs5 at that time.

Vested views have been expressed time and again that even such agreements were liable to stamp duty on market value at that time and therefore now need to be cured by payment of deficient stamp duty with other consequential payments.

However, non-payment of stamp duty on such an agreement cannot invite any consequences and therefore there is no infirmity in such agreement. You have used the term “sale deed” in your query.

A sale deed is a conveyance and therefore before December 10, 1985 also, it required stamp duty on conveyance of immovable property.

Whether you purchased flat before or after 1985, title in an immovable property cannot be transferred without registration of the document transferring the title. However, in case of a unit in a co-operative housing society, if the flat has already been transferred in your name, then you have a good title despite non-registration of the document of purchase.

Society cannot insist for registration of your document of purchase. Non-registration does not invite any penal provisions.

Non-payment of stamp duty on flat purchase document and non-registration thereof cannot in any manner affect your entitlement to a new unit and other benefits under a redevelopment project.

There is no bar on sale of a flat in the above circumstances. However, if your document of purchase was liable to stamp duty, the buyer would definitely consider such defect while buying your flat and may obtain suitable writing and indemnity from you or may require you to remove the defect by paying stamp duty with interest.

 

Builders are facing a dilemma over 1% VAT

Whether sale of under construction flat is a sale of immovable property or is a works contract is a bone of contention between the builders and revenue authorities for indirect taxation including value added tax (“vat”). Since around the year 2005 Central and State governments have been tempted to take a view that when a builder sells an under construction unit, then in respect of such sale the builder thereafter becomes a works contactor.
Conceptually and commercially, the analogy is not logical at all as such transaction is of sale of immovable property and not that of works contract. On such and other reasons like constitutionally, sale of immovable property does not come within the taxing purview of the State governments, in a writ petition by the MCHI, a stay has been granted by the Bombay High Court granting relief to its members from payment of vat subject to some procedural compliances. In view of pending writ petition, applicability of vat to such transactions is yet to be decided.

In the meantime, in the recent State budget, Maharashtra Government has attempted to lure builders by providing a composition scheme to tax them at 1% of the value of the unit in respect of sales of under construction units along with land or interest underlying the land. In pursuance of such enactment, a notification dated 09 07 2010 has also been issued. Value of the unit for this purpose would mean sale price as stated in the agreement for sale or stamp duty valuation whichever is higher. Agreements registered on or after 01 04 2010 are eligible for the Scheme.

In this background, it is for a particular builder to decide whether to opt for this 1% scheme and pay vat accordingly in respect of agreements registered on or after 01 04 2010. For the earlier transactions, earlier provisions including the earlier composition scheme of 5% would apply. Logically, by accepting 1% taxation, the builder would have to accept the proposition in law that he is a works contractor in respect of such transactions. Although the State Government has offered to charge only at 1% tax but it is not necessary that the same incentive rate would continue in future also. Many controversial taxes have made their easy entry with lesser rates initially followed by increased rates.

However, as a flat purchaser, if a builder decides to pay tax, even in protest then certainly he will be entitled to recover the same from you unless otherwise agreed in your contract. As a flat purchaser you are not entitled to contend that since vat is not applicable on sale of under construction flats therefore you will not pay the same.

 

Rules for removal of chairman from committee

Our society has elected managing committee of members in August 2010. Now, due to disputes and other problems, five committee members want to remove the chairman
Our society has elected managing committee of members in August 2010. Now, due to disputes and other problems, five committee members want to remove the chairman. They are also demanding re-election of the entire committee or they will resign and reduce committee to minority. Will our committee be valid then? Tenure of our committee is 5 years which is found to be quite long.
In the context of your query, chairman, secretary or treasurer can be removed by a no-confidence motion in a special meeting of the committee called and presided by the Registrar or under delegated authority by an assistant registrar or an officer above his rank.
The notice for such meeting will have to be given by one-third members of the committee and motion of no confidence is to be passed by three-fourth members present at such meeting. Attendance at such meeting will have to be two-third of the committee members.

If 5 out of 9 members of the committee resign, the strength of the committee would reduce to minority and apparently, functioning of the committee becomes questionable. However, the apprehensions about the validity of the committee are ill conceived. It is true that to transact business at a committee meeting, members present should form quorum agenda. However, such requirement of quorum would not be applicable for the purposes of filling in vacancies caused by death, resignation, disqualification or removal of committee members. Period of office of a co-opted member, would be
co-terminus with tenure of the committee, which in your case is 5 years from the date of election. Tenure of the committee can be reduced by an amendment to the byelaws.

Redevelopment panel can be formed within a society

As redevelopment, being a subject to be taken with utmost precaution and involves the ability to understand complex legal, taxation and construction aspects, the managing committee or the general body of the society can take a decision to form a redevelopment committee.
In the process of redevelopment of our property, can we form a separate redevelopment committee and how it can function in a co-operative housing society along with the managing committee?
As redevelopment, being a subject to be taken with utmost precaution and involves the ability to understand complex legal, taxation and construction aspects, the managing committee or the general body of the society can take a decision to form a redevelopment committee. The powers and functions of the committee can be decided by a concerned resolution of the managing committee or general body as the case may be.
But in any case, formation of such a committee will have to be authorised by the general body. The minutes of the meetings of the redevelopment committee should be separately recorded. The committee will report to the general body or the managing committee depending on by whom it has been formed.

Our society has sizeable amounts invested as sinking fund and other funds. Is it possible to collect proportionate amounts from the new flat purchasers in the redevelopment scheme? Whether a flat of an existing member sold after redevelopment would attract short-term or long-term capital gains?
It is possible to stipulate in the redevelopment agreement for collection of proportionate contribution from the incoming members. However, to ensure such collection, the documentation will have to provide strict terms and conditions detailing consequences for defaults to ensure that the funds reach the society. Not admitting the flat purchasers as members of the society may not be a workable solution. A reconstructed flat (after redevelopment) would attract long term capital gains if the earlier flat was acquired before 36 months of the date of sale.

Under the model bye laws, the member who has purchased a car parking space from the builder can sell the same. How to implement this bye law?
The model bye laws are only in the form of suggestions. Even when the bye laws are adopted by the society, the same are not tenable in law if they run contrary to the provisions of the prevailing laws. The position of law with reference to Maharashtra Ownership Flats Act, 1963, is settled by various court decisions that a car parking space including a stilt parking space cannot be sold by a builder or a promoter. In view of such a legal position, the bye-laws providing for sale of car parking spaces are void in law.

 

Society is not a beneficial party in sale/ transfer of flats and membership rights

Contribution from members received by the society towards cost of land and building(s) and other amenities will be covered by the concept of mutuality and therefore, will not be an income in the hands of the society.
We have taken a plot of land on lease in the name of the society. Now we are constructing flats and shops. There are investors also, who transferred their investments for profit. Flats are of different sizes and members would pay extra amounts for different kinds of amenities and car parking facilities. Our turnover is a few crores of rupees. Can we make profits? How would these activities attract tax?

Contribution from members received by the society towards cost of land and building(s) and other amenities will be covered by the concept of mutuality and therefore, will not be an income in the hands of the society.

Even though profit is made by the society, tax would not be attracted because of the application of concept of mutuality. A more pertinent question for you should be what will the society do of such profits.

When a member sells his residential flat and transfers his membership rights in the society, under Income-Tax Act, 1961, such transaction would be on account of such member and therefore, the tax implications would arise upon such member.

The society is not a beneficial party in respect of the sale consideration in transactions involving sale and transfer of flats and membership rights.

The society would be receiving transfer premium in respect of such transactions. Such transfer premium will also get covered by the concept of mutuality. To the extent the society collects such transfer premium from the members and within the framework of its byelaws, such transfer premium would not be taxable in the hands of the society.

So far as payments to contractors and sub-contractors are concerned, the same would be subject to the provisions of tax deduction at source under Section 194C of the of Income-Tax Act, 1961.

 

Succession of property of Hindus dying intestate

How can one utilise a TDR for construction purposes?

We are two brothers and four sisters, all married. The last sister married in 1984. My father has made a house out of his earnings in Visakhapatnam in 1987. He did not make any will and he expired in 2006. My mother is also no more. Now, what is the status if we have to share the property among ourselves? Do we come under the definition of a Hindu Undivided Family (HUF) and are we called a joint Hindu family governed by the Mitakshara law? What would happen if one of the married sons or daughters had died leaving children before the death of father or mother? We are Hindus.
—CV Nageswar Rao, Visakhapatnam
Since your father expired intestate in 2006 and left inter alia a house property and as it transpires that your father was a Hindu at the time of his death, the succession in your case would be governed by the provisions of Hindu Succession Act, 1956.

A property can become HUF property in various ways and one of them is that an ancestral property becomes HUF property. In your case since your father acquired the subject property out of his own earnings, therefore, the same is not a HUF property. On the death of your father, if he was survived by his wife then the widow along with the sons and daughters became equal co-owners of the house property.

Thereafter when the mother died, assuming without leaving a valid will, then the co-ownership share of the mother would get distributed to all the sons and daughters. In case your mother had pre-deceased your father, then obviously, the property would be shared between the sons and daughters.

Before the death of father or mother, if a son had died leaving behind a widow and/or children in his branch, then in such a case, the share of such pre-deceased son would be distributed among his widow and his children equally. Before the death of father or mother, if a daughter had died leaving behind widow and/or children in her branch, then in such a case, the share of such pre-deceased daughter would be distributed amongst her children equally.

How can one utilise a TDR for construction purposes?
For utilisation of transferable development right (TDR), a proposal has to be submitted in the prescribed form to the building proposal department of Mumbai Municipal Corporation giving details of the development rights certificate (DRC) to be utilised, details of the plot upon which to be utilised along with proposed building plans, etc. A holder of DRC who desires to use the floor space index (FSI) certified therein on a particular plot of land, shall attach to his application for development permission, valid DRC to the extent required. The proposals are approved on merits like any other building construction proposal and subject to DC regulations.
The DRC may be used on one or more plot or plots of land whether vacant or already developed by putting up a new construction or by constructing additional storeys subjects to guidelines provided under the development control regulations.

 

Limited liability pact may work better for development

Taxation of a development agreement or redevelopment agreement would depend upon the terms & conditions contained therein.
I want to give my land and existing structure under a development agreement. However, because of income tax implications, I am advised to enter into a partnership or joint development agreement with the developer. What is your view on it?
Taxation of a development agreement or redevelopment agreement would depend upon the terms & conditions contained therein. In general, to the extent of transfer of development rights, the cost of acquisition whereof is nil, should not attract any income tax implications.
However, VAT & service tax implications would also have to be analysed with reference to the contents of the development agreement. As far as forming a partnership is concerned, it involves law of agency with the result that actions and inactions of a partner can bind the firm and other partners also with unlimited liabilities and consequently every partner’s personal assets and properties can also be subjected to such liability and can be attached.

In this context, the newly introduced form of organisation namely a limited liability partnership may be a better option as it is a combination of limited liability like a company as well as flexibility of partnership. Further, in partnership there will be profit sharing against the ascertained fixed gains in a development agreement.

The partnership or joint venture should be genuine in substance or otherwise name sake or disguised documents may be disregarded by tax authorities as income tax law would proceed on substance rather than nomenclature assigned to a document. A joint venture may become an association of persons.

Can the co-operative society in which I am a member, appoint me as an auditor?
Unlike the Companies Act, 1956, the Maharashtra Co-operative Societies Act, 1960, does not prohibit a member of a co-operative society to be its auditor. Therefore, you can be an auditor in your own society provided that you are not in the managing committee because if you are a part of the management, as an auditor you would be required to report upon your own actions including inactions which cannot be allowed as your independence can be questionable.

A member of my society has given me a document that states he has gifted his flat to his wife. What are the procedures that I should follow as a secretary of the society?
You will have to verify that the gift deed has been properly stamped and registered. The transfer procedure in case of gift would be the same as in the case of sale of a flat. However, there will not be any premium on transfer inter alia for the reason that the transfer is to a family member only.

 

 

Occupation certificate not a must for deemed conveyance

Conveyance executed and property cards not being in the name of society would not be a big issue as the same is an issue of procedural compliances only.
How are feasibility report and conveyance related to redevelopment of society properties? Are occupation certificate and building plan necessary for deemed conveyance?
—Ashok Mhatre
It is desirable that feasibility of redevelopment of a property is determined before a society initiates the process of inviting a developer.

This includes verification of papers and documents including building plans of property, understanding the requirement of perfecting title of the property, estimation of available floor space index (FSI), premium FSI, transfer of development rights FSI, areas constructible by use of FSI and without FSI, etc.
A society which does not have conveyance would not be able to proceed on its own for redevelopment.

Conveyance executed and property cards not being in the name of society would not be a big issue as the same is an issue of procedural compliances only.

It is quite possible that documents like occupation certificate, building plans and other papers and documents, which the builder is bound to provide to the society, have not been provided.
In the absence of such papers and documents also, the right to deemed conveyance cannot be denied by the competent authority.
In fact, deemed conveyance is the remedy provided inter alia for cases of non-cooperating landlords and builders and developers.

Therefore, once the titles of the flats purchasers are established, deemed conveyance would have to be granted.

Competent authority is an administrator of law and cannot provide for the requirements not stated in the law.

I have dividend income from shares and also have other business income and capital gains from sale of shares, some of which were purchased with borrowed funds. We also have to bear securities transaction tax. Some transactions were squared off without taking delivery. What will be the income tax implication?
— Meenakshi V
As far as shares purchased with borrowed funds are concerned, the same may give rise to business income.
Sale of other shares in delivery-based transactions may give rise to capital gains or business income depending upon the frequency of transactions, intention at the time of
purchase, treatment in books of account, disclosure in financial statements, etc.

As far as dividend income is concerned, the same is exempt, whether the shares are held as investments or stock in trade.
It is possible to take a view that borrowed funds utilised for dealing in shares should not attract disallowance on relevant interest although dividend income therefrom is tax-free because in such cases dividend income is incidental and the predominant activity is to earn from dealing in shares.

For the purposes of section 14A, which disallows expenditure incurred to earn tax-free income, all direct and indirect expenses, including administrative, rent etc would have to be considered and if nexus of some expenses to dividend income is established, the same would be disallowable.

Securities transaction tax suffered on purchase and sale of shares to the extent sales of such shares give rise to capital gains, would not be allowable as deduction.

Such tax paid for trading in shares would, however, be allowable as deduction from business income. Transactions settled without actual delivery would be treated as speculation transactions.