Don’t worry about withdrawal of incentives for redevelopment

In the city of Mumbai and suburban areas, floor space index (FSI) incentives have been provided by use of transferable development rights (TDR) and under other schemes for redevelopment of properties.
Our society is contemplating redevelopment. Is it possible that the FSI incentives are withdrawn in the times to come?
In the city of Mumbai and suburban areas, floor space index (FSI) incentives have been provided by use of transferable development rights (TDR) and under other schemes for redevelopment of properties.

The prevailing incentives under various development control regulations are not so high as to cause apprehension of withdrawal of some of them. Present incentives are just making the redevelopments possible.
One observes that the quantum of incentives provided, over a period of time, have gradually increased for the logical reason that ultimately the government wants to encourage the redevelopments.

What is being questioned by the present municipal commissioner is the kind of manipulations taking place in construction of elevation features free of FSI. Although, these elevation features do not consume FSI and are legally not saleable areas but the in practice, they are being sold as usable areas.

Many of the rules of law do not get implemented because of the supply of housing stock continuing to be far less than the demand. View that the incentives may be withdrawn and thereafter redevelopment propositions may become less attractive is without basis or logic.

‘Apartments can be used for professional services’

We are a partnership firm carrying on profession from a residential flat. We have a number of staff members and are using them in rendering professional services. Can municipal authorities take action against us for change of user?
We are a partnership firm carrying on profession from a residential flat. We have a number of staff members and are using them in rendering professional services. Can municipal authorities take action against us for change of user? Can the society charge us more?
Even though professional services are being rendered with the help of staff, it does not change the analogy that a professional activity is not commercial activity. Since the use of even the entire residential flat for carrying on professional services does not tantamount to change of user, the municipal authorities cannot take any action against you. The society has no power to charge any extra amount, whether there is a change of user or not.

Before the formation of our society, there were many transfers by the original flat purchasers from the builder. The builder had collected transfer fees in respect of such transfers. Can the society claim such money collected by the builder?
A flat booked under construction and the relevant documents having been properly stamped and duly registered gives the flat purchaser an absolute right to sell or otherwise transfer the flat without any permission from the builder. The law does not support collection of transfer fees or no objection fees at the time of such transfers of flats, by original or subsequent purchasers either during construction stage or thereafter, before the society or other housing organisation is formed. However, if such amounts have been paid, one will have to have evidence of such collections. The person who paid such money would only have the locus to demand the same back and to take other legal actions.
Gifts received from which relatives are not taxable?
Section 56(2) of the Income Tax Act, 1961 inter alia provides that sums received without consideration from following relatives are not income:
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi).
However, one should note that Section 56(2) provides that amounts and specified properties received from non- relatives, but for the exceptions provided in the said section, are incomes but no where in the Income Tax Act,1961 it is provided that gifts received from relatives are not income and therefore tax free. Therefore, it is not a case that section 56(2) places the gifts from relatives beyond taxing provisions. If gifts are received from specified relatives, the recipient will have to prove genuineness of such gifts with reference to identity of the donor, capacity of the donor, source of funds of the donor, etc.

Sec 50C does not apply to typical society redevelopment

Who is taxable in redevelopment of society — the society or the members? Is redevelopment compensation and rental compensation liable to TDS or not, and does Section 50C apply to redevelopment?

In a redevelopment project, it is better that while conceiving and structuring the scheme and while documenting the transaction, de facto ownership rights of the members are recognised although the property stands in the name of the society. This will give better locus standi to members of their proportionate rights in the redevelopment project. This will also go better with income-tax and other taxes implications as presently although taxability of such projects has been decided in favour of the society, but since all these matters are reaching to high courts, in a possible situation if such transactions are considered taxable by the high court, there will be substantial scope for exemptions if the income is taxed in the hands of individual members rather than in the hands of a society. In any case, provisions of tax deduction at source under the Income-Tax Act, would not apply either to redevelopment compensation or to rental compensation.
Provisions of Section 50C of the Income-Tax Act are attracted on transfer of immoveable properties in the nature of land or building or both held as capital assets and consideration stated in the instrument of transfer is less than the valuation adopted assessed or assemble by stamp duty authorities and the said section in this context in a nutshell provides that in such a case, stamp valuation would be treated as gross consideration for such transfer and accordingly capital gains would be computed on higher side. In a typical society redevelopment, provisions of Section 50C will not apply for the reason that in such a redevelopment, only development rights are transferred and there is no transfer of land or building. In the recent Bombay High Court decision, petitioner had challenged the validity of provisions of Section 50C wherein he failed but applicability of Section 50C to society redevelopment was not decided by the Hon’ble high court.

In contemplation of death, only movable assets can be gifted

A gift in contemplation of death can be made of any movable property which the donor could dispose of under a will. What is a gift in contemplation of death and how to make it? Can one gift his flat in contemplation of death? — S Venkitesh
A gift is said to be made in contemplation of death when the donor is ill and he expects to die shortly and delivers to another person possession of the movable property to be kept by him as gift in case the donor dies of that illness. A gift in contemplation of death can be made of any movable property which the donor could dispose of under a will. It is possible for the donor to resume such a gift before he dies. Further in a case where donor recovers from the illness during which he made the gift then such a gift will not take effect.
Further, if the donor survives the person to whom such gift was made then also such gift does not take place. If such property instead of being given away in contemplation of death is made subject matter of the Will then the bequest under a Will would require executor’s assent to perfect the title of the legatee and will be subject to probate, when applicable. Gifts in contemplation of death can be made only of a movable property. Therefore one can not gift his flat in contemplation of death.

Redevelopment benefit is proportionate to the size of your flat

Society functions by decisions of the majority, but rule of majority cannot be an oppression on minority and the decision of majority has to be within the framework of applicable laws.
Majority of members of our society in redevelopment have agreed to fixed additional areas irrespective of the sizes of our existing flats. We, few members are adversely affected because of our larger sizes of flats. Can the society do so? Whether monies received by us would be taxable as our income or society’s income?
Society functions by decisions of the majority, but rule of majority cannot be an oppression on minority and the decision of majority has to be within the framework of applicable laws.
In a co-operative housing society (CHS) type of organisation, although all members are equal in respect of their membership rights in view of principle of one member one vote but their property rights may be substantially at a variance. Property rights of members in a CHS are with reference to sizes of their respective flats. MOFA, 1963, being a territorial Act, automatically applies to sales of all flats on ownership basis by a builder, developer or promoter and since under MOFA, sale of units in the building is succeeded by conveyance of the underneath and appurtenant land, the builder recovers entire price of the property from sale of flats.

Under such a legal system, therefore, even though each flat purchaser has paid the price for acquisition of his flat, but implicit in the price of each flat is the price of proportionate land.

In redevelopment transaction, whether society is the taxable entity or individual members, would depend upon the manner in which scheme of redevelopment is designed and the documentation of the transaction. Although depending upon the facts of each case, in many cases, redevelopment of properties inter alia of societies have been held non-taxable. But at the same time, in all such cases, appeals filed by the income tax department have been admitted by the Mumbai High Court. Decisions will come after some years.

If the high court confirms non-taxability of redevelopment through TDR-FSI route, things would be fine for societies. But if the high court decides that such redevelopment transactions are taxable, in such an adverse eventuality, if the society is a taxable entity, taxes would have to be paid whereas if a member is a taxable entity then once again due to various exemption sections applicable to individual assesses under the provisions of the Income Tax Act, 1961, the tax liability may come to nil or negligible.

Therefore, a member and not the society as a taxable entity in such transactions, would provide double safety. In the case of Aurovilla CHS Ltd, represented by this writer, Hon’ble Mumbai Tribunal, inter alia held that in respect of corpus fund of Rs 10.26 crore, since the members were the owners of the property, society is not taxable.