GST IMPLICATIONS ON DEVELOPER (PROMOTER) IN CASE OF RE-DEVELOPMENT OF HOUSING SOCIETY – PART I

Generally, life of a building is about 70 to max 80 years. In case not maintained properly then buildings can become structurally weak in 50 or 60 years. Residents of such building(s) would have formed Housing Society. These buildings are demolished and, in their place, new buildings are constructed. In constructing new buildings additional FSI (Floor Space Index) is made available to the society and they construct buildings with more built-up area. In nutshell this is Society Redevelopment. The transaction has GST Implications. Generally, existing Housing Society engages a real estate developer (Builder) for constructing new buildings. This is generally through a tri-partite agreement between real estate developer, housing society and all flat owners.

Broad contents of Society Redevelopment Agreement (hereinafter DA) are as below:

• Society transfers development rights to Real estate Developer (hereinafter Developer) and grants license to enter the premises for construction. As reciprocal consideration developer assures the following to the existing members:
• Additional Carpet Area. Say 50% extra carpet Area. Means if a person was owning 500 Sqft carpet in old building then he gets 750 sft flat in new building. There can be a clause if the net additional Carpet Area is more or less by certain percentage (say 3%) then there may be no compensation paid or charged to existing flat buyer.
• Monthly compensation for alternate accommodation (i.e) certain amount which existing flat owner may use to pay rent of accommodation elsewhere when buildings are demolished and under construction, certain amount towards Brokerage for new flat, certain amount towards packing & moving of luggage/baggage and furniture etc of existing residents, certain amount for hardship that family will undergo due to shifting etc. 
• Time frame is committed by Developer for constructing new buildings and also getting all approvals.
• Builder is entitled to sell additional area (in form of additional flats or shops etc) and retain consideration from sale of additional flats. This is generally called “Free Sale Area”
• Society in DA grants all rights (apart from Development Rights) like appointing contractors & architects, applying for approvals, paying approval fees, procuring and paying for materials.
• Commitment for total time frame to construct and complete entire project for Rehab portion (i.e) area to existing flat buyers and also the free sale area.
• Developer is authorised to buy Transferable Development Rights (ToDR) from other developers or Municipal Corporation or he may become entitled for additional FSI in any different way.
• Additionally, DA may contain clauses for Liquidated Damages (in case of delay), increase in different monetary compensation, clauses for existing flat buyers to buy additional area or surrender his existing carpet area etc.
• New flat is generally called Permanent Alternate Accommodation (PAA) and developer executes such PAA Agreement (Called PAAA) with each existing flat owner. Construction of all new buildings and getting all approvals from all statutory authorities is Developer’s responsibility.
• DA may contain condition for real estate developer providing bank guarantee of certain amount to Housing Society.
• DA may probably contain clause for Developer being responsible for forming new society and additionally contributing certain amount to such society.
• DA may contain clause regarding fixing responsibilities for payment of Stamp Duty, GST, Registration charges etc.
• DA may contain clause about rectifying defects of workmanship for few years – may be 3 years or 5 years.
• DA may authorise society and Developer to jointly appoint a Project Management Consultancy (PMC) who will share reports about progress of work, quality of work etc to Developer and Society.
• In case the existing flat owner wants to surrender his flat for monetary consideration then per square rate for builder to purchase such existing flat from existing flat owner is fixed.
• In case existing flat buyer wishes to buy additional area then rate of buying is also fixed.

There can be variation in different clause on case-to-case basis and two re-development agreements can be different in some respect or aspect.

We will discuss each transaction of Redevelopment agreement separately for GST and Income Tax implications. In this note we will discuss Tax implications on Transfer of Development Rights and Transferable Development Rights.

Concept of Development Rights:

Development of Land is complex process of constructing Residential/Commercial/Industrial buildings, seeking approvals for such construction, raising funds for such construction, engaging Architects, Contractors for such Construction, marketing & selling these buildings and various associated activities. Development of Land can be broadly understood as bringing up new structure/building on plot of Land whereby either families can reside enjoying various common facilities or building could be for Office space or it could be shopping complex/Mall or School/College or a Hospital or any such building of any use.

We can conclude that development right is linked to Land and is a right or benefit associated with Land and development rights are derived from Land.

Development Rights are not defined under CGST Act 2017 (hereinafter CGST Act) or IGST Act 2017 (hereinafter IGST Act) or Income Tax Act 1961 (hereinafter IT Act)

Whether Transfer of Development Rights is equivalent to transfer of Immovable Property:

Immovable Property is not defined in CGST Act or IGST Act.

We will refer the definitions of “Immovable Property” through other laws.

General Clauses Act 1897:

“Immovable Property” shall include Land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

Registration Act 1908:

'immovable property' includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass;

RERA Act 2017: Sec 2(z):

'immovable property' includes land, buildings, rights of ways, lights or any other benefit arising out of land and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, standing crops or grass;

Income Tax Act 1961 – Section 269UA

(d) immovable property means

(i) any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.

Explanation: For the purposes of this sub-clause, land, building, part of a building, machinery, plant, furniture, fittings and other things include any rights therein ;

(ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building ;

From the above definitions, we can state that Development Rights being arising from Land are immovable property. But these are defined in other laws and not in CGST Act or IGST Act.

We will also refer few favourable judgements stating that benefits arising from land are immovable property.

1. DLF COMMERCIAL PROJECTS CORPORATIONS VERSUS COMMISSIONER OF SERVICE TAX, GURUGRAM - 2019 (5) TMI 1299 - CESTAT CHANDIGARH
2. CHHEDA HOUSING DEVELOPMENT CORPORATION VERSUS BIBIJAN SHAIKH FARID - 2007 (2) TMI 664 - BOMBAY HIGH COURT
3. SMT. DROPADI DEVI VERSUS RAM DAS AND ORS. - 1973 (12) TMI 97 - ALLAHABAD HIGH COURT
4. SADODAY BUILDERS PRIVATE LTD. VERSUS JT. CHARITY COMMISSIONER, NAGPUR AND OTHERS - 2011 (6) TMI 936 - BOMBAY HIGH COURT

Amongst all of the above, will draw specific attention to case law of DLF Commercial by CESTAT Chandigarh. Para 16 & 17:

15. As immovable property has not been defined in the Finance Act, 1994, therefore, as per Section 3 (26) of the General Clauses Act, 1897, the immovable property means as under:-

(26) “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;

16. On going through the said definition, the immovable property includes land benefit arising out of land. In the case of transfer of development rights of the land, therefore, it is to be seen in the legal aspect whether the benefit arising out of land can be equated to transfer of development rights of land or not?

The said issue has been examined by the Hon’ble Allahabad High Court in the case of Bahadur and Others vs. Sikandar and Others wherein the Hon’ble Apex Court observed as under:-

“Therefore, the principal question we have to consider is whether the right to collect dues upon a given piece of land, the property of the alleged lessor, is a benefit to arise out of land within the purview of Section 3 of the Registration Act. In our opinion, the right to collect dues upon a given spot is such a benefit, and therefore, we are constrained to find that the document in question purported to convey that which falls within the definition of immovable property. The so-called lease being an unregistered instrument, it could not effect the transfer and could not be admissible in evidence. We are therefore of opinion that the Court of first instance was right. We set aside the order of the lower appellate Court and restore the decree of the Court of first instance with costs in all courts.”

Further, in the case of Chheda Housing Development Corporation vs. Bibijan Shaikh Farid, the Hon’ble High Court of Bombay observed as under:-

15. The question is whether on account of the term in the clause which permits acquisition of slum TDR the appellants in so far as the additional FSI is concerned, are not entitled for an injunction to that extent. An immovable property under the General Clauses Act, 1897 under Section 3(26) has been defined as under:-

(26) “immovable property’ shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.” If, therefore, any benefit arises out of the land, then it is immovable property. Considering Section 10 of the Specific Relief Act, such a benefit can be specifically enforced unless the respondents establish the compensation in money would be an adequate relief.

Can FSI/TDR be said to be a benefit arising from the land. Before answering that issue we may refer to some judgements for that purpose. In Sikandar and Ors. Vs. Bahadur and Ors. 27 ILR 462 a Division Bench of the Allahabad High court held that right to collect market dues upon a given piece of land is a benefit arising out of land within the meaning of Section 3 of the India Registration Act, 1877. A lease, therefore, of such right for a period of more than one year must be made by resitered instrument. A Division Bench of the Oudh High Court in Ram Jiawan and Anr. V. Hanuman Prasad and Ors. AIR 1940 Oud 409 also held, that bazaar dues, constitute a benefit arising out of the land and therefore a lease of bazaar dues is a lease of immovable Allahabad High court in Smt. Dropadi Devi v. Ram Das and Ors. MANU/UP/0120/1974 : AIR1974AII473 on a consideration of Section 3 (26) of General Clauses Act. From these judgments what appears is that a benefit arising from the land is immovable property. FSI/TDR being a benefit arising from the land, consequently must be held to be immovable property and an Agreement for use of TDR consequently can be specifically enforced, unless it is established that compensation in money would be an adequate relief.”

Further, the issue was examined by the Hon’ble High Court of Bombay again in the case of Sadoday Builders Private Ltd. and Ors. Vs. Jt. Charity Commissioner and Ors (supra) wherein the issue was in respect of sale of transferrable development right is immovable property or not?

The Hon’ble High Court observed as under:-

“5. The principal issue which arose before the learned Joint Charity Commissioner as to whether the TDR could be termed as a movable property, is concluded and is no more res integra in view of the judgment of the Division Bench of this court reported in 2007(3) Mh.L.J. 402 in the matter of Chheda Housing Development Corporation vs Bibijan Shaikh Farid and ors.Para no.15 of the said judgment is material and is reproduced hereunder.

15. The question is whether on account of the term in the clause which permits acquisition of slum TDR the appellants insofar as the additional F.S.I. is concerned, are not entitled for an injunction to that extent. An immovable property under the General Clauses Act, 1897 under section 3(26) has been defined as under : -

(26). 'immovable property' shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.'

If, therefore, any benefit arises out of the land, then it is immovable property. Considering section 10 of the Specific Relief Act, such a benefit can be specifically enforced unless the respondents establish that compensation in money would be an adequate relief.

Can FSI/TDR be said to be a benefit arising from the land. Before answering that issue we may refer to some judgments for that purpose. In Sikandar and ors. .vs. Bahadur and ors., XXVII Indian Law Reporter, 462, a Division Bench of the Allahabad High Court held that right to collect market dues upon a given piece of land is a benefit arising out of land within the meaning of section 3 of the Indian Registration Act, 1877. A lease, therefore, of such right for a period of more than one year must be made by registered instrument. A Division Bench of the Oudh High Court in Ram Jiawan and anr. .vs.

Hanuman Prasad and ors., AIR 1940 Oudh 409 also held, that bazaar dues, constitute a benefit arising out of the land and therefore a lease of bazaar dues is a lease of immovable property. A similar view has been taken by another Division Bench of the Allahabad High Court in Smt.Dropadi Devi vs. Ram Das and ors., AIR 1974 Allahabad 473 on a consideration of section 3(26) of General Clauses Act. From these judgments what appears is that a benefit arising from the land is immovable property. FSI/TDR being a benefit arising from the land, consequently must be held to be immovable property and an Agreement for use of TDR consequently can be specifically enforced, unless it is established that compensation in money would be an adequate relief.'

6. The Division Bench has held that since TDR is a benefit arising from the land, the same would be immoveable property and therefore, an agreement for use of TDR can be specifically enforced. The said dictum of the Division Bench is later on followed by a learned single Judge of this court in 2009(4) Mh.L.J.533 in the matter of Jitendra Bhimshi Shah ..vs.. Mulji Narpar Dedhia HUF and Pranay Investment and ors. The learned judge relying upon the judgment of the Division Bench in Chheda Housing Development Corporation (supra) has held that the TDR being an immovable property, all the incidents of immovable property would be attached to such an agreement to use TDR. In view of the judgments of this court (supra), in my view, the order of the Charity Commissioner that no permission under Section 36 is required as TDR is a movable property cannot be sustained and therefore, the application filed by the respondent no.2 - Trust under Section 36 of the said Act would have to be considered on the touch stone of the said Section 36 and also on the touch stone of the principles applicable to such a sale by a Trust.”

As the Hon’ble High Court observed in the case of Sadoday Builders Private Ltd. and Ors. (supra) that transferrable development right is immovable property, therefore, the transfer of development rights in the case in hand is termed as immovable property in terms of Section 3 (26) of General Clauses Act, 1897 and no service tax is payable as per the exclusion in terms of Section 65B(44) of the Finance Act, 1994.

17. We also take a note of the fact that from time to time the query was made to the Revenue by the trade organization as well as M/s DLF Ltd whether they are liable to pay service tax on transfer of development right of land or not and the same was not answered till yet which means revenue itself is not clear whether the said activity is taxable service or not. In that circumstances, we hold that the extended period of limitation is not invokable and it cannot be said that the appellant did not pay service tax with malafide intentions.

CESTAT Chandigarh’s judgement in case of DLF Commercial is challenged by Revenue in Supreme Court.

Word of caution:

1. These judgements are not of GST Regime but can have persuasive value.
2. Secondly holding transfer of development rights as immovable property will remove it from ambit of GST and that can mean big revenue loss to government.
3. In GST Regime we have unfavourable judgement of Telangana High Court in case of judgement - PRAHITHA CONSTRUCTIONS PRIVATE LIMITED VERSUS UNION OF INDIA - 2024 (2) TMI 902 - TELANGANA HIGH COURT which held transfer of development right as Service.

Putting aside all the above arguments & Case Laws, in next part we will discuss relevant provisions in GST Law, Notifications, FAQ’s published by CBIC considering Supply of Service by way of Transfer of Development Rights.

(Views are strictly personal and article is for general understanding)

Manoj.M.Kasture ([email protected])

28th June 2025