2009 (8) TMI 1267 - AT - Income Tax

Tribunal rules lump sum from developer not taxable as capital gains for Cooperative Housing Society

The appeal was allowed by the Tribunal in a case regarding the taxability of income earned by a Cooperative Housing Society and its members as long term ... - ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received by a cooperative housing society and its members from a developer in consideration for permitting construction of additional floors by exploiting developer's TDR/FSI constitute 'transfer' of a capital asset chargeable to tax as long-term capital gains under Section 45. 2. Whether the society or its members had any existing right or cost of acquisition in respect of the entitlement to construct additional floors such that receipt of consideration would be taxable as capital gains. 3. Whether amounts paid by the developer to the members but routed through or associated with the society can be assessed as income of the society (aggregate assessment of society and members) for capital gains purposes. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability as 'transfer' resulting in long-term capital gains (Section 45) Legal framework: Section 45 charges income arising from the transfer of a capital asset to tax as capital gains; essential elements include existence of a capital asset, its transfer and cost of acquisition for computation. Precedent treatment: The Court relied on the Supreme Court authority holding that where there is no cost of acquisition of a right, computation provisions of Section 45 cannot be applied to treat receipt as capital gains (followed). Interpretation and reasoning: The Tribunal examined the nature of the receipt - sums paid by a developer to obtain permission to construct additional floors using the developer's TDR/FSI - and found there was no pre-existing proprietary right or development-right held by the society or its members that was sold or transferred. The developer had independently acquired TDR/FSI and sought mere permission to exploit it over the existing structure. There was no sale of a documented development right by the society or its members, nor any prior expenditure constituting cost of acquisition of such a right. Ratio vs. Obiter: Ratio - where a taxpayer has not held any right entitling construction and has not incurred cost to acquire any development right, amounts received for permitting a developer to construct using the developer's TDR/FSI are not chargeable as capital gains under Section 45. The discussion applying the Supreme Court principle to the facts is integral to the decision (ratio). Conclusion: Amounts received by the society and its members for permitting construction by the developer do not amount to transfer of a capital asset taxable as long-term capital gains under Section 45. Issue 2 - Existence of an acquired or vested right / cost of acquisition Legal framework: Capital gains taxation presupposes a capital asset with a cost of acquisition; acquisition costs are relevant to chargeability and computation. Precedent treatment: The Tribunal applied earlier decisions of the same tribunal and the Apex Court that where no cost has been incurred in obtaining a putative development right (or where no such right vests), capital gains cannot be levied (followed). Interpretation and reasoning: The facts establish that the society and members had already exhausted entitlement in constructing existing flats and had no residual entitlement to construct further floors. The developer had purchased TDR from third parties; the society merely permitted physical construction over its building without conveying or selling an identifiable development right that the society had earlier acquired. Because there was no cost incurred by the society or members in respect of any transferable development entitlement, the statutory machinery for computing capital gains (which requires a base cost) cannot operate to create a charge. Ratio vs. Obiter: Ratio - absence of cost of acquisition when no development-right was possessed by the payee precludes treating the receipt as capital gains (ratio). Conclusion: No vested right or cost of acquisition existed in the society or its members; therefore the receipts cannot be taxed as capital gains. Issue 3 - Aggregation of amounts payable to members and society; assessability in hands of society Legal framework: Taxation requires identification of the person in whose hands income arises; receipts to members are distinct from receipts to the society unless a legal transfer or accrual to the society is established. Precedent treatment: The Tribunal considered prior Bench decisions holding that amounts paid to members for permitting construction were not assessable as capital gains where no transferable right existed; those decisions were followed and applied. Interpretation and reasoning: The Assessing Officer assessed only the sum contracted to be received by the society, while the CIT(A) expanded assessment to include members' shares as assessable in the society's hands on the theory of transfer of the society's right. The Tribunal rejected that expansion because the members and society lacked any transferable development-right and the payments to members were for consent/permission, not for transfer of the society's asset; hence there is no legal basis to aggregate the members' receipts into the society's capital gains. Ratio vs. Obiter: Ratio - absent transfer of a right held by the society, payments to members cannot be aggregated as society's capital gains; characterization depends on whether an actual asset or right was transferred (ratio). Conclusion: The enhancement to aggregate members' receipts with society receipts and tax the total as capital gains was unjustified; both society and members' receipts are not assessable as long-term capital gains on the facts. Ancillary reasoning on nature of payment and distinction from sale of development rights Legal framework: Distinction between sale/transfer of a capital asset (including transferable development right) and voluntary permission/compromise payments for inconvenience or consent. Precedent treatment: Tribunal decisions cited were relied upon to distinguish situations where a society sold an entitlement obtained under statute from situations where a developer's independently acquired TDR was merely permitted to be used (distinguished). Interpretation and reasoning: Payments made by the developer were compensatory/lumpsum for permitting construction and for inconvenience and alterations, rather than consideration for transfer of an identifiable capital asset belonging to the society or members. That factual and legal distinction negates the characterisation of the amounts as consideration for transfer of a capital asset. Ratio vs. Obiter: Ratio - characterization of receipts depends on legal nature of the right conveyed; where the developer's TDR is independent and the payee grants mere permission without having borne acquisition cost, the receipt is not capital gains (ratio). Conclusion: The payments were not receipts on transfer of a capital asset and therefore not taxable as long-term capital gains.