The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a ₹18.40 crore long-term capital gains addition made against a cooperative housing society, holding that any tax liability arising from the redevelopment transaction could fall only upon its individual members and not upon the society acting in a representative capacity.
The Bench of Amit Shukla (Judicial Member) and Girish Agrawal (Accountant Member) observed that direct tax liability cannot be transferred or imposed upon another entity when the underlying transaction establishes that the relevant rights in the flats belong to individual society members.
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The society, comprising 14 members, filed its income tax return declaring a total income of ₹91,000. Its case was subsequently selected for limited scrutiny under the Computer Assisted Scrutiny Selection system to examine capital gains or losses arising from the sale of property.
During the assessment proceedings, the Assessing Officer noticed from the Annual Information Return that immovable-property transactions aggregating to ₹18,40,18,300 had been registered using the society’s Permanent Account Number.
On the basis of this information, the Assessing Officer treated the entire reported amount as long-term capital gains in the hands of the society. The addition was made through an assessment order passed under Section 143(3) of the Income Tax Act, 1961.
The NFAC upheld the assessment, following which the society approached the ITAT.
Before the Tribunal, the society submitted that it had entered into a development agreement with Sambhavparshva Developers Private Limited in July 2015 for the redevelopment of its existing building.
The agreement was registered by the developer and valued at ₹13.95 crore for stamp-duty purposes. However, the society contended that the agreement did not involve any transfer or sale of the underlying land.
It maintained that it continued to remain the owner of the land and had merely granted development rights to the developer for reconstructing the existing building.
The development agreement expressly recorded that the society and its members had appointed the developer to undertake redevelopment. It further stated that only development rights, and no other rights, had been granted to the developer.
The society also submitted its bank statements to establish that it had not received any consideration from the developer under the redevelopment arrangement.
Following the execution of the development agreement, the developer entered into permanent alternate accommodation agreements with the individual members of the society.
Under these agreements, the members were to receive alternate premises in the redeveloped building in place of their existing flats. The housing society was included only as a confirming party.
The stamp-duty values of the development agreement and the permanent alternate accommodation agreements together amounted to ₹18.40 crore. These registered instruments resulted in the transactions being reflected under the society’s PAN in the AIR.
The society argued that the mere reporting of these documents under its PAN did not establish either receipt of sale consideration or accrual of taxable capital gains in its hands.
The Tribunal examined the clauses and schedules forming part of the development agreement. It noted that the agreement expressly stated that the society represented all its members.
The schedules identified the existing members, the units and areas occupied by them, the hardship compensation payable to individual members and the monthly displacement compensation that the developer was required to provide during the redevelopment period.
The ITAT also considered the Maharashtra government’s directive issued under Section 79A of the Maharashtra Cooperative Societies Act, 1960, concerning redevelopment of cooperative housing society buildings.
The directive requires a cooperative housing society to enter into an agreement with the selected developer subject to the terms and conditions approved by its general body. The Tribunal found that the agreement in the present case had been executed by the society for and on behalf of its members in accordance with this regulatory framework.
The Tribunal framed the central question as whether capital gains arising from the redevelopment arrangement could be taxed in the hands of the cooperative housing society or its individual members.
It held that the flats and the rights connected with them belonged to the members, while the society merely held the legal title to the land and building as their collective representative.
“The taxability, if any, would arise only in the hands of its members and not in the hands of the society,” the Tribunal observed.
The Bench emphasised that direct tax liability cannot be transferred or fastened upon another entity when the transaction itself shows that the relevant rights belong to different persons.
It further found that the Assessing Officer had relied merely upon the AIR information and treated the registered transactions as sales undertaken by the society. No evidence had been brought on record to demonstrate that the society sold the property or received consideration from the developer.
The ITAT also took note of the treatment adopted by the Income Tax Department in the immediately succeeding assessment year.
For Assessment Year 2017-18, reassessment proceedings had been initiated in connection with identical permanent alternate accommodation agreements executed among the developer, the individual members and the society.
Those proceedings were subsequently dropped after the Assessing Officer accepted the society’s explanation regarding the nature of the redevelopment transactions.
Considering the development agreement, the individual accommodation agreements, the absence of consideration in the society’s bank account and the Department’s subsequent acceptance of the same factual explanation, the Tribunal concluded that the addition was unsustainable.
It accordingly deleted the ₹18,40,18,300 addition and allowed the society’s appeal.
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