Many old buildings located in Tier-1 cities such as Mumbai, Pune, and Delhi, do not offer safe living conditions. Some of them are ancient, and even extensive repairs do not improve their health drastically. Society members/home owners run short of funds to carry out the necessary repair and maintenance work. As a result recently, many of them are undergoing a redevelopment.

When a building undergoes reconstruction, the members (if it's a co-operative housing society) or owners /occupants (in the case of chawls and pagdi system buildings) receive financial compensation and the new accommodation in lieu of the old. Besides this, members/owners/occupants of the buildings undergoing redevelopment get additional compensation in other forms.

There has been uncertainty about the tax applied to various components of the compensation in the hands of the receiver. Primarily, this led to many disputes between tax authorities and the receivers of compensation under the redevelopment agreement. However, the recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) has provided greater clarity on tax issues and can be referred to as a case law in future.

The total compensation to a member/owner/occupant comprises of the following:

1. A new accommodation as allowed as per DC rules applicable in force
2. Temporary housing until the redevelopment is complete or rent in lieu thereof
3. Rent/allowance until the time they have possession of their new tenement (which is a one-time payment)
4. Corpus fund

In the case of any establishment apart from a housing society, taxation of the compensation will depend on the nature of agreement among owners and the developer. In the event of properties governed by the Rent Control Act, the compensation in any form becomes taxable for the receiver, as in such instances, tenants transfer tenancy rights.
 

But for the members of Housing Societies, the tax treatment is different…

While compensation given by the developer towards rental expenses, to the extent of actual rent paid by the member, is exempt; anything above that is included as income of the receiver and subject to tax at the rate applicable on his/her tax slab. Shifting charges are incidental and are tax-free in the hands of the receiver.

As far as the new apartment/home in lieu of the older one is concerned, Income-tax laws consider it a taxable transfer and hence the gains made on this would be seen as the capital gains. However, if the holding period of the old accommodation is more than 3 years, such transfers are tax-exempt, which is often a case in reality (Section 54 of the Income Tax Act). Hence, you may find provisions of the law quite straightforward and unambiguous in the case of first 3 types of compensations for the members of cooperative housing societies.

The real point of disputes, many a times, is the corpus fund, especially when it is to be distributed among members. For those who haven't heard much about this concept, the corpus fund is a reserve created by the developer that is transferred to the Housing Society on completion of the project. This is sort of a reserve kept aside by the developer that helps the members of the Society deal with higher maintenance outgoings post-redevelopment. More amenities and additional taxes inflate maintenance costs for completed redevelopment projects. Up until now, the tax authorities were considering the distribution of this reserve among members of the Housing Society as their share of the profit in the redevelopment.

However, as per the latest judgment of ITAT, even when distributed, the corpus fund should not be considered as a profit share. Rather it should be regarded as compensation paid to the member for the hardships borne in the duration of the redevelopment.

To keep potential malpractices from arising in the future, ITAT has made it clear that when the assessee sells the apartment/building, the acquisition cost (whether indexed or otherwise) will be reduced to the extent of corpus fund distributed. In other words, the ruling discourages the likelihood of the members taking undue advantage of its recent judgment. What one receives as the "compensation for hardships" remains the "compensation" only, until the receiving member doesn't intent to make a profit from the deal.

Hopefully, the latest ruling of ITAT will iron out disputes between the taxpayers and tax authorities.
 

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cshetty1006@rediffmail.com Sep 12, 2018 Rent compensation received for 30 months @ 20000 p.m but rent paid for 36 months @ 15000 p.m. please let me know how much rent is taxable

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