Capital Gains Tax of ₹2.28-Crore was set aside on Housing Society for developer payments to members

Conclusion: Addition of ₹2.28 crore made as long-term capital gains in the hands of the assessee society was deleted in full as amount paid by a developer directly to individual members of a co-operative housing society pursuant to redevelopment cannot be taxed as capital gains in the hands of the society, particularly when the society itself never received the amount.

Held: Assessee, a co-operative housing society registered under the Maharashtra Co-operative Societies Act, 1960, appealed against the order of the NFAC confirming a reassessment made under section 147 for AY 2015-16. The reassessment was initiated based on information flagged under the Risk Management Strategy alleging receipt of ₹2.28 crore on account of sale/transfer of immovable property. AO treated this amount as long-term capital gains taxable in the hands of the society, alleging that the consideration was received by society from a developer pursuant to a supplementary development agreement. Assessee contended that the amount was paid directly by developer to its 40 individual members and not to the society, and that only ₹36 lakh was received by society as a refundable security deposit. CIT(A) upheld the reassessment and the addition. Assessee contended that reopening was invalid being time-barred and in violation of sections 147 to 151A and section 144B; the amount of ₹2.28 crore was never received by the society but was paid directly to individual members pursuant to the supplementary agreement, as compensation for hardship, inconvenience and damages; rights transferred arose due to amendments in the Development Control Rules, 1991, had no cost of acquisition and therefore were not chargeable to capital gains under section 45, following the decisions of the Bombay High Court in Sambhaji Nagar CHSL and Maheshwar Prakash No. 2 CHSL. Revenue relied on the assessment and appellate orders, contending that the consideration was effectively received by the society and that the amounts paid to members were only at the direction of the society, making the capital gains taxable in its hands. Tribunal held that the documentary evidence on record, including the supplementary agreement, bank statements, resolutions of members and payment details, clearly established that the sum of ₹2.28 crore was paid directly by the developer to the 40 individual members and was never credited to the society’s bank account. The two credits of ₹18 lakh each received by the society were found to be refundable security deposits unrelated to transfer of FSI/TDR. It was further held that the additional FSI arose solely due to amendments to the Development Control Rules, 1991, and there was no cost of acquisition attributable to such rights. Following the binding judgment of the Bombay High Court in Sambhaji Nagar Co-operative Housing Society Ltd. and the Supreme Court decision in B.C. Srinivasa Shetty, the Tribunal held that capital gains computation failed and no tax could be levied. Tribunal also accepted that assessee was a tenant co-partnership housing society, where ownership vests in individual members and not in the society, as clarified by CBDT Circular No. 9 of 1969. Consequently, even otherwise, the consideration was taxable, if at all, in the hands of members and not the society.

FULL TEXT OF THE ORDER OF ITAT MUMBAI