Taxpublishers.in - Monday Corner Answer to the Quiz for the week (29 Jul 2024)

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Quiz for the week (29 Jul 2024): Famous Co Ltd is a reputed builder and developer. It identified a project where there are 40 residential units (apartments) for entering in to a JDA. All the residents agreed to enter in to a JDA with it. As per agreement each flat owner would be eligible for one re-built apartment with 10% more carpet area. In addition, each owner would be paid Rs.25,000 per month towards hardship compensation for locating to some other accommodation from the commencement of the project and until the project is completed (say 24 months) and Rs.5 lakhs towards TDR / FSI. This amount towards TDR/ FSI would be paid at the time of completion of the project. Assume you are one of the owners of the apartment. How would you manage your income tax liability as regards the hardship compensation and transfer of FSI / TDR? Best Answer : The facts given in the question consist of three issues viz. (i) the impact of JDA by surrendering the old property in return for rebuilt apartment with 10% more carpet area; (ii) compensation by way of hardship allowance of Rs.25000 per month for 24 months; and (iii) receipt of Rs.5 lakhs towards transfer of TDR/FSI. Section 45(5A) says that where the capital gain arises to an assessee being an individual or a HUF and the transfer of capital asset being a land or building or both, under a specified agreement the capital gain is chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. For the purposes of section 48, the stamp duty value on the date of issue of the said certificate, of his share, being land or building or both in the project plus the consideration received in cash, if any, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset. In this case, it is apparent that the project has not been completed and therefore section 45(5A) would not be triggered at this point of time. After the completion of the project the stamp duty value of the property plus cash consideration less the indexed cost of acquisition of the old property would be liable to tax as capital gain (loss). The amount of hardship compensation received is not having the semblance of income and therefore it is to be considered as part of the total consideration only while computing the capital gain under section 45(5A). In this context, the decisions referred below have held that the amount received is to be considered as part of capital receipt and consequently part of sale consideration. [Kushal K. Bangia v ITO - 2012 TaxPub(DT) 1995 (Mum-Trib); Jitendra Kumar Soneja v. ITO - 2016 TaxPub(DT) 3857 (Mum-Trib) : 161 ITD 269 (Mum) (Trib); and Pradyot B.Borkar v. ACIT - 2020 TaxPub(DT) 0911 (Mum-Trib) ]. As regards payment towards TDR/FSI, the recipient has to admit the same under the head “capital gains”. If the amounts were received at the time of completion of the project then it should be computed by taking the sale consideration of TDR/FSI as Rs.5 lakhs less cost of acquisition. It is possible that the TDR/FSI is increased by the local government / authority for the purpose of construction and if there is no cost of acquisition involved in allotment of additional TDR/FSI it must be taken as ‘zero’. Based on the date of grant of such permission for the increased construction and the date of transfer of TDR/FSI it would be considered as long-term or short-term capital asset and the result gain (loss). Since the project gestation period is stated as 24 months it is possible that the TDR/FSI would also be long-term capital asset and the entire amount received being chargeable as long-term capital gain. To sum up, the hardship compensation is not taxable at the time of receipt. It is to be considered along with sale consideration under section 45(5A). As regards rebuilt apartment the capital gain must be computed after the project completion certificate is obtained by comparing the stamp duty value of the consideration received less the indexed cost of acquisition of the original property. The amount received towards TDR/FSI since would be received at the time of completion of the project it is taxable at that time only. It may be noted that it is possible to transfer TDR/FSI without transferring the property and if the amount is received much before the completion of the project, and if the transfer of TDR /FSI is also complete at the time of receipt of compensation / consideration it is taxable at that point of time itself. It cannot be deferred to the date of completion of the project.

Quiz for the week (29 Jul 2024):

Famous Co Ltd is a reputed builder and developer. It identified a project where there are 40 residential units (apartments) for entering in to a JDA. All the residents agreed to enter in to a JDA with it. As per agreement each flat owner would be eligible for one re-built apartment with 10% more carpet area. In addition, each owner would be paid Rs.25,000 per month towards hardship compensation for locating to some other accommodation from the commencement of the project and until the project is completed (say 24 months) and Rs.5 lakhs towards TDR / FSI. This amount towards TDR/ FSI would be paid at the time of completion of the project.

Assume you are one of the owners of the apartment. How would you manage your income tax liability as regards the hardship compensation and transfer of FSI / TDR?

Best Answer :

The facts given in the question consist of three issues viz. (i) the impact of JDA by surrendering the old property in return for rebuilt apartment with 10% more carpet area; (ii) compensation by way of hardship allowance of Rs.25000 per month for 24 months; and (iii) receipt of Rs.5 lakhs towards transfer of TDR/FSI.

Section 45(5A) says that where the capital gain arises to an assessee being an individual or a HUF and the transfer of capital asset being a land or building or both, under a specified agreement the capital gain is chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. For the purposes of section 48, the stamp duty value on the date of issue of the said certificate, of his share, being land or building or both in the project plus the consideration received in cash, if any, shall be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset.

In this case, it is apparent that the project has not been completed and therefore section 45(5A) would not be triggered at this point of time. After the completion of the project the stamp duty value of the property plus cash consideration less the indexed cost of acquisition of the old property would be liable to tax as capital gain (loss).

The amount of hardship compensation received is not having the semblance of income and therefore it is to be considered as part of the total consideration only while computing the capital gain under section 45(5A). In this context, the decisions referred below have held that the amount received is to be considered as part of capital receipt and consequently part of sale consideration. [Kushal K. Bangia v ITO - 2012 TaxPub(DT) 1995 (Mum-Trib); Jitendra Kumar Soneja v. ITO - 2016 TaxPub(DT) 3857 (Mum-Trib) : 161 ITD 269 (Mum) (Trib); and Pradyot B.Borkar v. ACIT - 2020 TaxPub(DT) 0911 (Mum-Trib) ].

As regards payment towards TDR/FSI, the recipient has to admit the same under the head “capital gains”. If the amounts were received at the time of completion of the project then it should be computed by taking the sale consideration of TDR/FSI as Rs.5 lakhs less cost of acquisition. It is possible that the TDR/FSI is increased by the local government / authority for the purpose of construction and if there is no cost of acquisition involved in allotment of additional TDR/FSI it must be taken as ‘zero’. Based on the date of grant of such permission for the increased construction and the date of transfer of TDR/FSI it would be considered as long-term or short-term capital asset and the result gain (loss).

Since the project gestation period is stated as 24 months it is possible that the TDR/FSI would also be long-term capital asset and the entire amount received being chargeable as long-term capital gain.

To sum up, the hardship compensation is not taxable at the time of receipt. It is to be considered along with sale consideration under section 45(5A). As regards rebuilt apartment the capital gain must be computed after the project completion certificate is obtained by comparing the stamp duty value of the consideration received less the indexed cost of acquisition of the original property. The amount received towards TDR/FSI since would be received at the time of completion of the project it is taxable at that time only. It may be noted that it is possible to transfer TDR/FSI without transferring the property and if the amount is received much before the completion of the project, and if the transfer of TDR /FSI is also complete at the time of receipt of compensation / consideration it is taxable at that point of time itself. It cannot be deferred to the date of completion of the project.