From ET Realty
MUMBAI: A Pali Hill society, which sold its balance development rights to a builder almost a decade ago, now finds itself caught in the cross-hairs of the income tax department.
The case, which could lead to double taxation for flat owners if upheld, could affect thousands of housing societies in the city which go in for redevelopment. The income tax commissioner’s (appeals) decision, said experts, could open the door for future litigation.
The Chetak Cooperative housing society will now battle it at the tax tribunal level. They contend that the over-100 flat owners, who received Rs 6 lakh to Rs 16 lakh each from the builder, have already paid tax on this amount. Hence, the I-T department cannot tax the society again. “The same income is again taxed in the hands of the society, which is totally unjust and against the principles of natural justice,” said the society, which is more popularly known as Manju Mahal in Bandra’s upscale Pali Hill.
In 2007, Sandhu Builders paid around Rs 8 crore to the members for giving it the power of attorney to utilize about three acres of the society’s land. The builder used the transfer of development rights (TDR) to construct the tallest tower on Pali Hill, the 19-storey Sandhu Palace, where each flat commands a price of Rs 35-Rs 40 crore.
Interestingly, although the payments were made in 2007, the I-T department reopened the case and sent a notice to the society in 2013. The department assessed the income at Rs 7.93 crore and levied a tax, penalty and fine of Rs 3.58 crore. The society said the assessing office “erred in treating TDR proceeds as taxable income, inspite of several court decisions that the same is not liable to be taxed”.
The society raised two groundsthat no amount was taxable in the hands of the society as it was paid to the members as part of the contract with the developer and the society was not concerned with the same. The second was that even if the society was treated as belonging to the society, it was exempt from tax on the basis of several decisions, including a decision of the high court in the case of commissioner of income tax (CIT) vs Sambhaji Nagar CHS Ltd.
The CIT (appeals), however, rejected the contentions of the society and stated that the decision of the high court was not applicable. The department has also recovered from the society large amounts of money. Its decision would apply to many other societies and their members in Mumbai and in other places wherever there is TDR.
“This view of the department, contrary to many decisions over the years, creates a great deal of uncertainty for the public at large. At this point of time, ease of doing business is very important for India, and the country has suffered a great deal on account of unwarranted tax. The finance ministry and the income tax department should review their own actions and must note that certainty is extremely important and that the system of taxation should be fair, and it should not amount to double taxation,” said advocate Anil Harish, an expert in the field of real estate law.