REDEVELOPMENT OF PROPERTIES AND CHARGE TO TAX – A CONFLICT AMONG STATUTES

ABSTRACT

This paper attempts to deliberate on how housing infrastructure laws enable taxing statutes to create a situation of disadvantage to the consenting parties who let go of their existing housing for betterment, yet get taxed in return, a tax which is complicated to understand.

Mohamed Nawaz Haindaday
Taxation of Extra Housing Space

CONTENTS

ABSTRACT
I	INTRODUCTION – Purpose and Nature of Study
II	CONTEXT: CAUSE OF GROWTH OF HOUSING, ENABLING POLICIES AND STATUTES AND THE FISCAL GAINS IN REDEVELOPMENT OF PROPERTIESCause of growth of housingEnabling StatutesFiscal Gains
III	ROLE OF TAX STATUTE IN REDEVELOPMENT AND EFFECTS THEREAFTER Redevelopment of housing properties and the play of Income TaxHow does a redevelopment transaction become subject to income tax Relevant provisions of the Act regarding Capital GainsThe issue discussed in the light of a recent judgement of the Hon’ble Bombay High CourtAn argument on the arbitrariness of the Act and authorities there under
IV	CONCLUSION

ABSTRACT

Housing infrastructure is directly proportional to the growth in population.  Housing needs vary for the urban areas, semi-urban areas and now with emphasis on developing new towns and cities, which are slowly but gradually converting rural areas into semi-urban and mini-urban areas, the demand for housing has assumed larger proportions.  India has shifted from being an agrarian economy to a mixed economy where private and public sectors co-exist.  With growth in population, comes the need for housing the growing population.  The Government of India and various States have at various points in time worked upon and developed the policies relating to promotion and development of the housing sector.  This paper would concentrate on the housing laws as are applicable in the State of Maharashtra and the anomalies which are counterproductive to the common citizens vis-à-vis the tax regime as it exists in relation to the taxation associated with development and redevelopment.

Development of housing infrastructure requires an abundant supply of land.  The topography of the State of Maharashtra is such that except the city of Mumbai, which is the financial capital of India, the other parts of Maharashtra have land in abundance.  However, considering the importance which Mumbai has to not only the rest of Maharashtra, but also to rest of India, and the fact that Mumbai generates not only opportunities but also revenue arising from the abundant opportunities and thereby contributes the major chunk of tax revenue, it is needless to say that this city has the largest demand for and the potential to develop, the housing sector.  

To understand the land area of Mumbai, it is important to understand that Mumbai comprises Greater Mumbai, Suburban Mumbai and the Mumbai Metropolitan Region.  Mumbai city, being Greater Mumbai, has had a large chunk of existing buildings mostly of the British era, housing families which have now multiplied.  The families multiplied and the buildings depreciated.  Suburban Mumbai consisted mainly of villages / gaothans and the same would be true for the MMR.  

The Government of Maharashtra to promote housing infrastructure development brought in various legislations and also amended existing legislations like the Mumbai Municipal Corporation Act to promote development and / or redevelopment of existing land areas or existing building structures to create multi-storied housing complexes.  This required existing landowners or building owners or in certain cases, existing housing societies to agree to go in for redevelopment.  Redevelopment laws provide certain incentives to existing landowners or housing societies to agree to hand over their properties.  These incentives or benefits attract the attention of the revenue authorities who invoke the tax laws to tax and “extract” their pound of flesh from landowners etc. who get caught unawares.

This paper attempts to deliberate on how housing infrastructure laws enable taxing statutes to create a situation of disadvantage to the consenting parties who let go of their existing housing for betterment, yet get taxed in return, a tax which is complicated to understand.

Introduction

Taxation is a complex maze.  It is famously said that Indian Tax laws are by far the most complex, complicated and proviso and explanation heavy laws.  The Indian Income Tax Act with its consistent feature of amendments, either legislative or through executive orders, leaves no “stone” unturned to tax every person living or artificial, of his / its earning or losses be they in real or deeming terms.

Housing is one of the primary needs of people.  Having a house to live in, a dwelling place, constitutes a very important aspect of human life.  Housing is one of the major contributors to the growth of economy and an economic indicator also.  Even though agriculture contributes around 16% to the GDP, the growth of the economy is now more concentrated around industrial growth and also growth in the technology sector.  Unlike the agrarian economy, industrial growth and growth in other sectors is more dependent on an increased number of human resources which is one of the important factors driving the growth.  Human resource is the fodder for the growth of the housing economy.  Housing is also elevated as a fundamental right of every individual.

Growth in population creates a demand for housing, which in turn leads to creating a supply.  These factors spur a growth in the housing sector.  Creating a supply of housing requires a consistent and ever-increasing need of land parcels.  The Central and State government, exercising legislative and administrative powers, bring about enabling legislations and policies to create housing and promote the growth in the housing sector.  The Government of India regularly brings about policies enabling promotion and development of the housing sector.  Various States have formulated their own State legislations and housing policies and have also set up state owned housing development authorities to facilitate and promote acquisition and also redevelopment of existing lands and / or buildings.

Land is one of the most important and essential ingredients for meeting the demand of housing and is also a scarce resource in some parts of the country or though available, would be under certain legal constrains.  Availability can be looked at from two different sources: lands having existing buildings / structures or open lands.  Whatever be the sources, the land or the structure thereon would be a property or an asset of some person.

The land required for the purpose of meeting the demand for creating housing leads to exchange / sale / transfer of existing ownerships, under pro-housing sector development laws and policies.  Such transactions essentially have an element of gain in terms of money.

1. Purpose and Nature of Study

This paper shall endeavour to analyse the impact of the Income Tax Act on the redevelopment projects with specific reference to house owners.  It will also discuss how the complicity of the State in exploiting the situation which landowners or apartment owners find themselves in as a part of the housing infrastructure development policies and laws brought in by the State.

The four broad heads of incomes describe the taxability and describe the types of incomes which directly and indirectly become subject to tax; directly by way of self-compliance to pay tax and indirectly by the mode of deductions at source or withholding tax.

Sections 45 to 55A forming part of Chapter IV of the Income Tax Act tax profits or gains arising out of transfer of a capital asset.  This charge to tax is more commonly known as Capital Gains Tax. Capital Asset and transfer are defined in Section 2 of the Act.  Capital asset includes a house property, or a building, with or without land appurtenant to it.  Such type of capital asset becomes a prospective subject of re-development.  Redevelopment of old housing properties or development of vacant lands forms part of one of the most important sectors of every economy – housing.  The purpose of this paper would be to understand how, a burgeoning need of housing, and its satisfaction, leads to an additional cost to the most important contributory parties in this major factor of economic growth, the common man.  The paper would attempt to relate the housing laws with fundamental rights and if there was a violation of such fundamental rights; thus, attempting to discuss an inter se conflict of laws.  It is pertinent to state that the paper will restrict itself to housing laws applicable to the State of Maharashtra. 

CONTEXT: CAUSE OF GROWTH OF HOUSING, ENABLING POLICIES AND STATUTES AND THE DEVELOPMENT AND REDEVELOPMENT OF PROPERTIES

1. Cause of growth of housing

An article in the Economic Times reports that according to the Confederation of Real Estate Developers’ Associations of India (“CREDAI”), “the housing demand in India is projected to reach 93 million units by 2036…”.  CREDAI’s report believes that it would not be Tier I cities, but cities in Tier II and III which would lead the demand and supply for housing.  The report also refers to the government’s plans to set up smart cities and create multiple commercial activities in and around such planned smart cities, which will further contribute to the real estate growth in these Tier II and III cities.  The Economic Times report however does not refer to any discussion in the CREDAI report with reference to the demand and supply for housing in Tier I cities.  It cannot be discounted that the need to develop Tier II and III cities stems from the fact that Tier I cities are facing a saturation of pure land for development of housing infrastructure.  This important fact of non-availability of “just the land” for development results in redevelopment activity, of old, existing housing units.  It results in vertical growth, especially in cities like Mumbai and brings about an abundant supply of housing.  In Tier II cities may have land is abundant in plenty, yet the benefits of redevelopment would still be available.  Yet another report on CNBCTV18 dated 27 March 2023 gives an interesting information on the housing need for apartments as distinct from independent houses in the price range of Rs.1-2 crore.  The demand for small dwelling units can be said to exist in both Tier I and Tier II cities.  Metropolitan regions of Tier I cities are the areas where such low-cost housing units can be made available in plenty.  In proper Tier I cities, the price band of Rs.1-2 cr. would not afford a reasonable housing unit, but anything beyond Rs.2 cr. and not exceeding Rs.3 cr. could give a good supply of reasonable housing apartments.  Such, housing apartments are usually constructed by utilising existing and old housing infrastructure and which result in a variety of options in terms of dwelling units; affordable, mid-tier and premium housing accommodation.  Tier I cities have homogenous mix of population, resulting in a ready market for the variety of housing needs and which cater to different segments of society.  Tier II cities’ housing demands are tailored according to the economic quality of the populace and so on and so forth.

The underlying theme in development of lands or redevelopment of existing housing infrastructure is utilisation of ownerships of existing owners by modes including inter alia transfer by way of sale, exchange, or extinguishment. 

2. Enabling Policies and Statutes

As stated earlier, this paper concentrates on housing and laws as applicable in the State of Maharashtra and the tax implications in relation to activities of development and redevelopment.  But before dwelling further it would be apposite to refer to The National Housing & Habitat Policy-1998 “NHHP-1988”.  Extracting from a document titled “The National Housing & Habitat Policy-1998: An overview”, para 2.1 explaining the Background states as under:

“2.1 … The constant migration of people from rural areas to cities in search of jobs also puts housing and basic services in the urban areas under strain. A well-balanced housing policy, it is felt, has to be designed to conserve our increasingly depleted natural resource reserves to the extent possible while at the same time catering to the growing need for shelter. The need was, thus, to ensure sustainable development of housing and human settlements in a balanced manner. Keeping this in view, Government of India introduced the National Housing and Habitat Policy, 1998 in July 1998 which is envisaged as a war against human indignity and individual servitude. In the longer run, it is envisaged that the ideal role of the government would be that of a facilitator and enabler rather than a provider. This Policy, therefore, seeks to persuade the players in the private and cooperative sectors through fiscal concessions and other incentives to take on the responsibility to supplement government’s initiatives. With the expected increased role of the private sector, the government’s role of direct intervention for the benefit of the poor and deprived will be redefined.”

Interpreting the italic emphasised words, it would be needless to say that various policies and statutes as applicable in the State of Maharashtra are part of the larger national policy on housing.  What follows in this paper is an analysis of how the stated public policy on housing development is in direct conflict with the Income Tax law and rules.

The major laws and regulations framed for development and redevelopment within the State of Maharashtra can be listed as under:

• The Maharashtra Regional & Town Planning Act, 1966 and Rules framed thereunder, “MRTP”
• The Maharashtra Housing and Area Development Act, 1976 and Rules framed thereunder, “MHADA”
• Development Control and Promotion Regulations for Greater Mumbai, 2034, “DCPR-2034”
• Unified Development Control and Promotion Regulations for Maharashtra, “UDCPR”
• Standardised Development Control and Promotion Regulations for Regional Plans in Maharashtra, “SDCPR”
• The Mumbai Municipal Act, 1888, “MMC”
• The Maharashtra Municipal Corporation Act, 1949, “MahaMC”
• Maharashtra Highways Act, 1955, “MHA-1955”

(Note: DCPR-2034, UDCPR and SDCPR are issued under the authority of the MRTP Act.  DCPR-2034 is also read with MHADA and MMC Acts.)

Apart from the above State Acts and Regulations, two Central Acts also are invoked when land within the State of Maharashtra is to be acquired for the national public purposes, namely:

• The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013; “LAA-2013”, AND
• The National Highways Act, 1956, “NHA-1956”

Two other relevant Statutes that have an important bearing vis-à-vis the tax laws are also relevant to be referred to under this part of the paper.  These are:

• The Maharashtra Stamp Act, 1958, “Stamp Act”; AND
• The Registration Act, 1908

3. Fiscal Gains

Adverting to the italicised portion extracted from the NHHP-1988, the words fiscal concessions are very important and relevant to the underlying theme of this Paper.  The meaning of fiscal, in the strict sense would mean “1. of or relating to government finances esp. tax revenues 2. of or involving financial matters…”.  

For the purpose of this paper, where the emphasis lies on the benefits, fiscal benefits most importantly, arising from the various enabling laws and policies, it would be irrelevant to discuss the Statutes listed above except insofar as discussing the relevant provisions that enable fiscal benefits to the stakeholders. 

Of the above, the MRTP Act, LAA-2013, MHA-1955 and NHA-1956 mainly deal with acquisition of land.  Compensation received on compulsory acquisition of lands is generally exempt from tax. 

MHADA, MMC Act and the three Regulations listed above are the laws which enable redevelopment of land by bringing about Schemes under the Act which result in fiscal gain or benefits to the existing occupiers and owners of housing properties or lands which the Income Tax Act seeks to tax as Capital Gains.

The MHADA and MMC Acts, contain specific provisions which enable development and redevelopment of existing housing structures.  The three regulations stated earlier contain broad and specific provisions which create incentives.  Before the incentives are discussed, it is essential to state that the activity of development or redevelopment as provided under the enabling statutes is necessarily carried out by an agency/person known as “Developer”.  Reg. 2 of DCPR-2034 vide Clause 37 defines a “Developer/Builder/Project Proponent as the person who is legally empowered to carry out the development.”  

Now we come to the incentives that are made available by way of the Regulations.  The incentives are in terms of Floor Space Index “FSI” or Fungible Compensatory Area “FCA”.  The FSI or the FCA, are rights or permits made available to a Developer who agrees to undertake redevelopment of an existing housing structure by demolishing the existing structure and utilising the land that derives therefrom for constructing new multi-storeyed buildings containing dwelling units and / or commercial units.  The FSI and the FCA are incentives primarily meant for a proposed developer to incentivise such developer to gain benefits from the activity. 

How does the benefit of FSI and FCA get attached to the owners / occupiers of existing old housing units, whose building structure becomes the subject of redevelopment?  The common approach to redevelopment of existing housing units is that the proposed developer negotiates and enters into an agreement with the owners and / or occupiers to take over their existing building, demolish the structure and construct an altogether new multi-storeyed building.  Unlike in the past, presently many of the developers prefer only to assume the responsibility of demolishing and building, on the land, a new structure and avoid taking over the title of the land on which the structure stands.  Typically, the ownership in the land remains with the co-operative housing society, in the case of a building occupied by persons OR in the case of landlord owned and tenant occupied buildings, the ownership remains with such landlord.

In order to obtain consent of the owners etc., the consideration that the developer is required to offer consists of a dwelling unit in the reconstructed building along with amenities including parking.  The dwelling unit that the developer has to offer is of an area different from the area occupied by the occupiers in the old building and in excess of the earlier occupied area.  Apart from the increased carpet area, the occupiers get in total an area which is described as a “super built-up area”, which is much higher than the erstwhile occupied area.  In most of the cases, there is no cash component paid to the owners and the entire consideration is in the form of a Permanent Alternate Accommodation “PAA”.

This PAA goes on to become the tool that brings about a change in flavour for the recipients thereof, from happiness to that of stress and fiscal liabilities, not to discount the ultimate threat of criminal prosecution.  All this, with respect to the taxing statute is discussed in Part III of this Paper.  The relevance of the lengthy discussion on the background was necessary to understand the relevance of this Paper.

ROLE OF TAX STATUTE IN REDEVELOPMENT AND EFFECTS THEREAFTER 

1. Redevelopment of housing properties and the play of Income Tax

As stated earlier in the Paper, profits or gains arising from transfer of a capital asset are taxed as Capital Gains.  Part E of Chapter IV of the Act beginning from Sections 45 to 55A deal with taxation of Capital Gains.    However, before the provisions of law are discussed, it is necessary to first understand how, for a common man, a happy transaction of redevelopment (assuming the timelines are adhered to and the developer survives the entire process of construction and further, there arises no need to invoke RERA) falls into the dreaded trap of income tax.

To understand this, it would be futile to view this transaction from the eyes of the hapless and unassuming owners etc.  For this category of persons, beginning from the time of receiving a redevelopment proposal, and through the process of negotiations, culminating in signing of the PAA Agreement “PAAA”, and finally receiving possession of the new flats, the aspect of “income tax” was nowhere to their knowledge.  Until…few years down the line and before the end of period of limitation laid down under Section 149 of the Act, when the taxman comes knocking of their doors do they feel the tremors or the after-effects of redevelopment.  Therefore, to put it simply, the impact of transaction is best viewed from the eyes of the taxman directly.

As the perfect spoilers, the taxman’s first missive to the unaware beneficiary of redevelopment would come not earlier than after the end of at least two financial years from the date of the transaction.  The date on which the PAAA is registered would be the relevant assessment year in which the assessee would be subject to the rigours of the provisions dealing with taxation under Capital Gains.  Needless to say, the registration of the PAAA triggers compliance on the part of the Registration Authority which passes on the information to various departments including the Income Tax Department.  For various reasons, best known to the taxmen, the processing of the information takes quite a number of years before it reaches the Income Tax Department, and it is only then, presumably, that the process of taxing the assessee begins.

2. How does a redevelopment transaction become subject to income tax

From the discussion in Para II – C above it can now be understood that the result of a redevelopment project is of the occupier being put in possession of a housing apartment containing an area larger than the area occupied in the old housing unit.  This excess area received by the assessee, in the eyes of the taxman, is the incidence of tax and requires to be taxed as capital gains in the hands of the assessee.  The Tax Department bases its claim on the value it obtains from the PAAA, as registered and for the purposes of the Act, such value attracts Capital Gains tax.  

3. Relevant provisions of the Act regarding Capital Gains

To understand the question of taxability, we will have to analyse relevant provisions of the income tax act insofar as they deal with capital asset, transfer, full value of consideration and capital gains and their interplay on the transaction of redevelopment.  The provisions are explained in brief as follows:

1. The definition of “transfer” as provided for in section 2(47) of the Act is of great significance to understand whether the transaction of redevelopment falls within the ambit of an act of “transfer” as defined.  A careful reading of the definition of transfer leads to the question whether, by way of redevelopment is there a sale or exchange or relinquishment of an asset (read apartment / flat / house property) by the owner of the flat to the developer.  If not, does such a transaction put the developer in possession of a property in terms of section 53A of the Transfer of Property Act (ToPA)?  
2. The term “transfer” is also relevant to Section 45 which is the charging section for the purpose of Capital gains.  The section clearly provides that a profit or gain that arises out of transfer of a capital asset shall be chargeable to income tax under the head “Capital gains”.  If the transaction of redevelopment fails the first test of transfer, the result of redevelopment does not give rise to an incidence of tax and thus the provisions of section 45 shall also consequentially not be applicable.
3. Sections 48 and 49 shall also have a bearing in determining why the transaction of redevelopment with reference to an apartment owner shall not be subject to tax under the head capital gains.  
4. Section 50C is very often invoked by the assessing officer to determine the value of consideration when such assessing officer basis his claim to tax on the premise of registration of the agreement of permanent alternate accommodation.  Such premise is also, in the view of this author, not applicable insofar as apartment owners in a redevelopment project are concerned.
5. The income tax act provides exemption from capital gains tax subject to the conditions laid down in sections 54 to 54GA.  Insofar as the exemption concerns a property used for residence, which is the subject of this research paper, the provisions of section 54 merit a read.  Section 54 exempts a profit or gain on transfer of a residential house, if the proceeds or the amount of capital gain is invested in another house property.  Applying this to the transaction of redevelopment of house property, the first test again would be transfer within the meaning of section 2(47); once such test fails, everything consequential to it fails.  Assuming for a moment that a reverse reading of section 54 was to be done, it could be argued that when a gain of an increased space in a redeveloped flat is taxed as capital gain, the assessee could take the benefit of section 54 to save from tax.  However, when section 54 very clearly lays down condition precedent to take benefit of saving tax, such provision cannot be applied to the transaction of an increased space in a redeveloped flat, which does not arise out of any sale of an existing house property.

To understand the exact nature of how a housing redevelopment works, and while analysing the provisions of the Income Tax Act, it would be better to discuss the issue in the light of a very recent judgement of the Hon’ble High Court of Bombay delivered in February 2023.  This judgement discusses all the ingredients relevant to the issue which will be easy for the reader to co-relate with the relevant provisions of the income tax act as explained above.

4. The issue discussed in the light of a recent judgement of the Hon’ble Bombay High Court

The judgement in Adityaraj Builders and Ors. Vs. The State of Maharashtra & Ors. is primarily on the issue relating to the Stamp Act and the question of stamping of Development Agreements and Permanent Alternate Accommodation Agreement.  The judgement has valuable discussion and analyses the essence of the agreements in detail.

As stated earlier, the issue before the Hon’ble Court related to stamp duty which was to be levied on the PAAAs.  Before a developer enters into PAAAs with individual members, it enters into a Development Agreement “DA” with the Society.  The Respondent State sought to levy stamp duty on the PAAAs along with levying stamp duty on the DA.  The levy of stamp duty on the DA was not in dispute; stamp duty on the PAAAs was in dispute.  The Court has observed that the DA is compulsorily between a Society and the Developer; it is the Society that goes into redevelopment.  There could be only one DA without there being a single PAAA.  

The relevant discussion with special reference to the question of the taxability on redevelopment starts from para 38.  Due to limitations, only the relevant portions of the material paras are reproduced as below:

“38.  The next point … is that sometimes by operation of law, a member is entitled as of right to an additional area over and above the area that he or she presently occupies.  Under the Development Control & Promotion Regulations 2034 (“DCPR”), ……, an additional area is promised to existing occupants.  ….  They are all promised, without any element of purchase, rebuilt homes of 500 sq. ft. with built-in toilets and bathing facilities.  It surely cannot be suggested that these persons who are entitled to an enhanced area on redevelopment by MHADA are deemed to be ‘purchasers’ of not only the existing area but the increased area in their rebuilt homes.  There is no exemption from stamping that is pointed out to us for such transactions.  We do not see how the stamp authorities’ or State Government’s logic can be differentiated between a MHADA redevelopment, and a redevelopment done privately between a society and a developer.

39. There is a third element regarding square footage. Sometimes the society member has the option of purchasing even further area. To be clear, …, but, in addition, additional area available to the project that any member may purchase for valuable  consideration. ….  

40. The last argument on area, presented …, is about the concept of what is called “fungible FSI“. ……. The amount of available fungible FSI is also capped, and most DAs therefore require the builder–as part of the consideration–to make this available free to members through the society.  

41. There can be no question of members having to pay stamp duty on acquisition of additional built-up area or carpet area derived from fungible FSI. The only stamp duty a member must pay is for any additional area that she or he actually purchases for consideration.  

42. The reason for this is self-evident. It takes us to the concept of redevelopment to begin with. The society is the owner of the structure and the land. It is the society that owns the property and the land. Members have shares in the society. That membership allows them to have occupancy rights for individual flats and use of certain parking spaces, garages, common areas and facilities and so on. When a member ‘sells’ her or his flat, she or he is actually selling membership of the society. … The law earlier was, until it was clarified in the early 1980s by a Division Bench of this Court, that a transfer of shares in a society did not attract stamp as a conveyance. This Division Bench held that it did, and that law has now for the last 35 years have been firmly settled. It is impossible to argue that the land and building are not the property of the society itself. … The DA comes into play because it is the developer who bears the burden and costs of redevelopment. But consideration must pass between the developer and the society. That consideration takes the form of the society yielding or ceding to the developer in lieu of cash consideration, and additional FSI benefits. This is the free-sale component that is made available to the developer. This is the consideration. …. To put it even more bluntly: the developer is not selling homes to society members on re-development. The only sale is of any additional area that the member purchases. The rest is an obligation to be performed by the developer in consideration of the members, through their society, giving the developer the benefit of the free-sale units.  

43. We are concerned here with only one aspect: the redevelopment of society buildings and premises. It does not matter how that redevelopment takes place. From the perspective of a society member, she or he is getting: (a) a home in replacement of a home; (b) a larger home in replacement of a smaller home; and (c) the option of purchasing additional area for the replacement home. It is only item (c) that can ever be brought to stamp. Items (a) and (b) are never liable to stamp.”

[Emphasis supplied]

The judgement referred above definitely had no connection with any aspect of the tax law, but with the Stamp Act.  However, it cannot be said that the ratio and the underlying detailed discussion of what constitutes “property” (read “capital asset”) and most importantly purchase cannot be read into the Income Tax law.  In fact, this judgement holds extreme relevance toward creating a precedence on taxation of redeveloped properties.  There has not been any major development on the law relating to Section 50C r/w Section 56(2)(x)(b) and thus, the last on this is yet to be said.

Coming back to the judgement the Hon’ble Court has very clearly held that when an existing occupant of dwelling unit in the old building receives an additional area in the newly developed building, he does not purchase the additional area.  He gets it by virtue of operation of law.  Such additional area therefore does not accrue to him as a “profit or gain” in terms of Section 45 nor is there a transfer. Transfer is an essential ingredient to fix the liability of capital gains.  The existing occupants continue to occupy a dwelling unit, regardless of all other facts.  The essence is transfer; there is none.  The judgement has clearly explained how the FSI and in certain cases the fungible FSI is passed on to existing occupants by the developer.  It could plausibly be said that the dwelling unit owner(s) has(have) no control over their desire to consent or object to redevelopment.  The law allows a majority of fifty-one percent consenting occupants to proceed with redevelopment, dissenters have no choice. The incentives accrue to all.

5. An argument on the arbitrariness of the Act and authorities there under

1. Provisions of TDS

The Income Tax Act has a separate chapter dealing with collection and recovery of tax.  Section 194-IA under Chapter XVII provides for deduction at source from payments on transfer of certain immovable properties excluding agricultural land.  It is pertinent to note that it is not common knowledge of any developer applying Section 194-IA to any DA or PAAA.  Thus, when a person enters into the process of redevelopment, more specifically at the point of execution of the PAAA, neither the developer nor the flat owner is faced with the situation of deduction of tax at source.  And rightly so; a plain reading of S. 194-IA provides for deduction of tax at source when there is a transfer of property, other than land, for consideration, in cash or by any other mode.  Such deduction is to be made at one percent of the stamp duty value.  A DA or a PAAA does not attract application of S. 194-IA.  Furthermore, apart from S. 194-IA, there is no other provision which fixes a liability on a person, to deduct tax at source, on a transaction of redevelopment.  

For any transaction generating “income”, the Income Tax Act makes appropriate provisions to collect tax at source and fixes the liability to deduct tax at source on the payer of consideration.  The payee, therefore, through the mode of compliance related to TDS, becomes liable to file an appropriate Return of Income, determine liability and pay due taxes.  All this only when there is a situation of capital gains, as provided for within the meaning of Ss. 2(47) and 45. Therefore, ab initio, the income tax law does not consider a transaction of redevelopment as an incidence of tax, which otherwise would have necessitated an appropriate provision for deduction and collection of tax at source at the point of execution of the PAAA or DA, as the case may be.

2. Stealth action by the tax law against persons benefitting from housing laws and policies

As explained in the immediately preceding para, the income tax law per se does not recognise a transaction of redevelopment as resulting in profit or gain.  Had that been so, as stated earlier, adequate provisions would have been made.  It is therefore interesting to understand how such transactions become subject of scrutiny.  The Income Tax Department has devised a unique way of first disturbing and then destroying the happiness that house owners derive from redevelopment.  And this is how…

Just before the time limit provided under Section 149, for issue of notice u/s 148 expires, the taxman issues a notice u/s 148A to the unsuspecting house owner.  The notice bases its right to enquiry on the “registration” of the PAAA, which according to the taxman, is brought to its knowledge by its Investigation Unit “IU”. And thus begins the process of various notices, and further notices and then the notice u/s 142 et al.  

Why stealth?  To receive a notice, after passage of a considerable time, though within powers and limitation, for the house owner, it is a bolt from the blue.  Stealth also because, the income tax law does not in clear terms cover such a transaction as to be subject to tax; nor are such transactions considered at the commencement of the projects.  Invoking Section 50C at times, or simpliciter, information obtained from the IU, the Income Tax Department initiates tax proceedings that have the potential to not only tax, and penalise, but culminate with criminal prosecutions.

3. Article 300-A of the Constitution of India

Right to property was a fundamental right under Articles 19(1)(f) and 31.  However, the Constitution (44^th Amendment) Act, 1978, deleted Articles 19(1)(f) and 31 as a result of which, the right to property was no longer a fundamental right.  The 44^th Amendment Act simultaneously introduced Article 300-A which made right to property a constitutionally recognised legal right.  A constitutionally recognised legal right is available against the executive interference but not against legislative interference.  Article 300-A mandates that a person shall not be deprived of property save by authority of law.  

Importing these provisions to the taxing of a transaction arising out of or resulting from a redevelopment of house property, in terms of extra space received by a flat owner, taxing a house owner for an extra space received by him in accordance with law results in an act which seek to extract a pound of flesh for the income tax without the house owner actually transferring his asset.

Even otherwise, as is held by the Supreme Court on many occasions, Article 300-A is available against executive action.  An executive action in terms of taxing a result of redevelopment would be an action of misapplying the provisions of the income tax act in the absence of specific provisions to tax such transactions.  And such action is amenable to challenge.

CONCLUSION

The law on taxing owners who enjoy the benefits of redevelopment is yet to evolve finally.  It is common knowledge amongst tax practitioners, mainly Chartered Accountants, about the existence of notices targeting transactions on account of PAAA.  However, the moot question is whether there is a conflict amongst the statutes?  Whether the income tax law can be invoked on gains or incomes from events that occur by operation of law?    Can the legislature make a law that violates fundamental rights of persons when they benefit by way of receiving additional space merely because the law enables such increased space?  There are so many questions that require to be looked at to defend the hapless assesses from being subjected to not just fiscal harassment, but also mental agony.  It should not be ignored that while issuing the first notice calling for explanation, the taxman also invokes “concealment” charge against the assessee.  It should also not be so susceptible to being invoked, that the threat or rather the reality of criminal prosecution hangs like the Damocles sword. 

 See paras 3 and 5 of the Statement of Objects and Reasons for the 44^th Amendment.