TAX NEWS - June 2010

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India Tax: Sec 50C does not apply to typical society redevelopment

Who is taxable in redevelopment of society — the society or the members? Is redevelopment compensation and rental compensation liable to TDS or not, and does Section 50C apply to redevelopment?

In a redevelopment project, it is better that while conceiving and structuring the scheme and while documenting the transaction, de facto ownership rights of the members are recognised although the property stands in the name of the society. This will give better locus standi to members of their proportionate rights in the redevelopment project. This will also go better with income-tax and other taxes implications as presently although taxability of such projects has been decided in favour of the society, but since all these matters are reaching to high courts, in a possible situation if such transactions are considered taxable by the high court, there will be substantial scope for exemptions if the income is taxed in the hands of individual members rather than in the hands of a society. In any case, provisions of tax deduction at source under the Income-Tax Act, would not apply either to redevelopment compensation or to rental compensation.

Provisions of Section 50C of the Income-Tax Act are attracted on transfer of immoveable properties in the nature of land or building or both held as capital assets and consideration stated in the instrument of transfer is less than the valuation adopted assessed or assemble by stamp duty authorities and the said section in this context in a nutshell provides that in such a case, stamp valuation would be treated as gross consideration for such transfer and accordingly capital gains would be computed on higher side. In a typical society redevelopment, provisions of Section 50C will not apply for the reason that in such a redevelopment, only development rights are transferred and there is no transfer of land or building. In the recent Bombay High Court decision, petitioner had challenged the validity of provisions of Section 50C wherein he failed but applicability of Section 50C to society redevelopment was not decided by the Hon'ble high court.

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