No capital gains on sale of FSI by housing societies, rules high court

Mumbai: A housing society does not have to pay any capital gains tax when it sells additional floor space index (FSI) to a builder, according to a recent Bombay high court decision.
Development Control Regulations (DCR), 1991, provide for grant of additional FSI if an existing building is redeveloped. The society can utilize it either for extension of the existing building, construction of a new building or even sell it to a builder.
When the additional FSI was sold to a builder, it typically resulted in an endless bout of tax litigation, which will be put to rest with the Bombay high court order. This favourable order will bring cheer to many old housing societies that have entered into redevelopment agreements or plan to do so.
Lower Parel's Sambhaji Nagar Coop Housing Society, owing to reconstruction of its old buildings, generated an additional FSI (as per DCR), which it sold to a builder for Rs 2.2 crore. Authorities sought to tax the sale proceeds as capital gains. The society won an appeal at the tax tribunal level.
The tax department, though, took the matter to the high court.
Capital gains is the difference between the sale proceeds minus the indexed cost of acquisition.
Hitesh R Shah, partner, SHR and Co, a firm of chartered accountants, explains the recent order. HC has taken into consideration the amendment in tax laws, which have brought tenancy rights in the ambit of capital gains. However, regarding a housing society’s sale of additional FSI (received in the form of TDR) to the developer, HC held it was generated by the plot itself and there was no cost of acquisition. Thus, the question of computing capital gains for tax purposes didn’t arise.”
Experts hasten to point out that HC dealt with capital gains arising in the hands of a housing society on the sale of additional FSI or TDR where there was no cost of acquisition. The same order cannot be stretched to apply to members of a housing society who transfer their existing flats to the developer in lieu of a new one.
This transaction between members of the housing society and the developer could be regarded as a ‘transfer’ for the purpose of capital gains and could, depending on the facts of each individual case, result in capital gains.