Tax Column

Tax Column

Tax Queries By Jayesh Dadia Chartered Accountant

I have been a tenant in a residential house for the last 50 years. I have agreed to surrender and transfer the tenancy rights of my residence to an ultimate buyer for a consideration of ₹ 20 crore. The proposed buyer is asking me to obtain approval of the Income Tax Department under Section 281 of the Income Tax Act. Is such permission required for the transfer of tenancy rights?

The provision of Section 281 of the Income Tax Act can be invoked only if there is sale, mortgage, gift, exchange or any other mode of transfer of your asset in favour of any other person. The assets referred to in Section 281 are specific and tangible in nature. Asset means land, building, machinery, plant, shares and securities and bank fixed deposits. Therefore, tenancy right does not fall within the definition of an asset mentioned above. Tenancy right is not a tangible asset but an intangible asset. Therefore, prior permission under Section 281 of the Income Tax Act is not required or applicable for transfer of tenancy rights. Further, tenancy right does not treat you as a deemed owner of land or building.

I have recently sold my house for a total consideration of ₹ 10 crore. I have incurred certain expenses such as brokerage, lawyer’s fees, tax advisor’s fees, society maintenance expenses, etc. Can I claim all these expenses while computing long-term capital gain?

Under Section 48 of the Income Tax Act, you can claim deduction of expenditure incurred wholly and exclusively in connection with the transfer or sale of a residential premise. In other words, all the expenses incurred which have a direct bearing on the transfer of a capital asset can be claimed as deduction. Brokerage is certainly connected with the transfer of asset and therefore can be claimed as deduction.

Similarly, legal fees, if incurred for drafting the sale agreement, due diligence, etc. can also be claimed as deduction. A tax advisor’s fee is not related to the transfer of asset and therefore may not be allowed as deduction. Society transfer fee is certainly allowable deduction but old outstanding society maintenance charges cannot be claimed as deduction. The net consideration i.e. full consideration less deduction mentioned above is subject to long-term capital gain tax and also eligible for various deductions under Sections 54 and 54 F of the Income Tax Act.

My residential cooperative society has extra FSI and also wants to opt for redevelopment. In view of the proposed amendment, will the amount received on sale of extra FSI to the builder become taxable? And will there be any tax implications if a tenant or member receives compensation and extra area on redevelopment?

The existing provisions of Section 55, inter-alia, define the cost of any improvement and cost of acquisition to compute the capital gain. However, if there are certain assets such as intangible assets or any sort of rights for which no consideration has been paid for acquisition, the existing Section 55 does not define the cost of acquisition as nil. Therefore, this leads to many legal disputes and the courts have held that sale or transfer of intangible assets having no cost cannot be charged to tax in the absence of any cost.

As a result, transfer of certain intangible assets such as development right, extra FSI, etc. by societies were always held as tax-free i.e. not taxable. To bring such intangible rights within the ambit of taxation, a proposed amendment is made in Section 55 so as to provide that cost of any improvement or cost of acquisition of capital asset being any intangible asset or any other rights shall be nil. As of now the cost has been defined for intangible asset as nil. Therefore, post amendment, if any society or any person sells or transfers any rights in FSI or any other intangible asset, the entire consideration will be subject to tax by considering the cost of acquisition as nil.

Hence, if the society sells the extra FSI to the builder for a consideration, then the entire consideration will be subject to long-term capital gain. However, in my opinion, on redevelopment any compensation received by a member or tenant of the building will still not be subject to tax as the same is in the nature of capital receipt. By paying one-time compensation to a tenant or member, there is no transfer of any rights or assets by the tenant or member in favour of the builder. Extra area given to the member will not be subject to tax in the hands of the member as there is no transfer.

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