Homeowners, Not Housing Society, Liable for Capital Gains Tax on Development Rights Sale
The Income Tax Appellate Tribunal (ITAT) Mumbai ruled that short-term capital gains from transferring development rights to a builder should be taxed in the individual homeowner’s hands, not the housing society’s.
Capital Gains TaxRedevelopment AgreementHousing SocietyIncome TaxItat MumbaiReal Estate MumbaiNov 15, 2025
This ruling came after a case filed by the RBI Employees Bhagvati Co-op. Housing Society Ltd., a cooperative housing society registered under the Maharashtra Co-operative Housing Society Act 1960. The society filed the case against the income tax department after they added Rs 5 crore (4,97,63,657) to their STCG income and imposed a penalty of Rs 1.5 crore (1,53,76,971).
Chartered Accountant Suresh Surana explained to ET Wealth Online that in the case of ITO vs RBI Employees Bhagvati Co-operative Housing Society Ltd., the residential society in Mumbai entered into a redevelopment agreement with a developer. Under this agreement, the developer was to redevelop the existing property and provide the society’s members with new flats and other benefits, such as additional area, temporary accommodation, or compensation.
The Income Tax Department, during the assessment, treated the redevelopment agreement as a transfer of property by the society and made additions in the society’s hands under the head Short-Term Capital Gains (STCG), arguing that the society had effectively transferred land or building rights to the developer.
The ITAT, Mumbai, after examining the agreement and supporting documents, held that:
- The land and building belonged collectively to the individual members, not to the society itself.
- The society had acted merely as a representative body to facilitate and sign the redevelopment agreement on behalf of its members.
- The consideration arising from redevelopment, whether in the form of new flats, additional area, or monetary compensation, was received or accrued to the members, not to the society.
The ITAT emphasized that the society did not earn any profit or gain for itself and the funds received by it (like refundable deposits or corpus for building maintenance) were held in a fiduciary capacity. Therefore, there was no taxable transfer or capital gain in the hands of the society. Relying on CBDT Circular No. 9 of 1969 and past judicial precedents such as Raj Ratan Palace Co-op Housing Society Ltd. (ITAT Mumbai), the Tribunal ruled that the tax liability, if any, would arise in the hands of individual members who were the beneficial owners of the property.
Impact on individual members of the housing society
Following this ruling, individual flat owners (members) are considered the real transferors in redevelopment cases, which means:
- Any monetary compensation, rent reimbursement, or additional built-up area received as part of the redevelopment project will be taxable in the member’s hands under the head Capital Gains.
- The cost of acquisition and period of holding of their original flat will determine whether the gain is short-term or long-term.
- Members can claim relevant exemptions, such as under Section 54 (for reinvestment in a residential house), Section 54EC (for investment in specified bonds), etc., where applicable.
- The society, however, will not be taxed merely for executing the agreement, as it has no beneficial ownership or income element arising from the transaction.
Background of this case
In this case, the housing society had not filed any income tax return (ITR) for the Assessment Year (AY) 2011-2012. The income tax Assessing Officer (AO) learned that the housing society had made a development agreement with M/s Chetan Enterprises on November 9, 2010, for Rs 37 lakh (37,67,500) and had paid a stamp duty of Rs 27 lakh (27,76,850), while the applicable stamp duty value was Rs 5 crore (5,55,37,000). Additionally, the housing society had received an interest-free refundable deposit of Rs 1 lakh as part of the development agreement. As a result, reassessment proceedings were initiated in the case of the housing society under Section 147.
In response to the notice issued under Section 148, the housing society filed an ITR for AY2011-2012 on April 28, 2018, declaring ‘Nil’ income. The reassessment proceedings led to the Assessment Order, being passed on December 10, 2018, under Section 143(3) in conjunction with Section 147, which resulted in an addition of Rs 5 crore (4,97,60,657) in the hands of the housing society as Short Term Capital Gains (STCG), taxable at the rate of 30%.
Unhappy with the additions made by the Assessing Officer, the housing society appealed to the CIT(A). The CIT(A) agreed with the housing society’s argument that the money received from the development agreement shouldn’t be taxable for the housing society but be taxed in the hands of the members of the cooperative society. As a result, the AO’s addition of Rs 5 crore (4,97,60,657) in the hands of the housing society was deleted.
Being aggrieved with the CIT(A)’s order, the income tax department took the case to ITAT Mumbai.
Arguments by both sides
During the hearing, the Income Tax Department’s representative relied on the Assessment Order and argued that the CIT(A) had overlooked the fact that the housing society had signed a development agreement with the builder, meaning the income should be taxed in the hands of the housing society. Referring to the financial statements of the housing society, the Income Tax Department’s representative agreed that the housing society had listed the land and building as fixed assets and therefore, should be considered its owner.
The authorized representative for the housing society relied on the order passed by CIT(A) and argued that there was no infirmity in the order passed by the CIT(A), since the CIT(A) had followed the binding Circular No.9 [F.No.8/2/69-IT(A-I)], dated February 25, 1969, issued by Central Board of Direct Taxes, which provided that the ownership of flats vested in the individual members themselves and not with the cooperative society. The housing society’s representative said that though they had entered into a re-development agreement with the builders, the real owners of the flats were the individual members occupying the flats in the society.
ITAT Mumbai’s ruling on re-development agreements
ITAT Mumbai said that on perusal of the CIT (A)’s order, they found that the CIT (A) reached a conclusion that the housing society had only received a refundable deposit of Rs 10 lakh. However, when the development agreement signed with the builder is studied, ITAT Mumbai said that as per the agreed terms, the money received was to flow to the individual members of the housing society and the housing society had only received a refundable deposit of Rs 10 lakh.
Frequently Asked Questions
What is the main ruling of the ITAT Mumbai in the case of ITO vs RBI Employees Bhagvati Co-operative Housing Society Ltd.?
The ITAT Mumbai ruled that short-term capital gains from transferring development rights to a builder should be taxed in the individual homeowner’s hands, not the housing society’s.
Why did the housing society file a case against the income tax department?
The housing society filed the case after the income tax department added Rs 5 crore to their STCG income and imposed a penalty of Rs 1.5 crore.
What are the implications of this ruling for individual members of the housing society?
Individual flat owners (members) are considered the real transferors in redevelopment cases, meaning any monetary compensation, rent reimbursement, or additional built-up area received will be taxable in the member’s hands under the head Capital Gains.
What did the CIT(A) decide in this case?
The CIT(A) agreed with the housing society’s argument that the money received from the development agreement shouldn’t be taxable for the housing society but be taxed in the hands of the members of the cooperative society.
What was the argument presented by the Income Tax Department’s representative during the ITAT hearing?
The Income Tax Department’s representative argued that the CIT(A) had overlooked the fact that the housing society had signed a development agreement with the builder, meaning the income should be taxed in the hands of the housing society.
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