IT Department Wants Its Share from Owners of Redeveloped Property in Mumbai

The redevelopment of property in Mumbai has enriched 6 societies that lie in Bandra East. Each of the flat owners who handed over his apartment for redevelopment has received at least fifty lakh rupees from a builder and upon completion of the redevelopment project, will receive a larger flat free of cost.

The Income Tax Department’s Share

Despite the middle-income society having handed over their current flats for redevelopment to builders, the IT department wants its share of the windfall from flat owners. Each of the 6 societies received between 30 to 200 crores from a builder and each flat owner received between 50 lakhs and 1 crore from a builder as well. The IT department has issued notices to the housing societies and to individual homeowners.

Flat owners have been granted some respite as they challenged the IT Department and received a favourable ruling from the Income Tax Tribunal in one case. The flat owners also received a stay order from the High Court in another case. Notably, the Bandra Middle Income Group redevelopment project is the largest in Mumbai today.

Is This Double Taxation?

A representative of the Bandra residents has stated that because residents of the societies have already settled their dues with the IT department, the IT Department, by demanding that taxes be paid on the current windfall, is taxing residents twice. They have stated the IT Department is first taxing the society and then the individual members of the society which amounts to double taxation.   

In the case of the Middle Income Group Housing Society Number 4, the IT Department demanded that it was owed taxes, including interest and penalty, amounting to 73 crore rupees. The 168 members of this housing society were paid between 62 to 80 lakh rupees each by the builder. All 168 members of this housing society now reside in a new tower.  

A member of Group Housing Society Number 4 has stated that the society has challenged the notice of the IT Department before the Commissioner of IT. The member has stated before the Commissioner of IT that the society did not, in fact, receive the sum from the builder. According to the member, the society was only the custodian and it only negotiated on behalf of the members of the society.

You Win Some, You Lose Some

In the case of Group Housing Society Number 4; it was paid by one of the builders in Mumbai and the IT notice states that under the cooperative society rules the compensation they received would be used for the betterment of the society. However, because the money received by the society was profit that was distributed among the members of the society, it fell outside the purview of the rules of the corporative society and was taxable because the individual members received a share of the profit. Hence the society was taxable.

Another society won its case. Each member of the society received 53.5 lakh and the IT department demanded 33 crores from the society, however, the IT tribunal ruled that once members of the society have already received the income in their hands, the same income in the hands of a society cannot be taxed again. Notably, glancing at a list of those participating in the redevelopment projects one finds that the list of builders in Mumbai active in such projects consists of names of that are less well known.