1.4 Query: Accounting treatment of disposal of flats by a co-operative housing society.
1. A co-operative housing society had a piece of land on which there were a few houses occupied by tenants who were paying rent to the society. Cost of acquisition of land to the society is Rs. 1,10,000/- (in the year 1973).
2. For the use of FSI relating to the vacant portion of the land the society entered into an agreement with a builder for construction of a building on the said piece of land. The terms of agreement with the builder included the following:
(i) The builder will give free of cost one flat each to the tenants, who were occupying the existing structure standing on the piece of land; and the builder will also give three flats to the society, free of cost.
(ii) Builder will be entitled to sell the remaining flats constructed by him. Flat purchasers would subsequently become members of the society.
(iii) Builder would do some repair work to the existing building of the society.
3. The society collected premium from the erstwhile tenants which was equivalent to 30 months rent payable by them to the society. The society sold three flats allotted free of cost to it by the builder.
4. All the flat owners, including erstwhile tenants and the buyers of the flats allotted to the society, have been admitted as members of the society.
5. The society booked the cost of new building and the amount contributed by the members (except the erstwhile tenant members and those to whom the flats were sold by the society) towards cost of flats and land by way of the following journal entry in the books of account:
Building account Dr.
To contribution from members towards cost of land and building
(Being entry to bring into books the cost of the building and the amounts contributed by new members towards the cost of their respective flats as per the sale agreement with the builder)
Cost of the flats and equivalent amount contributed by members were determined on the basis of sale agreement between flat owners and the builder.
No entry has been passed with regard to the cost of flats allotted to erstwhile tenants as they have paid nothing to the builder.
Similarly, no entry has been passed with regard to cost of flats sold by society since cost of these flats to the society is nil.
The sale price of the three flats, stated above, has been credited to Members Contribution A/c.
6. The querist has further informed that:
(a) The ownership of the land rests with the society. Though the society is not presently the owner of these individual flats, it will become owner of the building, consisting of all such flats when these buyers become members of the society.
(b) New building will appear as asset in the books of account of the society after the transfer of flats in the name of the members.
7. The querist has made available a copy of the agreement between the society and the builder.
8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) How the cost of flats sold by the society should be brought into books of account as, while the contribution towards cost of flats has been actually received by the society, there is no actual cost to the society in respect of these flats?
(b) What accounting treatment should be given to the sale proceeds of flats and the premium collected from erstwhile tenants by the society?
(c) Whether the premium collected by the society from erstwhile tenants is chargeable to income-tax and if so under which head of income.
(d) Whether sale of flats by the society gives rise to capital gain chargeable to income-tax and, if not, whether sale proceeds are taxable and, if so, under which head of income. Opinion January 25, 19931. The Committee notes various terms and conditions of the ‘agreement’ between the society and the builder, as supplied by the querist, which provide, inter alia, as follows:
“(i) The society will sell the development rights of the property owned by it to the builder for a consideration of Rs. 2,60,000/-. The consideration will be discharged, by the builder, by allotting three flats on ownership basis valuing Rs. 2,47,500/- to the society and carrying out some miscellaneous construction/repair work costing Rs. 12,500/-.
(ii) The builder, after completion of the building, will give another ten flats to the society without charging anything. The society, in turn, will allot these flats to the tenants who are occupying the existing structure standing on the piece of land that is to be developed. Subsequently, the said tenants will become members of the society and the society will collect any charges, fees or compensation from the said tenants.”
2. It is not clear from the query, whether the cost of the existing structure and the land for which development rights are sold, can be ascertained from the books of the society. The Committee presumes that it can be reasonably ascertained. Such cost should be adjusted against the amount of sale proceeds of the three flats sold by the society (i.e., those flats allotted to the society by the builder) and the premium received by the society from the existing tenants equivalent to 30 months rent. The difference, i.e., the profit or loss, between the said cost and the said sale proceeds plus the premium should be separately disclosed in the profit and loss account as an extraordinary item. The building account in respect of all the flats, including the three flats sold by the society, should be brought into the accounts by giving corresponding credit to the “members’ contribution towards cost of land and building account” at the following values:
(i) The three flats sold by the society at the sale proceeds received by the society. The Committee is of the view that the three flats allotted to the society are not free of cost, but are against the transfer of development rights to the builder.
(ii) Ten flats allotted to the tenants at fair market value thereof.
(iii) Remaining flats at the sale proceeds received by the builder.
3. In view of Rule 2 of the Advisory Service Rules, the Committee does not offer its views on the taxation matters raised in the query as they involve interpretation of law.
4. On the basis of the above and subject to presumption made in paragraph 2 above, the Committee is of the following opinion in respect of the issues raised in paragraph 8 of the query:
(a) Kindly refer to paragraph 2 above.
(b) The premium received from the erstwhile tenants should be treated as income as suggested in para 2 above.
(c) No opinion in view of paragraph 3 above.
(d) No opinion in view of paragraph 3 above. _____________________________ |