ITAT Mumbai Sets Aside ₹2.28-Crore Capital Gains Tax on Housing Society For Developer Payments To Members

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed a Rs 2.28 crore capital gains tax addition against Colombia Co-operative Housing Society, holding that redevelopment compensation paid directly to individual members cannot be taxed as the society's income.

The ITAT held that amount paid by a developer directly to individual members of a co-operative housing society pursuant to redevelopment cannot be taxed as capital gains in the hands of the society, particularly when the society itself never received the amount.

A coram of Judicial Member Sandeep Gosain and Accountant Member Girish Agrawal observed that the only amount received by the society was Rs 36 lakh. The tribunal held that the two credits of Rs 18 lakh each were “pursuant to refundable security deposit relating to parking area and not in respect of FSI of 230 square meters,” and therefore could not be treated as consideration for transfer of development rights

The tribunal held that the amount received by individual members for “damages, inconvenience, and sufferings,” as described in the supplementary agreement, could not be taxed in the hands of the society. It further held that the redevelopment benefits arose due to amendments to the Development Control Rules, and that “there was no cost of acquisition paid or ascertainable” for such additional Floor Space Index (FSI) or Transferable Development Rights (TDR), rendering the capital gains computation unsustainable in law

The assessee, a co-operative housing society registered under the Maharashtra Co-operative Societies Act, 1960, had entered into a development agreement in 2002 with a developer for utilising additional FSI made available following amendments to the Development Control Rules, 1991.

A supplementary agreement was later executed in 2014 for completion of the remaining construction, pursuant to which the developer paid Rs 2.28 crore directly to the 40 original members of the society as compensation for hardship, inconvenience and suffering.

The tax department reopened the assessment and treated the amount as long-term capital gains in the hands of the society, alleging that the payments to members were made at the society's direction.

Allowing the appeal, the ITAT held that the society had never received the Rs 2.28 crore. The tribunal recorded that the amount “has been paid by the developer from its bank account directly to each of the 40 members of the assessee society into their respective bank accounts by issuing individual cheques”

The tribunal held that amounts paid by a developer directly to individual flat owners on redevelopment, arising from additional FSI or TDR for which there is no cost of acquisition, cannot be taxed as capital gains in the hands of the housing society.

The tribunal also relied on a 1969 circular noting that in tenant co-partnership housing societies, legal ownership vests in individual members.

The bench noted that individual members had already disclosed their respective shares in their tax returns and claimed applicable exemptions. Taxing the same amount again in the hands of the society was therefore not legally sound.

In view of the above, the ITAT partly allowed the appeal and deleted the capital gains addition of Rs 2.28 crore. The tribunal also held that the society had been wrongly assessed as an association of persons (AOP) and directed that assessment be made in the correct status of a co-operative society

Case Title: Colombia Co-operative Housing Society Ltd. v. ITO

Citation:  2026 LLBiz ITAT(MUM)1

Case Number: ITA No. 4222/MUM/2025 A.Y. 2015-16

Appearance for the Appellant: Pradip Kapasi, CA

Appearance for the Respondent: Virabhadra Mahajan, Sr. DR

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