The Bombay High Court has fixed a peculiar tax issue faced by home owners in redevelopment projects. In a recent judgement, the High Court said transit rent cannot be considered income, hence it is not liable to be taxed.

For more clarity on HC decision and its impact, let’s first look at how the redevelopment process works out for home owners.

When a residential property goes for redevelopment, the owners/occupants have to handover the possession to the developer. Then residents have to move out to an alternative accommodation, may be a rented house, till the time the building is under redevelopment.

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During the transit period till the completion of the redevelopment project, the developer pays some amount as compensation to property owners. This amount is called by different names such as Transit Rent/Hardship Allowance/Rehabilitation Allowance/Displacement Allowance.

There has been a confusion on whether such transit rent can be taxed or not. More so because some developers have been reportedly deducting TDS on the transit rent paid to property owners. The high court has ended the confusion by holding that transit rent is not a revenue receipt and is not liable to be taxed. As a result, the question of deduction of TDS on transit rent doesn’t arise.

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The high court’s judgement came in the matter of Sarfaraz S. Furniturewalla vs Afshan Sharafali Ashok Kumar & Others. In this case, the developer, Sea Rock Construction LLP, had sought PAN cards of owners to deduct TDS from the transit rent.

The owners objected to the demand saying TDS on transit rent is not required. The HC also agreed with this stand and clarified that rent is what a tenant pays to the landlord. However, transit rent is paid by the developer to the owner who has to suffer hardship during the transit period.

Why this HC judgement is important

The HC judgement is relevant for house owners in cities like Mumbai where a large number of old buildings and residential complexes are currently undergoing redevelopment.

A report last year quoted a developer as saying that there were around 13,000-14,000 redevelopment projects in the city, not counting slum redevelopment projects. Another report says that over 25,000 housing societies are up for redevelopment.

The redevelopment trend in Mumbai is expected to continue in coming years as most of the residential buildings in the city were built decades back and many of them have outlived their lives.

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