The Union Cabinet has recently approved the proposal to introduce a bill to regularise 1,728 unauthorised colonies. Once this bill is passed, the ownership rights of residents in these unauthorized colonies shall be recognized. The CBDT has also issued a notification to exempt these residents from any tax liability that may arise under Section 56(2)(x) from such regularization process.
Unauthorised colonies have been in existence in Delhi since the planned development started by the Delhi Development Authority (DDA) in the year 1957. Unauthorised colonies are the residential colonies constructed without seeking the required permission for the layout or building plans. Consequently, conveyance deed for these colonies are not registered by registrar/sub-registrar unless these are regularised by the Government. Transaction of purchase and sale of properties in these colonies is evidenced by a Power of attorney, possession letters etc. which does not convey any title in the property as held by the Supreme Court in case of Suraj Lamp & Industries (P.) Ltd. v. State of Haryana  14 taxmann.com 103 (SC).
In order to regularise these colonies, the Ministry of Housing and Urban Affairs has notified the regulation ‘the National Capital Territory of Delhi (Recognition of Property Rights of Residents in Unauthorised Colonies) Regulations, 2019’ which has fixed the charges to be paid and the procedure to be followed by the residents of unauthorised colonies in order to claim their ownership rights in the property.
The new regulation has been issued vide G.S.R. 814(E), dated 29th October 2019 in suppression of notification number S.O 683(E), dated the 24th March, 2008 which was issued previously for regularisation of Unauthorised Colonies in Delhi. The Cabinet has also given its approval to bring a Bill in the winter session of Parliament in November to implement the proposal.
2. Process of regularization of unauthorized colonies
Once the bill is passed by the Parliament, the DDA will begin the regularisation process in Delhi. A web portal would be developed for filing an application for recognition of ownership right in the property on payment of certain charges. With recognition of property documents, the property holders in these colonies would now be able to enter into valid property transactions. Besides providing a legitimate claim in the property, the decision will encourage property holders to invest in safe structures, thereby improving the living conditions in these colonies substantially.
The resident is required to pay the self-assessed charges calculated on the basis of carpet area of each unit. There shall be an option to pay the charges in three equal instalment. Those who will pay the entire charges in one instalment shall immediately be granted the ownership or mortgage or transfer rights in the property.
On successful submission of the application and verification of original documents submitted by the applicant conferring his ownership in the property, the authority shall issue the freehold certificate, which can be submitted to registrar/sub-registrar office to issue the conveyance deed of the property.
3. Income-tax Implications on registration of property
Though, in the process of regularisation, the resident persons don’t enter into any transaction of sale or purchase of properties but after this process they get perfect title in the property. A right in an immovable property is originated from such regularization which may have implications under the Income-tax Act. Let’s find out how?
3.1. Applicability of Section 56(2)(x)
As per Section 56(2)(x) of the Income-tax Act, 1961 where any person receives money, immovable property or specified movable property from any person without or for inadequate consideration then the money or difference between the value of property so received and actual consideration thereof is chargeable to tax as income from other sources in the hands of the recipient, subject to certain conditions.
In respect of immovable property, section 56(2)(x) provides that if a person receives any immovable property without consideration and stamp duty value of such property exceeds Rs. 50,000 then the stamp duty value of the property shall be chargeable to tax in the hands of the recipient under the head other sources.
Similarly where such property is received for inadequate consideration and difference between the consideration and stamp duty value of the property exceeds 5% of the consideration or Rs. 50,000 (whichever is higher), then the difference shall be chargeable to tax under the head other sources.
3.2. Does the term ‘immovable property’ includes right in a property?
Since, residents in such colonies already have the de facto ownership, the regularisation process, which will give them legally enforceable right in the properties, could be covered under the ambit of Section 56(2)(x). In order words, to attract the provisions of section 56(2)(x), such improvement in title of asset should fall within the definition of the immovable property.
The Income-tax Act, 1961, has not defined the term ‘immovable property’. Thus, we have to take reference from the judicial pronouncements. The Mumbai ITAT has defined the term ‘property’ in the case of Mrs. Nila V. Shah v. CIT (Appeals)  21 taxmann.com 324 (Mumbai) as follows:
“The word 'property' is of widest amplitude which also includes the right and interest of a person in a particular asset. Every possible interest which a person can clearly hold or enjoy in an asset can be termed as 'property' within the definition of capital asset. The transfer of property connotes the passing of the rights in the said property."
The legitimate rights in the property received by the residents of unauthorised colonies after the regularisation process may fall within the definition of the term ‘property’. In other words, the conversion of de facto ownership to de jure ownership would be considered as giving rights in an immovable property which brings it within the ambit of Section 56(2)(x). The difference in the actual acquisition cost and the stamp duty value on the date of execution of conveyance deed would be considered as the value of deemed income taxable under Section 56(2)(x).
3.3. Exemption from the provisions of section 56(2)(x)
Considering the undue hardship on such residents, the CBDT has inserted a new Rule 11UAC under Income-tax Rules, 1962 vide Notification No. 96/2019 dated 11-11-2019.
Rule 11UAC provides that the provisions of Section 56(2)(x) shall not be applicable to any immovable property received by resident of unauthorized colony in the NCT of Delhi. This exemption is subject to the condition that such transaction must be regularized by the Central Government on the basis of the latest power of attorney, agreement to sale, will, etc.
Therefore, on execution of conveyance deed, no income shall be chargeable to tax in hands of resident of unauthorised colonies as per the provisions of section 56(2)(x).
3.4. Statement of Financial Transaction (SFT) Reporting
Rule 114E of the Income-tax rules, 1962, provides a list of transactions in respect of which reporting is required to be made by various authorities to the Income tax department by filing the information in Form 61A. One of the transaction falling within the said list is in respect of sale or purchase of an immovable property.
It provides that an Inspector-General or Registrar or Sub-Registrar is required to report the transactions of sale or purchase of an immovable property, if the consideration or the stamp duty value of the property is Rs. 30 lakhs or more.
Under the scheme of regularisation, the resident of such colonies will receive an ownership certificate by submitting the evidence of possession or ownership. On basis of such certificate, a conveyance deed is registered with the sub-registrar office after payment of stamp duty value, which is deemed as sale of property wherein first party is the resident of unauthorised colony and second party is DDA.
The registrar shall be liable to report this deemed sale transaction if the stamp duty value of the property is Rs. 30 lakhs or more.
3.5. Capital gain tax liability on further transfer of property
When the residents transfer such property after regularisation, the capital gains from the transaction shall be computed considering the following factors:-
a) Determination of Cost of acquisition
The cost of acquisition of asset is the most important factor while determining the amount taxable as capital gains. In order to determine the cost of acquisition, a question which may arise before the taxpayer is which cost shall be required to be considered as cost of acquisition. One which has been paid at the time of acquisition of property or one which will be determined at the time of registering conveyance deed with the sub-registrar.
It must be noted that while determining the capital gains arising from the further transfer of property, the cost which the resident has paid at the time of actual acquisition will be considered as cost of acquisition of the property. The charges paid by the resident at the time of regularisation of property, other than those paid by way of penalty, will be considered as the cost of improvement of such property.
Section 49(4) of the Income-tax Act provides that the cost of acquisition of a property shall be deemed to be the value which has been taken into account for the purposes of the Section 56(2)(x). As the regularisation process has been exempted from the applicability of the said provision, the stamp duty value of the property shall not be considered as the actual cost of acquisition.
b) Determination of date of acquisition
Once the cost of acquisition of a property has been determined, another factor which has to be considered is availability of benefit of indexation. The benefit of indexation is based on the period for which the asset has been held by a taxpayer.
In order to determine the period of holding, one has to determine the date of acquisition of the property. The date on which property has been originally acquired shall be taken into consideration while computing the capital gain on further transfer of such property..
Naveen Wadhwa is DGM at Taxmann