Redevelopment projects: how the developer is taxed, scheme by scheme

This is Part 1 of a three-part study of how a developer is taxed on a redevelopment project. Part 1 covers the schemes and the characterisation of what the developer gets and gives. Part 2 covers what the developer pays the members, corpus, hardship compensation, rent and shifting charges, as project cost or capital, and tax deduction at source on each. Part 3 covers revenue recognition, section 43CB, the income computation and disclosure standards, the 2012 Guidance Note, Ind AS 115, the minimum tax and the slum-scheme deductions.

A redevelopment developer is paid, for most of its work, in a currency the Income-tax Act does not name. It demolishes a building it does not own, builds the old occupants new and usually larger flats at its own cost, pays them rent while they wait, pays the society a corpus, and is left with the right to sell whatever additional floor space the planning rules allow. In a slum scheme it may never sell a flat at all and earn its whole return as transferable development rights. Very little of that bargain is cash, and nothing in either Act was written with it in mind.

So every question that is simple in an ordinary project becomes a dispute here. What did the developer buy, and from whom? Is a free flat a sale? When does a right to build somewhere else become income? Which of the developer’s payments are the price of its stock, which are expenses, and which are nobody’s income at all? This Part takes those questions in the order a developer meets them, scheme by scheme, and argues each one both ways to the point at which it is open.

The focus is Gujarat, where section 41A of the Gujarat Ownership Flats Act, 1973 opened society redevelopment in 2019 and Ahmedabad and Surat now run public housing and slum schemes on a large scale. The case law, though, is almost entirely Mumbai’s. No decision of the Ahmedabad Bench of the Tribunal or of the Gujarat High Court on the developer-side questions in this Part could be traced, and where that matters the page says so rather than assuming the Mumbai answer will travel.

Key points

• Neither the Income-tax Act, 1961 nor the Income-tax Act, 2025 contains a provision written for redevelopment. The developer’s income is business income computed under the ordinary rules, and the disputes are about characterisation and timing.
• The development rights a developer acquires are stock in trade. The free rehab flats are the price of that stock, not sales, on every Tribunal decision traced; no High Court has decided otherwise.
• Section 43CA has been applied by Assessing Officers to the extra area tenants buy beyond their free entitlement. The free entitlement itself has not been the subject of a decided section 43CA addition, and the Bombay High Court remanded a section 69 addition built on nil-consideration alternate accommodation agreements in July 2026 without deciding it.
• FSI and TDR are stock in trade in a developer’s hands. The Mumbai Tribunal has refused to treat FSI as land for section 50C and has refused to substitute a notional value for actual sale proceeds.
• In slum schemes the majority Mumbai view taxes TDR in the year the rehab construction that generates it is complete, with the rehab cost set against it. A minority view taxes it on accrual.
• Whether the society or its members are the transferor decides whether section 45(5A), section 194-IC and the aggregation proviso to section 194-IA can apply. A cooperative society is not an individual or a Hindu undivided family.
• Self-redevelopment, MHADA housing stock surrendered in kind and cluster schemes have no decided tax authority at all.

Why redevelopment is not an ordinary real estate project

In an ordinary project a developer buys land or development rights for cash, builds, sells every unit, and computes profit as sale price less cost. The tax questions are timing (when revenue is recognised) and valuation (whether section 43CA lifts the price to the stamp duty value). Redevelopment keeps both questions and adds three that an ordinary project does not have.

First, the consideration for the land is paid in kind. The developer does not pay the society for the right to redevelop. It promises to build the members new flats, usually of a larger carpet area than their old ones, at no cost to them. The rehab component is the price of the land. That price is paid in concrete and steel, over two or three years, and its value is whatever the developer spends building it.

Second, there are payments to people who are not selling anything. A member gets rent for alternate accommodation while the building is down, a shifting allowance at each end, and very often a lump sum called a corpus or hardship compensation. The developer pays all of these. The Tribunal has held in a long line of Mumbai decisions that, in the member’s hands, most of them are not income. Whether in the developer’s hands they are cost of stock, a revenue expense, a capital outlay or something on which tax should have been deducted at source is the subject of Part 2.

Third, the output is often not a flat. In a slum rehabilitation scheme in Mumbai the developer may earn its return as transferable development rights, a right to build on another plot that it sells to other developers. In a public housing scheme in Gujarat the unused floor space index may become a transferable right. A right of that kind is not land or building, is generated in stages as the rehab construction progresses, and has no cost of its own except the rehab construction that produced it.

Each of those features creates a gap between what the developer’s books show and what the Act’s computational provisions were drafted to reach. The disputes in this Part all sit in those gaps.

The four schemes, and the instrument behind each

The tax analysis does not change with the scheme’s name, but the facts it works on do: who owns the land, who signs, what the developer is promised, and whether anything is sold for cash. Each scheme is described here from its governing instrument, with the Gujarat position first.

Society redevelopment in Gujarat: section 41A of the Gujarat Ownership Flats Act, 1973

Until 2019 the redevelopment of an apartment building in Gujarat needed every flat owner’s consent, which in practice meant it rarely happened. Section 41A of the Gujarat Ownership Flats Act, 1973, in Part IIA of that Act, changed this. It was inserted by Gujarat Act No. 5 of 2019, published in the Gujarat Government Gazette on 21 May 2019, the date a Division Bench of the Gujarat High Court is reported, in Letters Patent Appeal 290 of 2022 as quoted in Hansaben Ratubhai Prajapati v. State of Gujarat, to have recorded as its commencement; that order was not read. As quoted by the High Court, it provides that “notwithstanding anything contained in this Act, any work in relation to the re-development of a building can be carried out on such terms and conditions as may be prescribed, after obtaining the consent of not less than 75 per cent. of the flat owners of such building”, provided that either twenty-five years have passed from the date of the development permission, or the authority has declared the building ruinous, likely to fall or otherwise dangerous. The Explanation borrows the meaning of redevelopment from the relevant development control regulations.

The terms were prescribed by the Gujarat Ownership Flats (Amendment) Rules, 2019, notified by the Urban Development and Urban Housing Department on 26 December 2019, which inserted rules 18 to 25. Rule 18 repeats the twenty-five year or dangerous building condition and the seventy-five per cent consent. Rule 20 requires a project report covering the carpet area to be given to members, alternative accommodation and payment of rent, the corpus fund and the bank guarantee. Rule 23 prescribes what the development agreement must contain, and its list maps almost exactly onto the tax questions in this study: the completion period; a bank guarantee, if any; “free alternative accommodation to the members till the redeveloped flat is handed over to the member, or cash in lieu of existing premises or any combination”; registration under the Registration Act, 1908; the developer’s right “to sell and/or transfer and dispose of the remaining flats”; the carpet area to be allotted to each member; and the amenities, “corpus fund, if any, shifting charges”, and a penalty clause for delay. The Rules fix no amounts. The text of the Rules was read from a reproduced copy of the notification, not from the Gazette itself.

Two things follow for tax. The agreement is between the developer and the society acting by its members’ resolution, so the society is a party in every case; whether each member also transfers anything depends on the drafting. And the Rules themselves contemplate that a member may take “cash in lieu of existing premises” instead of a new flat, which is a sale of the member’s interest for money and a different tax event from the usual exchange.

The Gujarat High Court has enforced the scheme firmly. In Bhavdeep Co-operative Housing Society v. State of Gujarat, Special Civil Application 7723 of 2022, decided on 7 March 2024, where 95.8 per cent of members had consented, the two objecting members were directed to vacate within eight weeks.

Gujarat Housing Board and public housing redevelopment

Section 60A of the Gujarat Housing Board Act, 1961, in Chapter VI-A, was inserted in 2019; the amending Act’s number could not be traced. As quoted by the Gujarat High Court in Jayantibhai Somachand Contractor v. Estate Manager, First Appeal 2967 of 2024, decided on 17 March 2025, it allows “any work in relation to the re-development of a buildings or apartments” to be carried out by the Board “on such terms and conditions as may be prescribed, after obtaining the consent of not less than 75 percent of the owners or occupiers”, with the same twenty-five year or ruinous building proviso. Occupiers must vacate, and a proviso requires alternate accommodation or rent in lieu. The Court recorded that the Board’s redevelopment rules of 2020 were still in draft.

The schemes run under the Redevelopment of Public Housing Scheme Guidelines framed by the State Government on 11 February 2016. Their terms are known from the Gujarat High Court’s quotation and from municipal summaries rather than from the resolution itself, and should be read with that caution: a maximum carpet area for each rehabilitated unit of 140 per cent of the existing approved carpet area or thirty square metres, whichever is higher, and 125 per cent for non-residential units; transit or rental accommodation at the developer’s cost; the developer chosen by tender on the most additional area offered; and the balance floor space index available to the developer for free sale. In Hansaben Ratubhai Prajapati v. State of Gujarat, Special Civil Application 4216 of 2023, decided on 11 April 2023, the developer’s offer recorded in the order was a rent deposit of Rs 27,000, advance rent of Rs 13,500 and shifting charges of Rs 10,000, then Rs 13,500 a month. Those figures are a useful reminder of the scale of the payments discussed in Part 2.

Slum rehabilitation in Gujarat

The Gujarat slum schemes run under the Regulations for the Rehabilitation and Redevelopment of the Slums, 2010, released on 5 March 2010 and framed, according to the State’s submission to the High Court, under the Gujarat Slums Act, 1973, and under the Slum Rehabilitation Policy issued by Government Resolution dated 18 July 2013. The date of the 2013 resolution is confirmed in Dantani Kanubai Savjibhai v. State of Gujarat, Letters Patent Appeal 661 of 2020, decided by a Division Bench on 20 February 2021, which records the appellants’ case that the cut-off date for eligibility under the 2013 resolution is 1 December 2010. The terms of the 2010 Regulations are known only from a CEPT University working paper: a rehabilitated unit of a minimum of thirty-six square metres built-up area, additional floor space index for the developer, consent of at least seventy-five per cent of occupants, and in practice monthly rent where transit accommodation is not built. Neither instrument’s notification number could be traced and neither text was read.

In economic terms a Gujarat slum scheme is a public-private partnership: the developer builds rehab units on part of the slum land at its own cost and receives the right to build and sell on the rest, with additional or transferable floor space index. That is the same structure as a Mumbai slum scheme, and the tax analysis of the free-sale component, the rehab cost and any transferable right is the same.

Mumbai: the society, cessed buildings, MHADA layouts, clusters and slums

The Mumbai schemes are older and more varied, and they generated the case law.

Society redevelopment runs under directions issued under section 79A of the Maharashtra Co-operative Societies Act, 1960. The direction of 3 January 2009 required a three-quarters quorum and a three-quarters majority for the preliminary decision; a Bench of the Bombay High Court held those guidelines directory. A direction of 4 July 2019, issued in supersession of the 2009 direction and recorded as such by the Bombay High Court in Vilas Vishnu Jadhav v. State of Maharashtra on 15 July 2024, replaced them; its figures (a two-thirds quorum and fifty-one per cent consent) are taken from press reports, as are the terms of a further Government Resolution reported to have been issued on 30 September 2026. Neither the 2019 direction nor the 2026 resolution was read.

Development Control and Promotion Regulations for Greater Mumbai, 2034. The consent thresholds are set out in a table in the Bombay High Court’s judgment in Raj M. Ahuja v. Municipal Corporation of Greater Mumbai, Writ Petition 5130 of 2022, decided on 20 March 2023: regulation 33(5), MHADA layouts, fifty-one per cent of members; 33(7), cessed buildings in the Island City, “irrevocable written consent by not less than 51% of the occupiers of the old building”; 33(7A), dilapidated tenanted buildings, fifty-one per cent of tenants; 33(9), cluster development, fifty-one per cent of each building or seventy per cent overall; and 33(10), slum rehabilitation, “70 percent or more of the eligible hutment-dwellers”.

Slum rehabilitation in Mumbai is administered by the Slum Rehabilitation Authority constituted under Chapter I-A of the Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971, inserted by Maharashtra Act 4 of 1996 with effect from 24 October 1995, as recorded by the Bombay High Court in its suo motu judgment of 8 May 2026. That is the scheme the Central Board of Direct Taxes notified for section 80-IB(10), which is discussed in Part 3.

Self-redevelopment

In a self-redevelopment there is no developer. The society appoints a project management consultant and a contractor, borrows, builds its members’ flats and sells the surplus area itself. Maharashtra has encouraged this since a Government Resolution of 13 September 2019, reported to give additional floor space index, an interest subsidy and a nominal stamp duty; the resolution is known only from secondary sources and its number could not be traced. No Gujarat equivalent was found. Self-redevelopment matters here because it moves every developer-side question in this study into the society’s own hands, and no court has yet decided how they are answered there.

What the developer acquires: development rights held as stock in trade

The starting point of every computation is the character of what the developer acquires under the development agreement. It is not ownership of the land: the society keeps the land, and under section 41A of the Gujarat Act and the Mumbai directions alike the agreement grants the developer a licence to enter, demolish and build, together with the right to sell the additional units to purchasers and to receive their price.

That bundle is the developer’s stock in trade. The Mumbai Tribunal has consistently held that a developer’s floor space index and transferable development rights are stock in trade and their sale business income. In ACIT v. Shafaa Construction Co., ITA 4344/Mum/2009, decided on 28 October 2011 for assessment year 2006-07, a slum scheme, the Tribunal confirmed the Commissioner (Appeals), who had held that “the FSI and TDR are definitely the consideration of the project received in kind”, and held that FSI and TDR allotted by the slum authority were part of the developer’s stock in trade, so that their sale produced business income and not short-term capital gains. In Sumer Corporation v. DCIT, ITA 6801/Mum/2017, decided on 26 December 2018, TDR sale proceeds of Rs 33.99 crore from a regulation 33(10) project were held to be business income of the eligible housing project.

The characterisation matters for three reasons that run through all three Parts.

It takes the developer out of the capital gains chapter entirely, so section 45(5A), section 50C, section 54 and indexation are irrelevant to the developer, however much they matter to the members and the society.

It brings the developer within section 43CA, which reaches “an asset (other than a capital asset), being land or building or both”, the moment the developer transfers a flat. The question is whether handing a rehab flat to a member is such a transfer.

And it makes the cost of the development rights, including the cost of building the rehab component and the payments to members, part of the cost of inventory, deductible when the stock is sold rather than when the money is spent. That is the subject of Part 2.

Who transfers to the developer: the society or the members

The second foundational question is the identity of the transferor. It sounds like a member-side question and is in fact the hinge of three developer-side provisions: section 45(5A) and section 194-IC apply only where the transferor is “an individual or a Hindu undivided family”; section 194-IA turns on who the transferor is and how much each is paid; and the aggregation proviso inserted into section 194-IA(2) with effect from 1 October 2024 aggregates the consideration “where there is more than one transferor or transferee in respect of any immovable property”.

The members’ position. The Central Board of Direct Taxes stated in Circular 9 of 25 March 1969 that “the legal ownership in the flats can be said to vest in the individual members themselves and not in the co-operative society”. The Mumbai Tribunal relied on that circular in Colombia Co-operative Housing Society Ltd. v. ITO, ITA 4222/Mum/2025, decided on 22 December 2025 for assessment year 2015-16, where the developer had paid Rs 2.28 crore for loading TDR directly to forty members by individual cheques and the members had offered it to tax; the Tribunal held the sums were not the society’s income. In MIG Co-operative Housing Society Group II v. ITO, ITA 896 and 1099/Mum/2016, decided on 17 February 2017, the Tribunal likewise held that the payments to members were not the society’s income, while taxing a corpus received by the society itself as capital gains. The text of MIG Co-operative Housing Society on Indian Kanoon is partly garbled and its figures should be checked against the official order before reliance.

The society’s position. The society holds title to the land and the common areas, signs the development agreement, and in a classic society redevelopment it is the society’s right to additional floor space that the developer is really buying. The Bombay High Court held in CIT v. Sambhaji Nagar Co-operative Housing Society Ltd., [2015] 54 taxmann.com 77 (Bom), that a society which had incurred no cost in acquiring a right that “emanated from” the development control rules could not be charged to capital gains on it because no cost of acquisition could be computed; the judgment was read here only as quoted (paragraph 11) in the submissions recorded in Colombia Co-operative Housing Society, not in its own text. That reasoning has been overtaken from assessment year 2024-25. Section 55(2)(a) now includes “any other intangible asset” and “any other right” and gives them a nil cost in any other case, by an amendment the Department’s page attributes to Act No. 8 of 2023 with effect from 1 April 2024. The counterpart in the Income-tax Act, 2025 is section 90(3), ending “(c) nil, in any other case.”

What this means for the developer. In most agreements both are true at once. The society transfers its right over the land and the additional floor space; each member surrenders a flat, usually with a separate permanent alternate accommodation agreement for the new one. The developer is therefore dealing with several transferors at once, one of them a body corporate and the rest individuals. That combination is what makes the withholding analysis in Part 2 difficult. It also means that the question whether section 45(5A) can apply, which depends on an individual landowner and a specified agreement, has no single answer: the society is outside it on its own terms, and whether a member can be inside it, given that the member signs an alternate accommodation agreement but not usually the development agreement itself, has not been decided by any authority traced.

Is the developer taxed on the rehab flats it gives away?

This is the largest characterisation question in the subject and the one on which there is least authority. The developer builds, say, forty rehab flats and hands them to members who pay nothing. If those forty flats are a transfer of stock in trade for consideration, the developer has made a sale and section 43CA is in play. If they are the price the developer pays for its raw material, there is no sale and no income until the free-sale flats are sold.

The Revenue’s argument. A developer following the mercantile system exchanges one asset for another. It gives completed flats, which are its stock, and receives development rights, which are also its stock. An exchange is a transfer, the flats are “land or building or both” held otherwise than as a capital asset, and the consideration received or accruing is the value of the development rights. Accounting now supports this. Ind AS 115, paragraph 66, requires an entity that receives consideration in a form other than cash to “measure the non-cash consideration (or promise of non-cash consideration) at fair value”, and paragraph 69 treats goods or services a customer contributes as non-cash consideration if the entity obtains control of them; a developer reporting under Ind AS will therefore often book revenue on the rehab flats at the fair value of the development rights received, and an equal amount as the cost of those rights. If the books recognise revenue, the argument goes, the Act should not ignore it, and once the transfer is admitted section 43CA lifts the consideration to the stamp duty value of the rehab flats if that is higher.

The developer’s argument. No authority has accepted the Revenue’s argument, and three Mumbai decisions point the other way. In ITO v. Fine Developers, ITA 5038/Mum/2012, decided on 28 February 2018 for assessment year 2009-10, where land was surrendered to the slum authority for TDR and FSI, the Tribunal held at paragraph 41 that “there is no provision to substitute Notional market value for computing Business income”, taxed the actual sale consideration of the FSI and TDR, and held that the value of the land “will become cost of sale of FSI/TDR”. In Shafaa Construction the Tribunal confirmed the finding that the slum developer “does not get any cash consideration against the building constructed” and taxed actual sale proceeds less actual cost. And in Akruti City Ltd., ITA 4875 and 4913/Mum/2009, decided on 21 October 2011 for assessment year 2007-08, the Tribunal rejected the Assessing Officer’s attempt to value FSI held in stock at the ready reckoner rate while valuing FSI sold at the actual rate, holding that “such artificial bifurcation is not permitted in law”. On this view the rehab flats are not sold; they are what the developer pays for the right to build the free-sale flats, and their cost is part of the cost of the free-sale flats. An exchange of rehab flats for development rights is profit neutral by construction: the value given and the value received are the same thing measured twice. Taxing the rehab component as a sale would tax a profit that does not exist and then allow it back as cost when the free-sale units are sold, which is a timing distortion with no basis in the computational provisions.

The accounting answer is less helpful to the Revenue than it appears. The 2012 Guidance Note on Accounting for Real Estate Transactions, which governs companies and other entities not on Ind AS, does not gross up. Its paragraph 7.2 provides that “where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights should be recorded either at fair market value or at the net book value of the portion of the asset given up whichever is less”, and paragraph 2.2(a) includes “rehabilitation costs” in the cost of land and development rights. No paragraph of the Guidance Note values an exchange for constructed area at fair value or books revenue on rehab flats. Even under Ind AS 115, where revenue is booked, the same amount is booked as cost, so the profit is unaffected; what changes is the gross revenue figure, the inventory, and the year in which the amounts appear, which matters for the minimum tax in Part 3 but not for normal income.

Where the courts are. The Bombay High Court came close to the question in Shree Yashraj Real Estate Developers v. Assessing Officer, Writ Petition 3645 of 2024, decided on 27 July 2026 for assessment year 2018-19. The Assessing Officer had added Rs 4.24 crore, being the stamp duty value of permanent alternate accommodation agreements with tenants registered at nil consideration, as unexplained investment under section 69. The developer had challenged the refusal of revision under section 264. The High Court observed that the revisional authority could not be faulted on the Index-II extracts alone, restored the matter to it on condition that the developer pay costs of Rs 1 lakh, and directed that its order was not to be used as a precedent, without examining the merits. So the addition has been made, it has not been upheld, and it has not been struck down. The point is open. The developer’s position is stronger on the authority that exists, and it is also the position that matches what actually happens, but no High Court has said so.

Section 28(iv). The Revenue has a second route that does not need a transfer at all. Section 28(iv) charges the value of any benefit or perquisite arising from business, whether convertible into money or not, and the Finance Act, 2023 is reported to have extended it to a benefit in cash or in kind from assessment year 2024-25; the amended text could not be read on the Department’s site, whose page for section 28 refuses automated access. The Supreme Court in CIT v. Mahindra & Mahindra Ltd., (2018) 404 ITR 1, decided on 24 April 2018, confined the unamended clause to benefits received in a form other than money, and development rights are exactly that. The developer’s answer is that the development rights are not a benefit or perquisite but the stock it pays for with the rehab flats; a trading receipt in kind is taxed when the stock is sold, and taxing its value on receipt and again on the sale of the free-sale units would tax the same value twice. The Revenue’s reply is that section 28(iv) is a charging provision of its own and that the rights can be valued on receipt with the rehab cost set against them, which is the second Revenue approach in the worked example in Part 2 by another name. No decision applying section 28(iv) to development rights in a redevelopment was traced. The point is open.

A practical note for Gujarat. The Gujarat Rules of 2019 require the development agreement to state the carpet area each member gets and to be registered. A registered agreement stating that the developer will transfer a flat of a stated area to a member for nil consideration is exactly the document on which the section 69 addition in Shree Yashraj was built. A developer is better placed if its agreements recite that the new flat is given in exchange for the member’s surrender of the old flat and the society’s grant of development rights, so that the nil consideration is visibly not nil.

Section 43CA and the rehab flat: free area, extra area and Triple Securities

Section 43CA(1) of the 1961 Act provides that where “the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty”, the stamp duty value is deemed to be the full value of the consideration. The first proviso disapplies it where the stamp duty value does not exceed one hundred and ten per cent of the consideration. Sub-sections (3) and (4) allow the value on the date of the agreement to be taken where consideration or part of it was received through the banking channel on or before that date. The counterpart in the Income-tax Act, 2025 is section 53, which keeps the one hundred and ten per cent tolerance and the agreement date rule. The general treatment of section 43CA for a developer is in the affordable housing article and on the section 43CA provision page; what follows is confined to rehab area.

Redevelopment produces three different kinds of area to which the section might be applied.

The free entitlement. The member’s new flat, up to the area the agreement promises, given for no money. Whether section 43CA reaches it depends on the answer to the barter question above. If the rehab flat is not a transfer for consideration, the section has nothing to bite on. If it is, the consideration is the value of the development rights, which nobody has ever computed flat by flat, and section 43CA would compare that unknown figure with the stamp duty value of each flat. No section 43CA addition on the free entitlement has been the subject of a decided appeal that could be traced.

Extra area sold to the member. Members commonly buy additional area beyond their entitlement, at a negotiated rate. That is a sale of stock for cash, and section 43CA plainly applies to it. In Welfare Properties P. Ltd. v. DCIT, ITA 4934/Mum/2018, decided on 29 November 2019 for assessment year 2015-16, the Assessing Officer applied section 43CA only to the extra area tenants bought beyond their free entitlement. That shows the Department’s own practice in Mumbai, drawing the line at the free entitlement; it is not a holding that the free area is outside the section.

Additional area given free beyond the original entitlement. This is the difficult middle case, and the one decided. In ACIT v. Triple Securities Pvt. Ltd., ITA 2270/Mum/2021, decided on 20 December 2022 for assessment year 2016-17, a tenanted building was redeveloped and extra area went to the tenants under a consensus reached in 2006. The Assessing Officer added Rs 2.19 crore under section 43CA. The Commissioner (Appeals) deleted it and the Tribunal dismissed the Revenue’s appeal, holding at paragraph 20 that section 43CA applies “only to transfer of land or building or both” and at paragraph 23 that the extra tenant area “could not be considered as stock-in-trade”. The decision is on its facts, and the facts, an agreement made long before the section came into force, were favourable. It does not establish a general rule that rehab area is outside section 43CA.

The arguments, both ways. For the developer: the rehab area is not stock in trade at all, because the developer never had the right to sell it; it was committed to the members before a brick was laid, and section 43CA reaches only an asset the assessee holds otherwise than as a capital asset, which presupposes an asset the assessee could have sold. For the Revenue: the developer constructs every flat, rehab and sale alike, as part of one business; the rehab flats are inventory until handed over; and the section looks at the transfer, not at the developer’s freedom to choose the buyer. The Revenue’s argument meets a practical obstacle it has not yet answered: the section needs a consideration to compare with the stamp duty value, and in a free rehab flat the only candidate is a share of the value of the development rights, which is neither recorded nor computable on any basis the section prescribes.

FSI and TDR: stock in trade, section 50C and the notional value argument

Floor space index and transferable development rights are a developer’s stock in a slum scheme and often in a public housing scheme. Three questions arise.

Are they land, so that section 50C or section 43CA can apply? In Shafaa Construction the Tribunal held at paragraph 6 that section 50C did not reach FSI because FSI “cannot be treated as land itself”. Section 43CA uses the same words, “land or building or both”, and the same reasoning applies to it. The Revenue’s answer is that a right to construct is an interest in land and that the stamp authorities in Maharashtra and Gujarat value TDR for stamp duty, so a value adopted for stamp duty exists. The answer to that is that the section requires the asset transferred to be land or building, not a right that the stamp law chooses to value, and that the deeming provisions are construed strictly. The point has not reached a High Court.

Can stock of FSI be valued at market? In Akruti City the Tribunal rejected an Assessing Officer’s valuation of unsold FSI at the ready reckoner rate as “artificial bifurcation”. Stock in trade is valued at cost or market value, whichever is lower, and an unrealised appreciation in its value is not income.

What is the cost of TDR? A developer that generates TDR by building rehab tenements has no purchase price for it; its cost is the cost of the rehab construction. That is the principle the Tribunal applied in Skylark Build, discussed next, and it is the reason the allocation of rehab cost between TDR, free-sale units and any amenity handed to the authority is a live issue, worked through numerically in Part 2.

Since 1 April 2024 section 55(2)(a) gives a nil cost to “any other right” acquired without cost. That affects the owner who generates a right and then sells it as a capital asset, typically a landowner or a society. It does not affect a developer whose rights are stock in trade, because section 55 governs only the capital gains computation.

Slum rehabilitation: when TDR income arises

In a Mumbai slum scheme the slum authority releases TDR to the developer in instalments as the rehab construction reaches stated stages. A developer may sell TDR in a year in which the project is far from complete. The question whether the profit on that sale is taxed in the year of sale or in the year the project is complete has divided the Mumbai Tribunal, and the division turns on whether TDR is earned as it is released or only when the construction that generates it is finished.

The majority view: tax on completion, rehab cost set against it. In ACIT v. Skylark Build, ITA 4307-4308/Mum/2009, decided on 17 June 2011 for assessment years 2006-07 and 2007-08, the developer received TDR for handing over transit buildings in a Worli slum project. The Tribunal held at paragraph 8 that “TDR received has to be set off against WIP and cannot be assessed separately as income”, and that the “cost of those buildings has to be deducted against income from sale of TDR”. In Videocon Atithi Shelters P. Ltd., ITA 3496-3499/Mum/2009, decided on 15 September 2010, the Tribunal held at paragraph 3 that “the sale of TDRs is to be accounted for in the year in which the project is completed”. Pushpa Construction Co. v. ITO, ITA 193/Mum/2010, decided on 25 April 2012, held that TDR from incomplete schemes was not taxable in the year of sale if offered in the year of completion, and remanded for verification. In ITO v. Aristo Shelters Pvt. Ltd., ITA 1931 and 5181/Mum/2019, decided on 6 February 2023, the Tribunal held at paragraph 20 that the developer “gets the TDR rights only when it completes the construction” and dismissed the Revenue’s appeal. And in DBS Realty v. PCIT, ITA 3034-3035/Mum/2018, decided on 8 March 2019, TDR sales of Rs 53.35 crore held as a liability under the percentage of completion method were accepted, the Tribunal quashing a revision order and holding at paragraph 26 that “the method adopted by the assessee is a legally permissible one”.

The minority view: tax on accrual. In Shivshahi Punarvasan Prakalp Ltd. v. ITO, ITA 5002/Mum/2010 and connected appeals, decided on 31 October 2011 for assessment years 2000-01 to 2003-04, the Tribunal recorded that “the cost to the developer comprised cost of construction of rehabilitation area and cost of free sale area”, and held at paragraph 3.2 that “income from sale of TDR had accrued during the year as per mercantile system of accounting followed by the assessee”, remitting the computation. It also recorded, at paragraph 2.11.4, that “the TDR accrues to the assessee only after completion of certain percentage of the project”, which is the point on which the two lines meet: TDR is released in stages, and once released it is the developer’s to sell.

How the two lines are argued. The developer’s case is that TDR is not a separate product but a by-product of one indivisible slum project; that a single project cannot be split into a TDR business taxed on sale and a flat business taxed on completion, a proposition the Tribunal accepted in ITO v. Chembur Trading Corporation, ITA 2593/Mum/2006, decided on 21 January 2009, whose holding that under project completion the sale proceeds of TDR are included in the year the project is completed is recorded in Videocon Atithi Shelters, and where, according to a published summary only, the Assessing Officer was held unable to “adopt two methods of accounting in one project”; and that the true profit on TDR cannot be known until the whole rehab cost is known. The Revenue’s case is that once TDR is released it is a finished, saleable asset, that the sale is final and the price received, and that deferring tax to completion lets a developer sell rights for years while carrying the proceeds as a liability. The Bombay High Court’s order of 14 September 2011 in Chembur Trade Corporation, Income Tax Appeal 3179 of 2009, is recorded in Pushpa Construction as having decided the point for the assessee, but that order is unreported and could not be read. No High Court decision resolving the two lines was traced. The answer in any given case will depend heavily on the method of accounting the developer has consistently followed, which is the subject of Part 3.

MHADA layouts and cluster redevelopment: the housing stock surrendered in kind

Under regulation 33(5) of the Mumbai regulations, a developer redeveloping a MHADA layout builds the members’ flats, sells free-sale area, and surrenders a share of the built-up area to MHADA as housing stock, or pays a premium in lieu. Cluster schemes under regulation 33(9) work similarly on a larger canvas. The surrender of housing stock is a second payment in kind, this time to a statutory authority rather than to the occupants.

No decision on the tax treatment of housing stock surrendered to MHADA, or of the premium in lieu, could be traced. The analysis follows the rehab flats. For the developer, the surrendered stock is part of the price of the right to build the free-sale area, so its construction cost is part of the cost of the free-sale inventory; the premium in lieu is the same price paid in money. For the Revenue, the surrender is a transfer of built stock to a third party for which the developer receives the additional floor space, so the barter argument above applies with more force, because MHADA is not a prior owner surrendering anything. Section 43CA would again need a consideration, and would again find none that is computable.

The nearest decision is on the society’s side. In MIG Co-operative Housing Society Group II the Tribunal held at paragraph 9.3 that a payment made to a government agency in pursuance of an agreement could not be treated as the society’s income, where Rs 9.04 crore had been paid to MHADA. That supports the proposition that the payment to MHADA belongs to the developer’s cost, not to anyone’s income.

Self-redevelopment: when the society is its own developer

In a self-redevelopment the society does what a developer would do. It builds new flats for its members, sells the surplus to outsiders and keeps the price. Every developer-side question moves into the society’s hands, and three answers become uncertain.

Is the sale of surplus flats business income or capital gains? A society that redevelops once, on its own land, and sells the surplus to fund its members’ new homes has a strong argument that it is realising a capital asset, its right to additional floor space, in the most advantageous way, and that it is not carrying on a business of developing property. The Revenue’s answer is that construction and sale for profit to the public is an adventure in the nature of trade, that the society has converted its land into stock in trade, and that the proceeds of selling flats it built are business income. If it is a conversion, section 45(2) taxes the capital gain on the value at the date of conversion in the year the stock is sold, and the business profit above that value as business income. No decision on a self-redevelopment was traced on either view.

Is the rehab component taxable at all? The members’ new flats are built with the society’s money, raised partly by selling surplus area. The society’s argument is mutuality: a body of persons applying its common funds for the benefit of the same persons makes no income from them. The test is the Supreme Court’s in Bangalore Club v. CIT, (2013) 350 ITR 509, decided on 17 January 2013: complete identity between contributors and participants, action by the participants in furtherance of the association’s mandate, and no profit to the contributors from a fund made up of their own contributions. That argument is strong for the members’ flats so far as the members fund them, and weak for the sale to outsiders, who are not members when they pay. The Revenue’s argument is that the funds for the members’ new flats come from outsiders’ purchase money, which breaks the identity at the source.

Does section 80P help? The deduction for cooperative societies under section 80P is confined to the categories of income it lists. Whether a housing society’s profit from selling surplus flats in a self-redevelopment falls within any of them was not found to have been decided and should not be assumed. The society’s argument would rest on the residual limb in section 80P(2)(c), which is capped at a small fixed amount, so even on the society’s best case the deduction does not shelter a substantial surplus. The Revenue’s argument is that a sale of flats to outsiders is not an activity of a housing society within any limb of section 80P(2).

These are the questions on which a society planning a self-redevelopment in Gujarat or Maharashtra most needs advice before the first sale, because the structure (whether surplus units are sold before or after completion, by the society or through a nominee, and on what accounting basis) changes the answer.

Where section 45(5A) enters: individual landowners and bungalow redevelopment

Not every redevelopment involves a society. Much of the redevelopment in Ahmedabad’s older residential areas is of bungalows and small plots held by individuals or Hindu undivided families, under joint development agreements in which the owner gets a share of the new building and sometimes cash. That is the case section 45(5A) was written for.

Section 45(5A) of the 1961 Act, inserted by the Finance Act, 2017 with effect from 1 April 2018, provides that where the capital gain arises to “an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement”, it is chargeable in the previous year in which the certificate of completion for the whole or part of the project is issued, and the stamp duty value of the owner’s share on that date, increased by any monetary consideration, is the full value of consideration. A “specified agreement” is “a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash”. The words “any consideration received in cash or by a cheque or draft or by any other mode” replaced “the consideration received in cash, if any” from 1 April 2024. The counterpart in the Income-tax Act, 2025 is section 67(14) to (16). The section is the subject of its own provision page.

Section 45(5A) is a member-side provision, but it drives the developer’s position in one respect. Section 194-IC requires the developer to deduct ten per cent of “any sum by way of consideration, not being consideration in kind, under the agreement referred to in sub-section (5A) of section 45”. Where the owner is an individual and the agreement is a specified agreement, any cash the developer pays the owner is within section 194-IC, and the Mumbai Tribunal held in Sugee Seven Developers LLP v. ITO (TDS), ITA 2313 to 2316/Mum/2025, decided on 10 October 2025, that a developer who had deducted one per cent under section 194-IA on cash paid to an individual leasehold holder should have deducted ten per cent under section 194-IC. Whether hardship compensation and rent paid to members are “consideration” under a specified agreement at all is taken up in Part 2.

Gujarat: what the Ahmedabad record does and does not contain

A study that calls itself Gujarat-led owes the reader a plain statement of the Gujarat authority. On the developer-side questions in this Part, the barter question, section 43CA on rehab area, FSI and TDR, the timing of TDR income, the transferor question, MHADA-type surrenders and self-redevelopment, no decision of the Ahmedabad Bench of the Tribunal or of the Gujarat High Court could be traced. The Gujarat case law that does exist on real estate developers goes to the method of accounting and to section 80-IB(10), and is discussed in Part 3: the Gujarat High Court’s decisions in CIT v. Radhe Developers on the developer who does not own the land, and ITO v. Mahalaxmi Builders on project completion, and the Ahmedabad Bench’s recent decisions holding that section 43CB does not reach a developer.

That has two consequences for a Gujarat developer. The Mumbai decisions are not binding on an Assessing Officer or the Commissioner (Appeals) in Ahmedabad, but the Ahmedabad Bench treats decisions of coordinate Benches as persuasive, and where there is no Gujarat authority it will ordinarily follow a reasoned Mumbai decision unless the facts differ. And the Gujarat schemes have features the Mumbai cases do not. The 2016 public housing guidelines tie the rehab area to a percentage of the existing carpet area and select the developer by tender on the area offered, which makes the rehab component a priced bid rather than a negotiated concession; that is a fact the Revenue may use to argue that the rehab flats have an ascertainable consideration in a way a Mumbai society’s do not.

One Gujarat fact cuts across three provisions. The State is widely reported to have revised its jantri rates, the stamp duty values, sharply with effect from 15 April 2023; the government resolution was not read for this study. A redevelopment agreement signed before that date and completed after it is the case in which section 43CA(3) and (4), which allow the value on the date of the agreement where the whole or part of the consideration was received by account payee cheque, account payee bank draft, electronic clearing or a prescribed electronic mode on or before that date, and the one hundred and ten per cent tolerance do their work for extra area sold to members and for free-sale units, and the free-sale buyer’s deduction under section 194-IA is computed on the same rates.

The development agreement read as a tax document

Rule 23 of the Gujarat Rules of 2019 lists what a redevelopment agreement must contain. Read with the tax consequences beside it, the list is close to a checklist of what decides the developer’s computation, and it is worth taking clause by clause because the drafting is done long before any tax adviser sees the file.

The completion period. The date on which the project is complete governs the year in which a developer following the project completion method recognises income, the year in which section 45(5A) charges an individual owner, and, for a slum scheme on the majority Mumbai view, the year in which TDR income is taxed. A completion period that the agreement measures to a building use permission or occupancy certificate fixes an objective date; one measured to “possession” invites argument.

Free alternative accommodation or cash in lieu. This is the clause that creates the rent and displacement payments analysed in Part 2. Whether the agreement calls the monthly payment rent, compensation, displacement allowance or hardship allowance does not decide its character, as the Mumbai Tribunal has held repeatedly, but an agreement that calls it rent and in which the developer undertakes to deduct tax on it gives the Revenue its best argument. That is precisely what happened in the Dalal Estate redevelopment discussed in Part 2, where the agreement described the payment as rent and recorded the developer’s agreement to deduct tax.

Registration. A registered development agreement is a “specified agreement” if the other conditions of section 45(5A) are met, and its stamp duty value may be what the Assessing Officer compares with the consideration. A registered permanent alternate accommodation agreement at nil consideration is the document from which the section 69 addition in Shree Yashraj was built.

The developer’s right to sell the remaining flats. This clause defines the developer’s stock. Units the developer may sell are its inventory; units it must deliver to members are the price of that inventory. Where a member buys additional area, the agreement should price it separately, because that additional area is a sale for cash to which section 43CA applies.

The carpet area each member gets. This fixes the free entitlement. Any later increase given free, as in Triple Securities, should be documented as part of the original consideration for the surrender, or it will be argued to be a gift of stock or a separate transfer.

Amenities, corpus, shifting charges and the penalty for delay. Each is a developer payment whose character is analysed in Part 2. A penalty for delay paid to members is, on ordinary principles, a revenue expense of the business; a corpus paid to the society is the price of the development rights; shifting charges are reimbursement of a cost the member incurs because the developer needs the building. The agreement should say which is which, because a single lump sum described as “compensation” invites the Revenue to treat the whole of it as whatever is least favourable.

The bank guarantee. A bank guarantee given to the society secures performance; its cost is a finance or project cost of the developer. If the developer instead deposits cash with the society as security, the deposit is not an expense at all until it is forfeited or adjusted.

Cash in lieu of a flat: the member who leaves

The Gujarat Rules contemplate that a member may take “cash in lieu of existing premises” instead of a new flat, and the same happens informally in Mumbai when a member prefers to exit. The developer then buys the member’s interest outright. Four consequences follow for the developer.

The flat becomes the developer’s stock. The developer that buys out a member acquires the right to the new flat that member would have received, and that flat becomes free-sale inventory. The price paid to the member is part of the cost of that inventory.

Section 194-IA applies, and the threshold is now aggregated. The developer is a transferee paying a resident transferor a sum by way of consideration for the transfer of immovable property other than agricultural land. Section 194-IA(1) requires deduction of one per cent of the sum or of the stamp duty value of the property, whichever is higher, and section 194-IA(2) exempts a transfer only where the consideration and the stamp duty value are both less than fifty lakh rupees. The proviso inserted with effect from 1 October 2024 aggregates the consideration “where there is more than one transferor or transferee in respect of any immovable property”, so a flat held jointly by spouses is tested on the combined price. In the Income-tax Act, 2025 the provision is serial 3(i) of the Table in section 393(1).

Section 194-IC may displace section 194-IA. If the member is an individual and the member’s own agreement with the developer is a specified agreement under section 45(5A), section 194-IC applies “notwithstanding anything contained in section 194-IA” to any sum paid as consideration, not being consideration in kind, and requires ten per cent with no threshold. In the 2025 Act, Note 2 to serial 3 of the Table in section 393(1) provides that where both serial 3(i) and serial 3(ii) apply, tax is deducted under serial 3(ii) only. A member who exits for cash, however, is not being given a share in the project, so the agreement for the buy-out is unlikely to be a specified agreement at all; the safer view is that section 194-IA applies to a pure buy-out and section 194-IC to cash paid alongside a share.

The price is not a hardship payment. A buy-out price is consideration for the transfer of the member’s flat, taxable in the member’s hands as capital gains, and the Mumbai decisions holding hardship compensation to be a capital receipt not chargeable to tax do not reach it. A member may argue that part of a buy-out price is compensation for hardship and so capital. The Revenue’s answer is that a member who exits receives the full price of the flat and nothing else is being compensated. Where the agreement does not split the sum, the whole is likely to be treated as consideration.

A developer’s checklist at the agreement stage

The characterisation disputes in this Part are decided, in practice, by documents signed years before the assessment. A developer entering a redevelopment in Gujarat or Mumbai can narrow every one of them at the drafting stage.

1. Record the exchange. State that each member’s new flat is given in exchange for the surrender of the member’s existing flat and for the society’s grant of development rights, so that the nil consideration on the alternate accommodation agreement is visibly not nil.
2. Separate the free entitlement from additional area. Price additional area sold to members in a separate clause, at a rate that can be compared with the stamp duty value, and receive at least part of it through the banking channel before the agreement date so that section 43CA(3) and (4) are available.
3. Name each payment for what it is. Rent for alternate accommodation, shifting charges, corpus and hardship compensation should each be separately stated and separately described. Avoid calling the monthly payment rent, and do not undertake in the agreement to deduct tax on it unless the developer has decided that tax is deductible.
4. Identify who receives what. State whether the corpus is paid to the society or to the members, and whether any cash is paid to a member as consideration for the member’s own transfer. That decides whether section 194-IA, section 194-IC or neither applies.
5. Fix completion objectively. Tie completion to the occupancy certificate or building use permission, so that the year of recognition and, for an individual owner, the section 45(5A) year are not arguable.
6. Keep project records by component. Record costs separately for the rehab component, the free-sale component, any amenity or housing stock handed to an authority, and any transit accommodation, with the basis of any common-cost allocation written down at the outset.
7. In a slum scheme, track TDR release against construction stages. Record when each tranche of TDR is released, what construction triggered it, and how the developer accounts for its sale, so that the method can be shown to be consistent from the first year.
8. Decide the accounting method once. Whichever of project completion and percentage of completion the developer adopts should be adopted from the start and followed consistently, for the reasons set out in Part 3.

Open questions in Part 1, argued both ways

1. Is the free rehab flat a transfer of stock in trade? For the developer: it is the price of development rights, the exchange is profit neutral, and Fine Developers and Shafaa Construction tax only actual sale proceeds less actual cost. For the Revenue: an exchange is a transfer, the rehab flats are built stock, and Ind AS 115 books revenue on them; the Revenue can also invoke section 28(iv), undecided in this context. Undecided by any High Court; the Bombay High Court remanded the nearest case in July 2026.

2. Can section 43CA apply to the free entitlement? For the developer: no consideration is computable and the area was never the developer’s to sell. For the Revenue: the section looks at the transfer, and the consideration is the value of the development rights. Undecided; Triple Securities is on its facts.

3. Is FSI or TDR land for section 43CA or section 50C? For the developer: Shafaa Construction says FSI is not land itself, and the deeming sections are strictly construed. For the Revenue: a right to build is an interest in land and is valued for stamp duty. Undecided above the Tribunal.

4. When is TDR income taxed in a slum scheme? For the developer: on completion of the construction that generates it, with the rehab cost set against it, as in Skylark Build, Videocon Atithi, Pushpa Construction and Aristo Shelters. For the Revenue: on sale, under the mercantile system, as in Shivshahi Punarvasan Prakalp. Unresolved by a High Court.

5. Who is the transferor, the society or the members? For treating the members as transferors: Circular 9 of 1969 and Colombia Co-operative Housing Society. For treating the society as transferor: it holds the land and signs. Usually both, and the drafting decides the rest.

6. Can a member be within section 45(5A) in a society redevelopment? For: the member surrenders a building in consideration of a share in the new one under a registered document. Against: the development agreement is the society’s, and the member’s alternate accommodation agreement does not itself allow anyone to develop anything. Undecided.

7. How is housing stock surrendered to MHADA treated? For the developer: part of the cost of the free-sale area. For the Revenue: a transfer of built stock to a third party for additional floor space. No decision.

8. Is a self-redeveloping society’s surplus sale business income? For the society: realisation of a capital asset, with mutuality covering the members’ flats. For the Revenue: an adventure in the nature of trade and a conversion into stock. No decision.

Concordance: the Income-tax Act, 1961 and the Income-tax Act, 2025

Subject	Income-tax Act, 1961	Income-tax Act, 2025
Stamp duty value for stock in trade	section 43CA	section 53
Capital gains on a specified agreement	section 45(5A)	section 67(14) to (16)
Cost of an intangible right acquired without cost	section 55(2)(a)	section 90(3)
Deduction at source on monetary consideration under a specified agreement	section 194-IC	section 393(1), Table serial 3(ii)
Deduction at source on transfer of immovable property	section 194-IA	section 393(1), Table serial 3(i)
Construction and service contracts	section 43CB	section 57
Income computation and disclosure standards	section 145(2)	section 276(2)

The concordance was checked against the Department’s own pages for each section of the Income-tax Act, 2025, reading the Act field on each.

Continue to Part 2: what the developer pays the members, as cost or capital, and tax deduction at source, or go on to Part 3: revenue recognition, Ind AS 115 and the minimum tax.

This note is general commentary on the law as at 22 October 2026 and is not advice on any matter. The position in a particular case depends on its own facts.