VIRUS SHAKES “REAL ESTATE” FOUNDATION

The Real Estate sector in India has been experiencing a downturn for quite some time. Severe liquidity crunch has plagued this sector and so have policy reforms, legislations and structural changes. These issues were merely the tip of the iceberg, as the Covid – 19 virus opened up a new front for the real estate sector.

Propelled by the burgeoning crisis,  the Confederation of Real Estate Developers Association of India (“CREDAI”) requested the  Ministry of Housing and Urban Affairs to include Covid -19 as a condition of force majeure  under Section 6 of the Real Estate (Regulation and Development) Act, 2016 (“RERA”) and that loans by real estate developers should not be classified as Non-Performing Assets in case of default on interest or principal repayment.

Force Majeure under RERA

 

Section 6 of RERA provides that if an event of force majeure (i.e. a case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project) occurs, then on an application made by the promoter, the authority after considering the facts of the particular case (including that there was no default on the part of the promoter) can extend the registration for not more than one year.

It can be argued that Covid – 19 could possibly be included in “any other calamity caused by nature” in the explanation to the section. It is pertinent to note that Ministry of Finance, Department of Expenditure Procurement and Policy decision vide its office memorandum dated 19th February, 2020 clarified that the disruption of the supply chain as result of the spread of corona virus should be considered as a case of “natural calamity” and force majeure clause may be invoked.

The above section merely enjoins a delay in the performance of the contract and does not release the developer from its contractual obligations. The above section also makes it abundantly clear that facts of each case would be considered separately, and decisions taken. The period of extension in the case of Covid – 19 could possibly be not more that 3 to 4 months.

Various remedial steps taken by statutory and regulatory authorities to alleviate the difficulties of the Real Estate Sector

 

Ø The Maharashtra Real Estate Regulatory Authority vide an Order dated 2nd April, 2020 inter alia relying on section 6 of RERA, extended the period of validity for registration of MahaRERA Registered projects where completion date, revised completion date or extended completion date expires on or after 15th March 2020 by three months. Further, the time limits of all the statutory compliances, which were due in March / April / May was also extended to June 30, 2020.

Ø The Karnataka Real Estate Regulatory Authority vide a circular dated 4th April, 2020 extended the period of validity for registration of K-RERA Registered projects where completion date (including revised completion date) expires on or after 15th March 2020 by three months. Further, the time limits of all the statutory compliances, which were due in March / April / May was also extended to June 30, 2020.

Ø The Uttar Pradesh Real Estate Regulatory Authority on 14th April, 2020 has decided to extend by three months the date of completion of the projects where the date of completion is between March 15, 2020 and December 31, 2020.

Ø The Reserve Bank of India (“RBI”) vide a press release dated 27th March, 2020 has directed all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Further, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. It has also been clarified that moratorium/deferment provided will not result in asset classification downgrade.

As per the statement of the Governor (RBI) dated 17th April, 2020, it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm will exclude the moratorium period. Further, the RBI allowed non-bank financial companies to extend the date for commencement of commercial operations (DCCO) for loans given to commercial real estate by additional one year,  over and above the one-year extension permitted in normal course, without considering it as restructuring. Banks had been directed to provide similar relief earlier.

Ø The Securities Exchange Board of India vide a circular dated 23rd March, 2020 has extended the due date for regulatory filings and compliances for Real Estate Investment Trusts and Infrastructure Investment Trusts for the period ending March 31, 2020 by one  month  over  and  above  the  timelines,  prescribed  under SEBI  (Infrastructure Investment  Trusts)  Regulations,  2014 (InvIT  Regulations) and  SEBI  (Real  estate Investment  Trusts)  Regulations,  2014 (REIT  Regulations) and  circulars  issued thereunder.

Relaxation on Construction activities

 

By an Order dated 15th April, 2020, the Ministry of Home Affairs has issued detailed guidelines for allowing certain additional activities to be undertaken from 20th Aril, 2020 in non – containment zones (containment zones are required to be demarcated by the respective States and Union Territories) across India, subject to all preparatory arrangements with regard to social distancing being implemented. One of these additional activities include certain construction activities which are as follows:

Ø Construction of roads,  irrigation    projects,   buildings   and  all  kinds  of industrial projects,  including   MSMEs,  in  rural  areas,  i.e.,   outside the limits  of municipal corporations   and municipalities;    and  all  kinds  of projects in industrial  estates.

Ø Construction of renewable energy projects.

Ø Continuation of works  in  construction   projects,  within  the limits  of municipal corporations and municipalities,  where workers  are available   on site and  no workers are required  to be brought in  from outside  (in  situ  construction).

Each State and Union Territory in the country will decide in which areas and to what extent the above activities can be allowed. However, this may relieve some pressure from the real estate sector. It remains to be seen whether real estate hotspots like Mumbai, Delhi and Bangalore will be permitted to allow construction activities considering that they are Covid-19 hotspots as well.

As can be seen from the above discussion, the situation with respect to Covid -19  is dynamic, and the real estate sector paradigm is bound to change as a result. Therefore, we will keep you updated in case of any further decisions, measures, notifications by the Government and other authorities with respect to the real estate sector.

 

We trust that the above update is helpful for you. If you require any further clarifications, please feel free to contact us.

Zerick Dastur <zerick@zdlegal.com>

Housing society is promoter for redevelopment of its buildings

Kamlesh Bhuvan CHS in Chembur had entered into a redevelopment agreement with Mahavir Enterprises for redeveloping its dilapidated building. There was also a tripartite agreement between the society, each member and the builder for allotment of flats in the re-developed building. It was agreed that each member would get additional space of 20% in the new building. The society also took a bank guarantee of Rs 50 lakh from the builder.

However, the builder defaulted in handing over possession of the flats on time and also failed to pay compensation for alternate accommodation for the period of delay. A member of the society Padam Chandiramani, filed a complaint before the Additional Mumbai Suburban District Forum against the builder—Mahavir Enterprises—through its partners D Gala and K Shah as well as against the housing society.

The builder contested the complaint. He stated that the keys to the flats of all the original 12 members, including Chandiramani, had been handed over to the society but the society had failed to hand over possession to its members. He argued the society had an obligation to ensure that all its members would get possession of the flats within 24 months, but had failed to do so. The society did not care to contest the case.

The forum held that the builder as well as the society were jointly and severally liable to put Chandiramani in possession of her flat, and ordered delivery of the flat within two months. Additionally, the builder was also ordered to pay compensation at the agreed rate of Rs 25 per sq ft per month along with 10% interest. Further, litigation costs of Rs 5,000 were awarded.

The builder and the society challenged this order in appeal. The state commission observed a co-operative housing society would come within the ambit of the definition of a promoter, developer and builder as it has promised it give possession of flats to its members in the redeveloped building.

Accordingly by its order delivered on April 12 by Justice A P Bhangalae for the bench along with Usha Thakare the Maharashtra State Commission modified the order passed to apportion the liability between the builder and the society If held that the builder would be liable to pay Rs 25 per sq ft to Chandirarmani for the period of delay till the date of handing over keys to the society, and thereafter, the society would be liable to pay the same amount of compensation for its failure to put Chandiramani in possession.

Jehangir Gai

(The author is a consumer activist and has won the Govt. of India’s National Youth Award for Consumer Protection. His e-mail is jehangir.gai.columnist@outlook.in)

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Can’t tax redevelopment payment to flat owner

ITAT: Can’t tax redevelopment payment to flat owner
Compensation received by a flat owner of a cooperative housing society , from a redeveloper cannot be taxed in his hands, according to a recent order of the Income-tax Appellate Tribunal’s (ITAT) Mumbai bench.

The ITAT noted this compensation was towards the hardship which the flat owner would face owing to the redevelopment. It held such compensation to be in the nature of a “capital receipt“, which “is outside the scope of income that can be chargeable to tax“. In other words, such compensation cannot be subject to income-tax.

This landmark order, whi ch relates to the I-T implications for a flat owner, will help taxpayers facing similar litigation. Management committees of co-operative societies, especially in Mumbai, will also find it easier to persuade their members (flat owners) to agree to undertake redevelopment, as I-T-related anxieties will ease. However, the ITAT held that another sum of money rece ived by the flat owner for payment of rentals while the redevelopment work was ongoing would not be taxed only to the extent it was actually utilised for rent payments. Any surplus would be treated as `income from other sources’.It would be added to the taxable income of the flat owner and the applicable I-T slab rate would apply (for income above Rs 10 lakh, the current rate is 30% plus surcharge and cess).

Jitendra Kumar Soneja had received a sum of Rs 22 lakh as compensation from the redeveloper and also another sum of Rs 8.55 lakh for paying rent as he had to vacate his flat while the redevelopment work was ongoing. Both these amounts were credited to his bank account.

As he was unable to satisfactorily explain the reason for not disclosing this sum of Rs 30.55 lakh in his I-T returns for the concerned financial year 2006-07, the I-T officer treated it as `undisclosed income’ liable to I-T. Having lost the case at the Commissioner of I-T (Ap peals) level, Soneja appealed to the ITAT.

Soneja’s counsel submitted to the ITAT that Rs 22 lakh was received as compensation owing to the hardship caused to the taxpayer on account of redevelopment. It was received as a corpus fund, which was a capital receipt and was not taxable. The ITAT took note of this contention and the fact that the compensation relates to a flat, which is a capital asset.

The ITAT did not agree with the views of the I-T department that such compensation was the flatowner’s share in the profits earned by the redeveloper. “One has to see what is the nature of income in the hands of the receiver and not the payer (redeveloper),“ ITAT held.

Going a step further, ITAT stated that while the compensation was a capital receipt and not taxable, it would be reduced from the cost of acquisition of the flat. This would have a tax impact, in case the flat (or rather the redeveloped flat) was subsequently sold.

Capital gains, on which capital gains tax is levied, is the difference between the sale price and the cost of acquisition (or purchase price).If the cost of acquisition is lower, it would result in a higher capital gains base and thus a higher incidence of capital gains tax.

As Soneji had incurred a rent expenditure of only Rs 6.80 lakh as against Rs 8.55 lakh received for this purpose, the balance of Rs 1.75 lakh was held liable to I-T.

Lubna Kably Mumbai: