Pagdi property & taxation issues on transfer, surrender & redevelopment

Pagdi Meaning and Pagdi System Redevelopment

The term "Pagdi" holds significant cultural and legal weight in the real estate landscape of Maharashtra and other parts of India. Stemming from a unique tenancy arrangement, the Pagdi system embodies a symbiotic relationship between landlord and tenant, marked by a lump sum payment, typically known as "pagdi," and subsequent nominal rent payments for property usage. In essence, the Pagdi system confers upon the tenant certain inheritable and transferable rights akin to ownership, albeit without formal title deeds. This distinctive characteristic allows tenants to pass on their pagdi rights to descendants or even sell them to interested parties, rendering it an integral part of the socio-economic fabric in regions where it is prevalent.

Need for Pagdi system

The Pagdi system, originating in the British era as a means to circumvent excessive taxes, has persisted through time and continues to serve a crucial role in today's real estate landscape. In bustling metropolitan hubs like Mumbai, Delhi, and Kolkata, where real estate prices soar, the Pagdi system provides a vital solution for a significant portion of the population. Approximately 35% of urban dwellers are transient, primarily comprising the working-class population seeking opportunities in these cities. For these individuals, investing in property is often financially unfeasible or undesirable due to the transient nature of their stay. Instead, they opt for the simplicity and affordability offered by the Pagdi system. Unlike traditional rental agreements with intricate legal formalities and higher rents, the Pagdi system offers a more straightforward and cost-effective alternative. By paying a lump sum "pagdi" amount upfront, tenants gain long-term occupancy rights with nominal rent obligations. This arrangement caters to the needs of those who prioritize simplicity and affordability in their housing choices, without entangling themselves in the complexities of property ownership. Thus, in today's dynamic real estate scenario, the Pagdi system continues to fulfill a crucial need, providing a practical and accessible housing solution for the transient working-class population in metropolitan areas

Pagdi Property-Tenancy Law & Rent Control Act

The Pagdi system, deeply rooted in the real estate landscape of Mumbai and other parts of Maharashtra, continues to be governed by specific tenancy laws and regulations, including the Maharashtra Rent Control Act of 1999. Despite recent developments such as the introduction of the new Model Tenancy Act of 2021, which aims to modernize rental housing and stimulate private investment in the sector, existing Pagdi tenancies remain unaffected. Under the existing legal framework, tenants residing in Pagdi properties have certain rights and protections, albeit with complexities and challenges, especially concerning property ownership and inheritance. For instance, the Maharashtra Rent Control Act stipulates that family members of a deceased Pagdi tenant who resided with them at the time of death are eligible successors to continue the tenancy, underscoring the importance of proper documentation and evidence. It is advisable that these family members should be part of the same Ration Card to establish their claim. Moreover, obtaining financing, such as a home loan, for Pagdi properties can be arduous due to lingering ownership issues and the intricate nature of the system. The process of establishing ownership rights and navigating bureaucratic procedures adds further layers of complexity, requiring meticulous attention to detail to avoid costly mistakes.

However, the legal framework does provide avenues for transactions involving Pagdi properties. Section 56 of the Rent Control Act legalizes considerations such as pagdi payments made to landlords, facilitating lease grants, renewals, and consent transfers. This provision ensures a degree of legal clarity in Pagdi property transactions, albeit within a framework that demands thorough understanding and adherence to regulatory requirements.

The proposed Model Tenancy Act

The suggested Model Tenancy Act will permit landlords to enforce whatsoever rent and increase it as they may think fit. It will be applicable to all tenants, occupancies, and premises, and will not safeguard even those who in the past have paid higher ‘Pagdi’ (security which is nearly equivalent to the market price of the premise given on rent) to landlords to dwell in tenanted premises. Many tenants may have paid for the repair and maintenance of the properties over the last 10 years.

Process for revision of rents: The process for revising rents under the Pagdi tenancy model entails several crucial steps and considerations to ensure fair treatment for both landlords and tenants:

a) The landlord must provide written notice at least three months prior to the proposed increase in rent becoming due. This notification allows tenants adequate time to prepare for any adjustments in their rental obligations.

b) If a tenant receives notice of a proposed rent increase but fails to provide notice of termination of tenancy to the landlord, they are deemed to have accepted the suggested rent increase. This provision emphasizes the importance of proactive communication between landlords and tenants regarding rent revisions.

c) Rent increases during the term of a tenancy agreement for a limited period are generally not permissible unless explicitly established in the tenancy agreement. Any increase in rent must adhere to the terms outlined in the agreement between the landlord and tenant.

d) Subletting or sub-allocating premises for a rent higher than the agreed-upon rent between the landlord and tenant is prohibited. This provision ensures that tenants do not exploit their rights to sublet for financial gain at the expense of the landlord's interests.

e) In cases where landlords incur expenses for improvements, additions, or structural alterations to the premises with the tenant's agreement, they may increase the rent by a mutually agreed-upon amount. This increase typically becomes effective one month after the completion of the work.

Advantages of the Pagdi system:

a) Legitimacy under the Maharashtra Rent Control Act, 1999, providing legal protection for both landlords and tenants.

b) Lower rents compared to current market rates in major metropolitan cities like Mumbai and Delhi, offering affordability to tenants.

c) Tenant becomes a co-owner of the premises, albeit not of the land, affording a sense of ownership and stability.

d) Tenants have the rights to sublet or sell the property (tenancy rights), providing flexibility and potential financial gains.

e) Transferable tenancy rights to family members, with priority given to those who lived with the deceased tenant at the time of their demise, ensuring continuity for the family.

f) In cases of redevelopment, tenants can become co-promoters, potentially benefiting from the redevelopment process.

Disadvantages of the Pagdi system:

a) Limited ownership satisfaction as tenants are co-owners of the premises but not of the land.

b) Disproportionate ratio of lump-sum premiums paid by tenants over time, potentially leading to inequities.

c) Low rents in prime locations of metropolises may not adequately incentivize landlords for property maintenance.

d) Neglectful maintenance by landlords due to lower rentals, leaving tenants responsible for renovations and repairs.

e) Tenants may bear the financial burden of renovating and repairing the premises themselves.

f) Potential necessity for tenants to pursue property redevelopment, adding complexity and costs.

g) Additionally, recent changes in taxation laws, such as the inclusion of the Pagdi system under the ambit of GST, have implications for both landlords and tenants, particularly regarding tenancy premium earnings and tax obligations.

The functioning of the Pagdi system &?transfer of ownership

Pagdi tenancy, a traditional rental model in India, grants tenant’s partial ownership rights over the property while paying rents significantly lower than market rates. Legalized in 1999 by Section 56 of the Rent Control Act, Pagdi tenancy allows landlords or their representatives to negotiate and receive sums as per the agreement with tenants.

It's important to note that from a tax perspective, Pagdi tenants do not own the house outright but hold the right to reside in it. Therefore, any compensation received upon vacating the premises is not considered the sale price of a house but rather a transfer of the right to live in the property. Understanding these legal and tax implications is essential for Pagdi tenants navigating the complexities of property ownership and tenancy rights

The Pagdi system, a distinctive form of tenancy in India, operates on a unique premise where the tenant becomes a partial owner of the property, excluding the land. Under this arrangement, the tenant pays rent to the landlord, maintaining occupancy rights unless subletting the premises. Crucially, tenants in the Pagdi system possess the option to sell the property, albeit with a percentage of the sale proceeds allocated to the landlord, typically ranging between 30 to 50%. This mechanism allows for property transactions while ensuring landlords retain a stake in their assets. Subletting within the Pagdi system entails a profit-sharing arrangement between the original tenant (now a partial owner) and the landlord. Typically, rent proceeds are divided between them, often in a 35:65 ratio, providing landlords with additional income streams while circumventing certain tax obligations. Notably, the absence of specific regulations governing charges for No Objection Certificates (NOCs) in the Pagdi system adds a layer of ambiguity to property transactions. However, tenants navigating such transactions are typically subject to customary practices and negotiations with landlords. For instance, in a hypothetical scenario within the Pagdi system, a tenant seeking to sell their property for Rs.10 lakh would be required to remit a portion of the proceeds, ranging from 3 to 5 lakhs, to the landlord. Despite enjoying restricted rights compared to full property ownership, tenants benefit from nominal rents and associated receipts provided by the landlord.

Overall, the functioning of the Pagdi system underscores a complex interplay between landlords and tenants, characterized by shared ownership arrangements, profit-sharing mechanisms, and informal agreements that govern property transactions within this unique tenancy model

Rules for inheriting tenancy rights under the Pagdi system

Under the Pagdi system, rules for inheriting tenancy rights are governed by Section 7 (15) (d) of the Maharashtra Rent Control Act, 1999. According to this provision, the family member of a deceased tenant who was residing with the tenant at the time of their death holds precedence as the successor to inherit the tenancy. Upon the death of a Pagdi tenant, only their legal heir(s) are eligible to inherit the tenancy rights. Testamentary succession, through a Will, is not feasible since tenancy rights are specific to the tenant and cannot be transferred through testamentary arrangements. To claim the tenancy rights of the deceased tenant, the family member must provide evidence of continuous residence with the tenant at the time of their demise. This requirement ensures that only those who shared a close familial relationship and resided with the tenant have the right to succeed the tenancy. Once established as the legal heir and successor, the new tenant can request the landlord to issue a fresh rent receipt in their name. However, it's essential to note that priority for inheriting tenancy rights is given to the family member who resided with the deceased tenant, granting them precedence over other family members in the bequest of such rights over the premises

How is it relevant today?

Currently, numerous micro-markets of Mumbai, Kolkata, and Delhi practice the Pagdi system and it has been predicted that over 7.5 lakh homes in Mumbai are under the Pagdi system. According to one of the official reports, Mumbai has around 19,642 old buildings where the Pagdi system of renting exists. Areas such as Colaba, Worli, Dadar, Mahim Fort, Parel, Lalbagh, Sewri, Warden Road, and Peddar Road have a considerable amount of tenancy of Pagdi dwellers.

Pagdi Properties: Can Landlords Kick Out Tenants on a Whim?

In the Pagdi system, landlords cannot evict tenants arbitrarily. They can only do so for specific reasons allowed under the law. The following are some of the reasons for which a landlord can evict a tenant in the Pagdi system:

·???????? Non-payment of rent by the tenant: If the tenant fails to pay the rent on time, the landlord can initiate eviction proceedings against them.

·???????? Subletting of the property: If the tenant sublets the property without the landlord’s permission, the landlord can evict them.

·???????? Illegal activities: If the tenant engages in illegal activities on the property, the landlord can evict them.

It is important to note that the landlord must follow the due process of law when evicting a tenant. They must serve a notice to the tenant and follow the procedures laid down in the Maharashtra Rent Control Act, 1999.

Passing on the Pagdi Property: Who Gets to Call the Shots?

In the intricate web of the Pagdi system, the intertwining of property ownership and tenancy rights raises complex questions about who holds the authority over the fate of the premises. Here are the key scenarios where the transfer of ownership and tenancy rights come into play:

a)????? Inheritance: Upon the demise of the original tenant, their heirs have the opportunity to inherit both the property and the tenancy rights associated with it. This succession ensures continuity within the family lineage, albeit with legal formalities to be observed.

b)????? Sale: The tenant holds the prerogative to sell their tenancy rights to a third party. However, the landlord enjoys a crucial right of first refusal, granting them the option to purchase the property before it is offered to any other prospective buyer. This provision safeguards the landlord's interests in the property.

c)?????? Redevelopment: In the event of redevelopment, the landlord holds the responsibility to provide alternative accommodation to the tenant within the new building. The tenant retains the autonomy to accept or reject the offered accommodation. Should the tenant decline the offer, the landlord is obligated to provide compensation, ensuring fair treatment during the redevelopment process.

Navigating these intricacies demands a nuanced understanding of legal nuances and expertise. Given the potential complexities involved, seeking legal counsel is imperative to ensure compliance with relevant regulations and safeguard the interests of both landlords and tenants. In essence, the transfer of ownership and tenancy rights within the Pagdi system is a multifaceted process, characterized by legal intricacies and considerations that require careful navigation to uphold the rights and responsibilities of all parties involved.

Pagdi system and challenges of redevelopment

Recent notifications from municipal authorities, like BMC, have expanded eligibility for new flats in redeveloped buildings to Pagdi tenants in non-cessed buildings predating June 1996. Tenants are advised to engage with landlords to clarify any eviction notices, especially if they have paid rent and possess rent receipts, as they may be entitled to a share in the redeveloped property.

However, the Pagdi system faces challenges, particularly in redevelopment. Many properties under this system are old and rundown, necessitating urgent redevelopment to ensure occupants' safety and well-being. Redevelopment within the Pagdi framework requires navigating legal, financial, and socio-cultural complexities.

Efforts towards Pagdi system redevelopment demand a comprehensive approach, involving collaboration among landlords, tenants, regulatory authorities, and developers. Balancing tenant rights preservation with modernization is a multifaceted challenge, requiring prioritization of tenant welfare and inclusion in decision-making processes.

Redevelopment initiatives should aim for sustainable solutions, integrating environmental considerations and community engagement. Leveraging innovative urban planning strategies and technology can mitigate adverse impacts and enhance living quality for Pagdi tenants.

While the Pagdi system embodies tradition and socio-economic dynamics, its redevelopment is imperative for urban renewal. By fostering collaborative and inclusive approaches, stakeholders can navigate the complexities, ushering in safety, prosperity, and sustainability for all involved parties.

Redevelopment of pagdi buildings in Mumbai

The redevelopment of Pagdi buildings in Mumbai represents a blend of historical legacies and modern complexities. Originating as a tax evasion mechanism during British rule, the Pagdi-kiraydar system evolved into a distinctive property ownership model, impacting property transactions in post-independence India. Under this system, tenants acquire partial ownership of premises, maintaining rent payments to landlords. Despite offering stability for some tenants, disparities in rent highlight the need for equitable reforms.

Efforts towards Pagdi property redevelopment demand a nuanced understanding of legal frameworks, historical contexts, and socio-economic realities. The Maharashtra government's introduction of incentives, like discounted additional Floor Space Index (FSI) for developers in 2019, aimed at revitalizing aging infrastructure and addressing housing needs. However, concerns about potential revenue loss for the BMC underscore the need for careful economic consideration.

Guidelines established by the BMC ensure that tenants in non-cessed buildings before June 13, 1996, are entitled to new flats in redevelopment projects, promoting continuity and fairness in housing policies. Government initiatives integrate legal frameworks and tenant protections to facilitate sustainable urban development and affordable housing solutions. Incentivizing programs offer increased FSI incentives for developers, fostering affordable housing development and encouraging participation in redevelopment initiatives.

Overall, the redevelopment of Pagdi properties in Mumbai aims to balance the interests of tenants, landlords, and developers while ensuring equitable outcomes. Through collaborative efforts and comprehensive strategies, stakeholders navigate the complexities inherent in Pagdi system redevelopment, ushering in a new era of safety, prosperity, and sustainability for all involved parties.

Redevelopment of Pagdi properties in Mumbai entails a structured process guided by specific regulations and incentives aimed at balancing the interests of tenants, landlords, and developers.

Section 33 (1) (A) of the Pagdi system redevelopment rules permits redevelopment with the consent of 70% of the tenants in a building, ensuring tenant participation in decision-making processes.

Additionally, Section 33 (7) mandates the payment of a percentage of sale proceeds to landlords in redevelopment scenarios, providing financial compensation for their interests.

Section 33 (9) outlines procedures for obtaining landlord consent, ensuring transparency and adherence to legal requirements.

The Maharashtra Rent Control Act of 1999 offers benefits, including discounted Floor Space Index (FSI), for developers redeveloping Pagdi properties in Mumbai. BMC guidelines prioritize tenants in non-cessed buildings before June 13, 1996, for new flats, ensuring fairness. Incentivizing programs provide developers with increased FSI incentives for redeveloping 2 to 5 Pagdi properties, fostering affordable housing. Government initiatives aim to secure Pagdi system rights and ownership, aligning with tenant protections under the Real Estate (Regulation and Development) Act, 2016 (RERA). By channeling taxes to MHADA, redevelopment responsibilities are streamlined, enhancing standards. In essence, Pagdi property redevelopment integrates legal frameworks, tenant protections, and government incentives to foster sustainable urban development and affordable housing, balancing stakeholder interests for equitable outcomes.

Tenants in non-cessed bldgs. to become flat owners after redevelopment

It is imperative to identify eligible tenants to safeguard their rights and ensure their willingness to vacate premises for redevelopment without apprehension. The guidelines also prevent landlords from exploiting the scheme by introducing fictitious tenements to amplify their incentives. Landowners are entitled to half of the area required for tenant rehabilitation to recover construction costs and derive profit, as outlined in the new DCPR regulations.

Furthermore, tenants are assured of receiving more space than their current occupancy, ranging from a minimum of 300 sq ft. to a maximum of 1,292 sq ft., free of cost. In instances where the allotted area exceeds the maximum limit, tenants must cover the construction costs for the additional space. Additionally, if two to five tenanted buildings undergo joint redevelopment, developers receive a 60% incentive Floor Space Index (FSI), while amalgamation of more than five plots attracts a 70% incentive FSI.

To initiate redevelopment, landlords must secure consent from at least 51% of the total residents and ensure the rehabilitation of all existing tenants in the new structure. These guidelines prioritize tenant welfare and aim to streamline the redevelopment process while fostering equitable outcomes for all stakeholders involved.

Pagdi Property & Redevelopment Complexities

a) Can a landlord redevelop a Pagdi system property without the consent of the tenants? Under the Pagdi system, tenants typically have rights and protections, and landlords cannot proceed with redevelopment without tenant consent. However, exceptions may exist based on specific circumstances and local regulations.

b) What are the legal implications of redevelopment in Pagdi system properties? Redevelopment in Pagdi system properties involves navigating tenant rights, landlord obligations, local regulations, and potential disputes. Seeking legal guidance ensures a legally sound and smooth process.

c) What steps should a landlord take to initiate the redevelopment of a Pagdi system property? Landlords initiating redevelopment typically need tenant consent, compliance with regulations, permits, and addressing legal or contractual obligations. Legal experts can help fulfill these requirements effectively.

d) How can tenants protect their rights during the redevelopment of Pagdi system properties? Tenants can protect their rights by staying informed, seeking legal advice, and collaborating with other tenants. Legal representation can advocate for tenant rights effectively.

e) What are the potential challenges and risks associated with the redevelopment of Pagdi system properties? Challenges may include disputes, non-compliance, financial implications, and delays. Legal professionals help anticipate and address these challenges effectively.

f) What legal documents are involved in the redevelopment of Pagdi system properties? Legal documents may include redevelopment agreements, consent forms, leases, permits, and contracts. Reviewing with legal guidance is essential.

g) How can landlords and tenants resolve disputes related to the redevelopment of Pagdi system properties? Disputes can be resolved through negotiation, mediation, arbitration, or legal recourse. Legal counsel helps navigate and resolve disputes fairly and legally.

Income Tax on “Transfer”

What are the types of Transfer in relation to Capital Asset as per Income Tax?

Section 2(47) provides an inclusive definition of “transfer”, in relation to a capital asset.

(i) The sale, exchange or relinquishment of the asset; or

(ii) The extinguishment of any rights therein; or

(iii) The compulsory acquisition thereof under any law; or

(iv) The owner of a capital asset may convert the same into the stock-in-trade of a business carried on by him. Such conversion is treated as a transfer; or

(v) The maturity or redemption of a Zero Coupon Bond; or

(vi) Part-performance of the contract: Sometimes, possession of the immovable property is given in consideration of part-performance of a contract; or

(Vii) Lastly, there are certain types of transactions that have the effect of transferring or enabling the enjoyment of the immovable property. Even the power of attorney transactions is covered.

Explanation 2 to section 2(47) clarifies that ‘transfer’ includes and shall be deemed to have always included:

1. Disposing of or parting with an asset or any interest therein, or

2. Creating any interest in any asset in any manner whatsoever

- Directly or indirectly, - absolutely or conditionally, - voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise.

The transfer of tenancy rights, commonly known as Pagdi, is considered a capital asset under the Income Tax Act, making any gains from such transfers subject to capital gains tax. The tax liability depends on whether the gains are classified as long-term or short-term, determined by the holding period of the asset.

For transfers occurring after three years from the acquisition date, the profits are treated as long-term capital gains (LTCG). In such cases, the cost of acquisition is adjusted based on the Fair Market Value (FMV) as of April 1, 2001, with indexation applied. LTCG is taxed at a rate of 20%, plus applicable surcharge and Cess.

To mitigate tax liability on LTCG, individuals can invest the net sale proceeds in purchasing or constructing a residential property within specified timelines under Section 54F. However, partial investments result in proportionate deductions. It's crucial to note that exemptions under Section 54 and Section 54EC, applicable to the sale of residential houses and specified bonds, respectively, are not applicable to Pagdi transfers.

As regards Redevelopment of Pagdi Flats, you are covered under the definition of “Transfer" and thus liable to pay LTCG, you can seek benefit under section 54F and get the whole of LTCG as exempt. Care should be taken that possession of redeveloped flat is received within 36 months. ?

Furthermore, the cost of acquisition for tenancy rights inherited through gift, will, or inheritance is determined based on the previous owner's cost. If the tenancy right was acquired before April 1, 2001, the actual cost or FMV as of that date is considered, with adjustments for inflation and expenses incurred for asset improvement.

Given that Pagdi rights are typically held for decades, the sale of such rights in redeveloped properties constitutes LTCG. The provisions of Section 112 of the Income Tax Act apply, with taxation at a rate of 20% plus surcharge and Cess.

It's advisable to seek professional tax advice from an expert CA to accurately compute tax liabilities and optimize deductions when dealing with the transfer of Pagdi rights and subsequent capital gains.

Section 55 | Income Tax Act, 1961 | Acquisition & Improvement Cost

Where the capital assets has become property of the assessee before 01.04.1981, then the cost of acquisition of such an asset will be the actual cost to the assessee or fair market value as on 01.04.1981 at the option of the assessee.

The provision of section 55 as existed up to AY 2017-18?provided that for computation of capital gain, an assesee shall be allowed deduction for cost of acquisition of the asset and also cost of improvement, if any. However, for computing capital gains in respect of an asset acquired before 01.04.1981, the assessee has been allowed as option of either to take the fair market value of the asset as on 01.04.1981 or the actual cost of the asset as cost of acquisition. The assessee was also allowed to claim deduction for cost of improvement incurred after 01.04.1981 if any.

As the base year for computation of capital gains has become more than three decades old, assessee were facing difficulties in computing the capital gain in respect of a capital asset, especially immovable property acquired before 01.04.1981 due to non-availability of relevant information for computation of fair market value of such asset as on 01.04.1981.

In order to revise the base year for computation of capital gains, section 55 of the Act has been amended by the Finance Act, 2017 from the assessment year 2018-19 so as to provide that the cost of acquisition of an asset acquired before 01.04.2001 shall be allowed to be taken as fair market value as on 01.04.2001 and cost of improvement shall include only those capital expenses which are incurred after 01.04.2001.

Consequential amendment has also been incorporated in section 48 so as to align for provisions relation to cost of inflation index to the new base year.

Accordingly from assessment year 2018-2019

(a)??? “ Indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost of Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 01.04.2001, whichever is later;

(b)?? Cost of improvement in relation to any asset other than capital asset being goodwill of a business or right to manufacture, produce or process any article or thing or right to carry on any business or profession shall be determined as under, where the capital asset become the property of the previous owner or the assessee before 01.04.2001 means all expenditure of a capital nature incurred in making any addition or alterations to the capital asset on or after the said date by the previous owner or the assessee. (c) Cost of acquisition in relation to any asset other than specified under section 55(2)(a) to 55(2) (ab) shall be determined as under:

(i)????????????????? Where the capital asset became the property of the assessee before the 01.04.2001 means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on 01.04.2001 at the option of the assessee.

(ii)??????????????? where the capital asset became the property of the assessee by any of the modes specified in sub section (1) of section 49, and the capital asset became the property of the previous owner before the 01.04.2001 means the cost of capital asset to the previous owner or the fair market value of the asset on the 01.04.2001 at the option of the assessee

A. Option to assessee to treat actual cost or fair market value as on 01.04.2001. Section 55(2)(b)(i) provides that where the capital asset has become property of the assessee before 01.04.2001, then the cost of acquisition of such an asset will be the actual cost to the assessee or fair market value as on 01.04.2001 at the option of the assessee. The assessee can opt for either value.

B. Other option to substitute the cost of acquisition of capital asset acquired from previous owner who acquired the same before 01.04.2001. Section 55(2) (b) (ii) provides that where the capital asset, which became the property of the assessee by of the modes specified U/s 49(1) and the previous owner as defined in section 49 had acquired it before 01.04.2001, then the cost of acquisition of such asset, in the hand of assessee, will be the cost to the previous owner or fair market value as on 01.04.2001 at the option of the assessee.

The assessee can opt for either value as the cost of acquisition of the assets.

Cost of Acquisition as per section 55

Intangible Assets.

1. Self-Generated Capital Assets.

a) Tenancy Right.

b) Route Permit. c) Loom Hours. d) Trade Mark. e) Brand Name

All the above self-generated capital assets Cost of Acquisition is NIL.

(In case of acquire then cost of acquisition shall be considered.)

Other Asset: Land, Building, Gold, purchase before 2001-2002 cost of acquisition will be fair market value of assets. Land, Building, Gold, purchase after 2001-2002 cost of acquisition will be actual cost of assets.

Section 49(1) in the Income Tax Act, 1961

(1)Where the capital asset became the property of the assessee—

(i) On any distribution of assets on the total or partial partition of a Hindu undivided family;

(ii) Under a gift or will;

(iii) (a) by succession, inheritance or devolution, or

(b)on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, or

(c) On any distribution of assets on the liquidation of a company, or

(d) Under a transfer to a revocable or an irrevocable trust, or

(e)under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (viab) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vicc) or [clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf) or] clause (xiii) or clause (xiiib) or clause (xiv) of section 47;

(iv)Such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969,

The cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Explanation.—In this sub-section the expression "previous owner of the property" in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section.

Conclusion: The Pagdi system, rooted in the pre-independence era, served its purpose during times of rent control necessity. However, as India progresses, the system's relevance and effectiveness have come into question. While it provided affordable housing solutions in the past, the current landscape demands a reevaluation of its place in our society.

Over the decades, both landlords and tenants have voiced concerns and faced disputes within the Pagdi system. Despite legislative interventions, the system's flaws persist, highlighting the need for comprehensive reform or potential abolition.

Today, alternative tenancy arrangements and housing schemes offer more flexible and equitable solutions for both parties. Lease agreements, leave and license arrangements, and housing loan schemes provide avenues for negotiation and ownership that align better with modern needs.

In light of these legal intricacies and the evolving regulatory landscape, stakeholders involved in Pagdi properties must exercise caution, seek expert guidance, and ensure compliance with relevant laws to safeguard their rights and interests effectively.?

?It's evident that the Pagdi system falls short in balancing the interests of landlords and tenants in contemporary society. Thus, there's a pressing need for either substantial reforms to modernize the system or its outright abolition. As we navigate the complexities of housing and property rights in the 21st century, it's imperative to prioritize solutions that ensure fairness, affordability, and sustainability for all stakeholders involved.

CA Harshad Shah, Mumbai [email protected]