'Compensation for redevelopment not taxable'

MUMBAI: Compensation received by a cooperative housing society flat owner from a redeveloper cannot be taxed in his hands, according to a recent order of the Income tax Appellate Tribunal's (ITAT) Mumbai bench.
It noted that this compensation was towards the hard ship which the flat owner would face owing to the redevelopment. It held that such compensation should 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.
The landmark order will help taxpayers facing similar litigation. Management committees of cooperative societies 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 received by the flat owner for payment of rentals during the redevelopment work 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 owner and the applicable I-T slab rate would apply (30% plus surcharge and cess for income above Rs 10 lakh). 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 200607, the I-T officer treated it as “undisclosed income“ liable to I-T. Having lost the case at the Commissioner of I-T (Appeals) 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.