INTRODUCTION
As the Title of the article suggests, it is not the Capital Gains Tax under the Income Tax Act that has been copiously dealt with in section 54 of the Income Tax Act that can be referred to the Act.
But, the crux of this article is to examine whether redevelopment compensation paid by the builder on account of hardship faced by the owner of a property due to displacement of the occupants, alternate accommodation, etc., is in the nature of capital receipt taxable.
Irrespective of the fact whether it was utilized for the purpose of alternate accommodation or not, it will be treated as capital receipt and is thus not taxable.14-May-2023.
How do I avoid/save capital gains tax on the sale of property? As well as how to save Capital Gains Tax on the Sale of Land.
To focus on Redevelopment, the above is not dealt with here.
Adverting, to the topic on hand and focusing on it, is handled here.
On the topic on Hand
Compensation paid by the builder on account of hardship faced by the owner of a property due to displacement of the occupants, alternate accommodation, etc., is in the nature of capital receipt?
Now, the question that arises is whether to pay any tax on the lump sum or monthly amount received from the builder?
The First question that is to be addressed is whether this compensation for alternate accommodation, hardship allowance, etc. is a revenue or a capital receipt under income tax laws?
Built-up area (in sq. Ft) and Existing Carpet area (in Sq. Ft) will suitably revised as agreed to between society members and the builder.
1. Details of Hardship Compensation: will be paid normally(Rs) per sqft as agreed to in the development agreement
A) Say 20% as first installment on registration of DA.
B) Say 30% as second instalment on vacation.
C) Say 50% as third instalment on Vacation.
2. Details of transit compensation: Rent Amount say (Rs) say to be escalated/ increased by 10% every 11 months from Society Handover over Date
A) Say per month rent First 11 months.
B) Say per month rent Second 11 months.
C) Say per month rent Third 11 months.
3. Details of Shifting Charges
Only one-time shifting charges
4. Brokerage say Rs.75 per sqft based on exiting Carpet Area to be escalated by 10% every 11 months from the Society Handover Date
A) First 11 months
B) Second 11 months
C) Third 11 months
5. Is rent paid for redevelopment projects taxed?
To ease redevelopment and to pay flat owners for the hardship faced by them during such work, a developer might offer them compensation in the form of rent to ensure alternate rent to guarantee alternative space for the period of the period.
As per the Income Tax Act, all revenue receipts and certain capital receipts specially stated in the Act are taxable. Hence, we evaluate whether this compensation for alternate accommodation, hardship allowance, etc. is a revenue or a capital receipt under income tax laws.
As the property has been given for redevelopment, compensation is paid by the builder on account of the hardship faced by the flat owner due to the displacement of its occupants. The said payment is in the nature of hardship allowance/rehabilitation allowance. In such a scenario, the compensation received by the assessee towards displacement in terms of the development agreement is not a revenue receipt. It constitutes capital receipt and hence is not liable to tax. This understanding has been confirmed by a recent order by the Income-Tax Appellate Tribunal (ITAT) – Mumbai in the case of Ajay Parasmal Kothari. Thus, in the example above, the member of the society will not have to add the rent received or any part of it to his taxable income. Irrespective of the fact whether it was utilized for the purpose of alternate accommodation or not, it will be treated as capital receipt and is thus not taxable. For the same reason, will not have to pay any tax on the lump sum amount received from the builder.
Let's take another example. X has a commercial shop at A Co-operative Society. The co-operative society opts for redevelopment with builder B. The latter provides alternative accommodation charges and hardship allowance lump sum say RS. 20 lakhs to X. Should this be added to X's taxable income? Similarly, P had given her flat at the same society on rent. Builder B provides alternative monthly accommodation charges and hardship allowance of ₹20,000. Should P pay tax on this amount?
Compensation paid by the builder on account of hardship faced by the owner of a property due to displacement of the occupants, alternate accommodation, etc., is in the nature of capital receipt. So, both will not have to pay any tax on the lump sum or monthly amount received from the builder.
In a nutshell, it can be concluded that irrespective of the fact whether the property is residential, commercial, self-occupied or let out, it will be treated as capital receipt and thus not taxable.
However, this is a grey area that the tax assessing officer can challenge in the courts.
Conclusion
Experts on the line are solicited with folded hands to ponder the issue and offer their professional guidance.
Arise, Awake and Stop not till our goal is reached.
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