At present, construction work is going on at a fast pace on about 11,125 building sites in Mumbai. A large part of this pertains to redevelopment projects – renovation of existing residential or commercial property for various reasons. To be sure, such projects are being taken up in other parts of the country as well. To facilitate redevelopment and to compensate flat owners for the hardship faced by them during such work, a developer may offer them compensation in the form of rent to ensure alternative accommodation for the duration of the project. Is. This compensation can be given either as a lump sum or as monthly payments. Should this amount be treated as taxable income by the recipient?
Let us take a hypothetical example of Ravi, who lives in a flat in Shreeji Co-operative Society Limited. The society decides to opt for redevelopment and hands over the project to Builder A. The latter provides optional accommodation fee. 20,000 per month to Ravi. Ravi shifts to another flat, but the rent here is 18,000. need balance 2,000 per month to be added to his taxable income? Let us consider another example. Builder A provides alternate housing charges and hardship allowance to Varsha, who lives in the same society, as a lump sum amount 10 lakhs. Varsha, however, moves into her parents’ flat and does not use the amount for the above purpose. What would be the tax implications for Varsha?
As per the Income Tax Act, all revenue receipts and certain capital receipts specifically mentioned in the Act are taxable. Therefore, we need to first assess whether this compensation for alternative accommodation, hardship allowance, etc., is revenue or capital gain under income tax laws.
As the property has been given for redevelopment, compensation is paid by the builder to the flat owner on account of hardship caused by 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 for displacement in terms of the development agreement is not a revenue receipt. This constitutes capital gain and hence not liable to tax. This understanding has been confirmed by a recent order of the Income Tax Appellate Tribunal (ITAT) – Mumbai in the case of Ajay Parasmal Kothari. Thus, in the above example, Ravi will not have to add the rent received or any part thereof to his taxable income. Irrespective of the fact whether it was used for the purpose of alternate accommodation or not, it would be treated as capital gain and thus not taxable. At the same time, Varsha will also not have to pay any tax on the lump sum amount received from the builder.
Let us take another example. Rama has a commercial shop in the Ramesh Co-operative Society. The cooperative society opts for redevelopment with Builder B. The latter provides for alternative accommodation fee and hardship allowance in lump sum 20 lakhs to Ram. Whether it should be added to the taxable income of Rama? Similarly, Pammi had given her flat on rent in the same society. Builder B offers optional monthly housing fee and hardship allowance 20,000. Should Pammi pay tax on this amount?
The compensation given by the builder on account of hardship caused to the owner of the property due to displacement of occupants, alternative accommodation etc. is in the nature of capital gain. Therefore, both Rama and Pammi will not have to pay any tax on the lump sum or monthly amount received from the builder.
As a result of the recent decision of ITAT in the case of Ajay Kothari, we can conclude that irrespective of the fact whether the property is residential, commercial, self-occupied or let, it will be treated as capital gain and hence Type will not be taxable. , However, this is a vague area which can be challenged by the assessing officer in the courts.
Nitesh Buddhadev is the founder of Nimit Consultancy.
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