In Mumbai suburbs, re-development of existing old buildings have become a big real estate activity as the Government permits additional floor area to be constructed which ranges from 2 times to 2.7 times of the plot area. To make the proposal lucrative, the developer offers existing member some additional area in the re-constructed area alongwith lump-sum money termed as corpus or compensation and also rent for a specific construction period.


Is this compensation/ rent taxable?


It has been a raising issue whether such compensation and rent received by a member of society is taxable or not under the Tax Act. The tax authorities have been taxing such receipts considering the same as taxable capital receipts, while the members’ contention has been that this compensation is towards hardships which the flat owner faces owing to the re-development activity. Thus, such compensation is in the nature of capital receipts which is not taxable.

In the recent judgement, the Mumbai Income Tax Appellate Tribunal in the case of Jitendra Kumar Soneja v/s. ITO held following the earlier judgment of Tribunal in the case of Kushal K. Bangya v/s. ITO that the compensation received by the owner of the resident flat in the society building is not taxable as the same is related to the Capital Asset and accordingly the same is outside the ambit of income u/s.2(24) of the Income Tax Act. It further held that, though the Capital receipt is not taxable as income, it shall end up reducing the cost of acquisition of flat and the same will be taken into account as and when the property is sold or transferred. Further, the Tribunal also held that any amount paid by the Developer towards rent shall be exempted only to the extent the same is spent towards paying rent till the owner has moved back to his original house. Any excess of receipt over the rent expense shall be taxable as income from other sources.

The judgment given by the Honorable Tribunal has tried to settle a controversial issue of taxation of compensation, but it is not going to be very easy as tax authorities will definitely challenge such decision in the Higher Courts. So, one wish the issue is somehow decided by the Higher Courts so as to give absolute clear map for taxation of such compensation received by the Flat owner.

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