Krishnakant Sharma Vs ITO (ITAT Mumbai)
Builder Pays, Assessee Gains, Revenue Fails – Hardship Compensation Not Income; Hardship Today, Tax Tomorrow? No! Only Capital Adjustment Says ITAT; Hardship Compensation is not Income- Redevelopment Payout is Capital, Not Taxable!
Summary: The ITAT Mumbai ruled that the “hardship compensation” cash amount received by a member of a co-operative housing society from a developer during a property redevelopment scheme is a capital receipt and therefore not taxable as income at the time of receipt. The assessee, having surrendered her old flat to receive a new one plus this compensation for displacement and inconvenience, argued the payment was intrinsically linked to the surrender of a capital asset. The Assessing Officer and CIT(A) had incorrectly treated the payment as a revenue receipt, akin to a taxable dividend. The Tribunal, relying on Supreme Court principles and judicial precedents in similar redevelopment cases, clarified that the payment compensates for the loss of possession and enjoyment of property, which are capital in nature. While the receipt must be used to reduce the cost of acquisition of the new flat for future capital gains computation, it does not constitute taxable income under the head “Income from Other Sources” in the year of receipt. The ITAT overturned the lower authorities’ orders, allowing the assessee’s appeals for both assessment years.
Analysis:
Assessee, a member of a co-operative housing society, surrendered her old flat to a developer under a redevelopment agreement. In return, she was to receive a new redeveloped flat & an additional cash amount termed “hardship compensation” to cover displacement, inconvenience, & temporary loss of residence during redevelopment.
AO treated this hardship compensation as taxable income, alleging that the society received money from the developer & “distributed” it to members like a dividend, making it a revenue receipt taxable under “Income from Other Sources”. CIT(A) upheld this view.
Before the ITAT, Assessee argued that the compensation was not revenue, but rather a capital receipt, as it was intrinsically linked to the surrender/modification of a capital asset (the flat). The payment was not for services, nor for any commercial activity, but purely for loss of possession & hardship. Reliance was placed on the co-ordinate bench ruling in Kushal K. Bangia v. ITO (2012) & recent decision in Kunnama V. Balakrishnan (2023), where identical compensation in redevelopment cases was held to be capital in nature & not taxable.
Tribunal carefully analysed the legal position. It reiterated that only revenue receipts are taxable unless a specific provision deems a capital receipt as income. Section 2(24) includes capital gain only if chargeable under section 45, & even the Department did not treat the receipt as capital gains. Tribunal highlighted Supreme Court decisions stating:
- The nature of receipt must be judged in the hands of the recipient, not the payer.
- Capital compensation cannot be taxed as income unless explicitly covered.
ITAT noted that Assessee’s ownership rights were affected, & the payment was compensation for discomfort, displacement, & loss of enjoyment of property-all capital in character. Thus, hardship compensation is not revenue, nor “dividend,” & cannot be taxed as income.
However, following the principle laid down in earlier cases, the Tribunal clarified that such compensation will reduce the cost of acquisition of the flat & will be considered when computing capital gains on future sale, but is not taxable at the time of receipt. Finding the issue squarely covered by precedent & applying judicial consistency, the ITAT overturned the orders of AO & CIT(A) & allowed the appeals for both assessment years.
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