Redevelopment and Unit holders – Income Tax Implications

In recent past there has been an increasing trend of redevelopment of old buildings in the Metro cities of India. The structure works in the manner that the builders takes the project of the particular building, wherein his liability is to demolish the old structure and construct the new structure,  a unit in the new structure will be given to all the existing unit holders with some additional benefit in form of larger unit area as compared to existing area of the Unit. Further, In addition to the above benefit, the builder also gives the compensation in form of Corpus fund, which is the hardship compensation during the period of Redevelopment further builder also provides with the monthly rentals which the unit holder will have to pay for the displacement period (Construction period). At times it is also observed that unit holders are provided with transportation charges and also the brokerage to get the alternative accommodation during displacement period.

Since a long period of time there has been an ambiguity on the issue whether the above amounts received will be taxable or exempt in the hands of the Unit Holders.

Now Let’s discuss each and every receipt individually to check its taxability.

1. Corpus Fund Received (Generally Lumpsum amount):

Corpus fund is a lumpsum amount paid by the builder to the unit holder in form of hardship compensation. It is a well settled principal in Income Tax Law that the capital receipts are not liable to tax. So, the question arises as to whether this compensation received will be treated as Capital receipt or Revenue Receipt in the hands of the Unit Holder?

There are plethora of Judgements by the Hon’ble ITAT, Mumbai Stating that such receipt would not be taxable in the hands of the Assessee. However, the amount received would be reduced from the cost of acquisition, whenever the occasion to compute the capital gain would arise in future, the citation of the case laws are produced below:

a. Kushal K Bangia vs. Income Tax Officer 21 (1) (2), I.T.A. No. 2349/Mum/2011.

b. Jitendra Kumar Soneja vs. Income Tax Officer Ward 6 (3) (3), I.T.A No. 291/Mum/2015.

c. Rajnikant D. Shroff, Mumbai vs. Asstt. Commissioner of Income Tax, Central Circle – 38, I.T.A. No. 4424/Mum/2014.

d. Pradyot B. Borkar vs. Asstt. Commissioner of Income Tax, Circle – 19 (3), Mumbai, I.T.A. No. 4070/Mum/2016.

2. Monthly Rentals Received during the period of displacement:

Monthly rentals are the amount paid by the builder during the displacement period for alternative accommodation to each and every unit holder. Hon’ble ITAT, Mumbai had an occasion to consider the above issue in case of Jitendra Kumar Soneja vs. Income Tax Officer Ward 6 (3) (3) (Supra), wherein the Hon’ble bench held that the rental compensation received would be allowed as deduction to the extant the same is paid for alternative accommodation and the balance would be taxable under the head Income from other sources.

3. Transportation, brokerage and Other Charges:

It is also noticed that, many a times builders provide for the transportation, brokerage and other charges, to the unit holders for displacement. All such expenses and charges received would also be allowed as deduction to the extant the actual expenditure has been incurred for the same and the remaining amount would be chargeable to tax under the head Other Sources.

To sum up the above issues, Corpus fund received is reduced from the cost at the time of computing capital gains and not taxed at the time of receipt, further Monthly rentals, transportation charges, brokerage and other charges would be chargeable to tax only if the same is not expended.