Taxation of Alternate Accommodation during Redevelopment – Simplified

What is Redevelopment?

Redevelopment refers to the process of reconstruction of the premises by demolition of the existing structure and construction of new structure in its place. This is done by utilizing the potential of the land by exploiting additional TDR, higher FSI, etc.

What is alternate accommodation?

Monthly Rental compensation that the builder pays to the homeowners during the property redevelopment period to the Unit Holders i.e Flat Holders, is called alternate accommodation.

Taxability on receipt of alternate accommodation received?

Since a long period of time there has been an ambiguity on the issue whether the amounts received is a capital receipt or revenue receipt and whether it will be taxable or exempt in the hands of the Flat Holders.

As per recent judgement of Income-Tax Appellate Tribunal (ITAT) – Mumbai in the case of Ajay Parasmal Kothari held that the rental compensation received by Unit Holders / Flat Holders is on account of hardship faced by Flat owner and hence it is a capital receipt and NOT TAXABLE in the hands of Flat holders.

It is important to note that it is NOT MANDATORY whether the flat owner has actually taken another accommodation on rent.

Short Summary of the Case of Mr Ajay Kothari

 Mr Ajay Kothari had a flat in a society in Malad, Mumbai and that building had gone into redevelopment. He had received Rs. 3.7 lakhs as alternate accommodation. The I.T Officer observed that Mr. Ajay Kothari had not utilised the alternate accommodation received from builder but he lived with his parents during the period and not paid any rent.

ITAT noted that even if Mr. Ajay Kothari had adjusted and lived with his parents and not paid any rent, he still faced hardship by vacating his flat for redevelopment and thus whole amount received as alternate accommodation is NOT TAXABLE.

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