Tax relief on builder-paid rent in redevelopment projects

(This story originally appeared in on Apr 27, 2023)

MUMBAI: The Income-Tax Appellate Tribunal’s (ITAT) Mumbai bench recently held that the rental compensation received from a builder due to a redevelopment project is not taxable in the hands of the former flat owner. ITAT adopted this stand even as the taxpayer, the former flat owner, had not taken another accommodation on rent but had moved in with his parents.

Typically, when a building goes in for redevelopment, the flat owners are either provided with alternate accommodation by the builder or paid a monthly rental compensation. The ITAT held the rental compensation is a ‘capital receipt’ and not a ‘revenue stream of income’, thus it is not taxable in the hands of the former flat owner. This order followed a similar order passed by the Mumbai bench earlier.

This case of Ajay Parasmal Kothari was picked up for scrutiny under the computer-aided scrutiny selection mechanism for the financial year 2012-13. During the course of the scrutiny, the income-tax officer observed that Kothari had received Rs 3.7 lakh from the builder.
Kothari had a flat in a cooperative housing society in Malad and the building had gone in for redevelopment. This sum of Rs 3.7 lakh comprised the monthly rental compensation received for alternate accommodation. The I-T officer further observed the taxpayer had not utilised this sum for an alternate accommodation. Thus, he proceeded to treat it as taxable income, under the head ‘income from other sources’. In other words, this meant the sum would be taxable at the applicable slab rate. The commissioner (appeals) upheld this course of action, which led to Kothari filing an appeal with ITAT.

The tax tribunal noted while the taxpayer had adjusted and lived with his parents, he still faced hardship by having to vacate his flat for redevelopment. Relying on an earlier decision taken by the tax tribunal, in this case also the ITAT held the compensation for rent was not taxable. Incidentally, the ITAT also condoned a delay of 1,566 days in filing an appeal with the ITAT on the grounds that the taxpayer was not rightly guided by his earlier tax counsel.

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