Case summary, Income Tax

ITAT Mumbai Decides: Can amount provided in lieu of re-development of a property be treated as capital gains in the hands of the assessee?

Issue: Whether CIT(A) erred in confirming the addition of INR 53,50,500 by the AO?

Case name: Pradyot B. Borkar v. ACIT


  • The assessee filed his return of income declaring a total income of INR 32,30,000.
  • While assessment, the AO noticed that the assessee has offered a long term capital gain of INR 31,12,638 arising from the sale of a residential flat and has simultaneously claimed deduction under Section 54 of the Income Tax Act.

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Forum: Mumbai ITAT


Lawyers (Revenue): Jothilakshmi Nayak

Applicable Sections: Section 54

Cases relied on

  • The assessee was owning a flat which was given for redevelopment under a scheme and he was entitled to receive a new residential flat along with INR 53,80,500. This sum comprised of amounts paid for Compensation for non–adherence by the redeveloper to the earlier agreed terms, Beneficial right and interest in corpus and income of the society and nuisance annoyance and hardship that will be suffered by the members during the development and moving of shifting cost.
  • The AO was of the view that the amount is paid towards compensation and it is not in any way related to transfer of capital asset giving rise to capital gains and hence does not qualify for exemption under the same.
  • The AO hence added the sum of INR 53,50,500 to the taxable income under the head `Income from other Sources’.
  • The assessee appealed to the CIT(A) against the AO’s order. The assessee argued before the CIT(A) that INR 53,50,500, is assessable under the head “Long Term Capital Gain”, and that it is in the nature of capital receipt, hence, not liable to tax. Therefore, has to be reduced from the cost of the new flat. The CIT(A) rejected the assessee’s submissions and confirmed the addition made by the AO.

Revenue’s Arguments

  • As per the terms of the development agreement between the housing society and developer, any capital gain accruing as a result of redevelopment is to be assessed at the hands of the housing society.
  • The compensation received by the members of housing society is in no way connected to the accrual of capital gain and is a completely distinct and separate payment made to the members due to certain other factors.
  •  It is not in the nature of capital receipts.

Assessee’s Arguments

  • The amount of INR 53,50,500, was received in connection with the handing over of the old flat for redevelopment in lieu of which the assessee received a new flat. Hence, it is connected to the transfer of capital asset and chargeable to capital gain.
  • Even if the revenue treats the amount of INR 53,50,500 as compensation, the same needs to be treated as capital receipts not chargeable to tax, hence, has to be reduced from the cost of the new flat.
  • The assessee relied on the following judgements in support of his arguments:
    • Kaushal K. Bangia v/s ITO
    • Jitendra Kumar Soneja v/s ITO
    • Rajnikant D. Shroff v/s ACIT

Tribunal’s Judgement

  • The amount of INR 53,50,500 was received by the assessee only because of handing over the old flat for the purpose of redevelopment and is integrally connected with the transfer of the old flat to the developer. Hence, the amount of INR 53,50,500, has to be treated as income under the head “Capital Gain”.
  • The alternative claim that the amount is in the nature of capital receipt, hence, not taxable would not be contested.
  • Thus, the appeal is partly allowed.

Download the entire case here

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