Compensation received from developer under Redevlopment agreement by member of Hsg. Society is not an Income Kushal K. Bangia vs. ITO (ITAT Mumbai)

I.T.A No.2349/ Mum/2011

Assessment year: 2007-08

Facts of the case:

• The assessee is member of Hsg Society "Vile Parle Ramesh CHS Ltd" 

• The said society along with its members has entered in redevelopment agreement wherein each member was to hand over vacant possession of their flats to developer
• The said developer was in turn to provide each members the following :-

            -  New flat with additional area  

            - Displacement compensation of Rs.34,000/- per month till members were given possession in new flat                                                 

            -Additional compensation referred to as Cash compensation Rs.11,75,000/- treating the same as Casual income 

• The Ld. AO, interalia made an addition  on account of :-  
• -Estimated  value of additional area of flat received
• -Additional compensation (cash compensation received) Rs.11,75,000 
• CIT (A) gave partial relief to assessee by deleting addition made by Ld AO on account of Estimates value of additional area of flat received and, upheld AO's addition of additional compensation Rs.11,75,000/-
• Aggrieved, assessee made further appeal to ITAT, Mumbai

Held as under;

In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes “any capital gains chargeable under section 45”, and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon’ble Supreme Court in the case of Padmraje R. Kardambande vs CIT (195 ITR 877) has observed that “..,, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act….” This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon’ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), “the burden is on the revenue to establish that the receipt is of revenue nature” though “once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish”. The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of payment in the hands of payer also ends up determining it’s nature in the hands of the recipient. As observed by Hon’ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), “it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer”. The consideration for which the amount has been paid by the developer are, therefore, not really relevant in determining the nature of receipt in the hands of the assessee. In view of these discussion, in our considered view, the receipt of Rs.11,75,000 by the assessee cannot be said to be of revenue nature, and, accordingly, the same is outside the ambit of income under section 2(24) of the Act. However, in our considered opinion and as learned counsel for the assessee fairly agrees, the impugned receipt ends up reducing the cost of acquisition of the asset, i.e. flat, and, therefore, the same will be taken into account as such, as and when occasion arises for computing capital gains in respect of the said asset. Subject to these observations, grievance of the assessee is upheld.

5. In the result, the appeal is allowed in the terms indicated above.