In redevelopment circumstances, the builder’s rent is not taxable: ITAT-Mumbai

MUMBAI: The Mumbai branch of the Income-Tax Appellate Tribunal (ITAT) recently ruled that the former apartment owner is not subject to taxation on the rental income obtained from a builder as a result of a redevelopment project. Even though the taxpayer, the previous apartment owner, had moved in with his parents instead of renting another place, ITAT took this stance.

When a building is being renovated, the owners of the flats are typically either given substitute housing by the constructor or, more frequently, paid a monthly rental compensation. The ITAT ruled that because the rental compensation represents a “capital receipt” rather than a “revenue stream of income,” the previous flat owner is not required to pay taxes on it.

Mumbai residents would be relieved by this decision, which followed a similar decision made earlier by the Mumbai bench and takes into account the numerous reconstruction initiatives taking place throughout the city.

Ajay Parasmal Kothari’s case was chosen for investigation as part of the computer-aided scrutiny selection (CASS) process for the 2012–2013 fiscal year. The income-tax (I-T) inspector discovered Kothari had received Rs 3.7 lakh from the builder while doing the scrutiny assessment.

In Malad, Kothari owned a condo in a cooperative housing organization that was slated for redevelopment. The monthly rental payments for the alternative housing were in the amount of Rs 3.7 lakh.

The I.T. officer additionally noted that the taxpayer had not used this money to pay for a different place to stay. He then went ahead and treated it as taxable income, falling under the heading “income from other sources.” This meant that the amount would be subject to taxation at the relevant slab rate. This line of action was upheld by the commissioner (appeals), which prompted Kothari to file an appeal with ITAT.

The tax tribunal recognized that even though the taxpayer had adjusted and was now living with his parents, having to leave his apartment for redevelopment nevertheless put him through hardship. The ITAT concluded that the compensation for rent was not taxable in this case as well, basing its conclusion on a previous tax tribunal decision.

In this case, the ITAT also excused a 1,566-day delay in submitting an appeal on the grounds that the taxpayer had received improper guidance from his prior tax advisor.