Compensation received by the assessee from the builder for cancelling the allotment of flat for delay not chargeable to tax being in the nature of capital receipt.
In a recent judgment, ITAT Delhi has held that compensation received by the assessee from the builder for cancelling the allotment of unit due to not handed over within time was not chargeable to tax being in the nature of capital receipt.
ABCAUS Case Law Citation:
4316 (2024) (11) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition made by the Assessing Officer (AO) under the head “Income from other sources” relating to interest received from builder as compensation for cancelling the allotment of unit.
The case of assessee was selected for scrutiny under Limited Scrutiny under CASS for the reason that gross interest shown in schedule OS of ITR was less than interest receipts reported in 26AS.
During the proceedings u/s 143(2), the assessee explained that the builder had allotted one residential flat to the assessee, which was to be handed over within 39 months, but the builder company could not hand over the possession. The company has paid the amount under question by way of damages to compensate the assessee for non-handing over the property with in time.
However, the AO completed the assessment by making addition of the amount received from the builder as undisclosed interest.
The CIT(A) partly allowed the appeal and directed the AO to re-compute the “Income From Other Sources” after deduction of interest paid on housing loan u/s 57(iii) of the Act.
Before the Tribunal, the asseseee stated that the case is covered by the decision of the Tribunal in the assessee own case in which the Tribunal held that the interest received in form of compensation as capital receipt.
The question to be decided was whether the compensation received by the assessee from builder for non-delivery of property in time could be construed as capital receipt not chargeable to income-tax or not?
The Tribunal observed the issue has been decided by the Hon’ble Himachal Pradesh High Court and relied upon decision of assessee’s own appeal.
It was observed that the Hon’ble High Court dealt with a case where there was delay in construction of the houses and thereafter the Housing Board paid interest at the agreed rate to the allottees in terms of the letter of allotment. The ITO(TDS) was of the view that in view of section 194A of the IT Act, tax had to be deducted at source. The Hon’ble High Court held that the amount which was paid by the Board was not payment of interest but payment of damages to compensate the allottee for the delay in the construction of his house/flat and the harassment caused to them. The Hon’ble High Court relied upon the judgment of the Hon’ble Supreme Court where the question was whether interest paid to the persons whose land had been compulsorily acquired under ss. 28 and 31 of the Land Acquisition Act was a revenue receipt or a capital receipt. The apex Court held that though it was termed as interest on delayed payment, it was actually a capital receipt and therefore the provisions of s. 194A of the IT Act would have no application.
The ttt further noted that in assesse’s own case, the Co-ordinate Bench had observed that the Hon’ble Calcutta High Court by applying the provisions of section 2(28A) of the Income- tax Act and the decision of Hon’ble Himachal Pradesh High Court held that the compensation paid to the builder to the flat allottee cannot be construed as interest at all and hence, there was no question of deduction of tax at source in terms of section 194A of the Act thereon. This decision of Hon’ble Calcutta High Court was further subjected to challenge by way of Special Leave Petition (SLP) by the Revenue before the Hon’ble Supreme Court which was dismissed
Following the judicial precedents the Tribunal held that the compensation received by the assessee from builder for cancelling the allotment of unit due to not handed over within time was not chargeable to tax in the hands of the assessee.
Accordingly, the appeal of the assessee was allowed.
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