Compensation received for vacating flat possession not taxable it is neither chargeable under the head ‘capital gains’ nor as income from other sources – ITAT
In a recent judgment, ITAT has held that compensation received by the assessee for vacating flat possession was not taxable as it was neither chargeable under the head ‘capital gains’ nor as income from other sources – ITAT
ABCAUS Case Law Citation:
ABCAUS 3932 (2024) (04) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) / NFAC in confirming taxing of compensation received by the assessee for vacating a residential flat under the head ‘income from other sources’ instead of capital gain and thereby, denying the assessee’s claim for deduction u/s.54F of the Income Tax Act, 1961 (the Act).
A company was a tenant of a residential flat by way of Leave and License agreement with landlord. However, at the end of agreement, the tenant company refused to vacate the flat and as a result, the landlord filed a suit against the tenant. The Court ruled against the Landlord and held the company to be a deemed tenant. The litigation continued in higher forums.
During the period when tenancy rights were with the said company, the flat was occupied by the father of the assessee who was then a director of the said company along with his family & brother’s & uncles as a joint family. The assessee was born & lived in the flat from childhood for over 40 years.
During the pending status of the suits between the landlord and the company, the company received offer from landlord for making out of court settlement and vacating the flat. The landlord offered to pay monetary compensation to the company for having the flat vacated from its directors & family members residing in the flat & handing over peaceful & vacant possession of the same.
However, the assessee However did not agree to vacate the flat and a Tripartite Memorandum of Understanding (MOU) was entered into. The landlord paid Rs. 2.01 crores to the company and the company out of the said amount paid Rs. 75 lakhs each to the assessee and his brother for vacating the said flat. It was agreed that the assessee shall not evoke any possessory or occupancy rights in respect of the said flat.
Both the assessee and his brother deposited the amount of Rs. 75 Lakhs each in the Capital Gains Accounts Scheme Account with Bank as required under the provisions of section 54F(4) of the Act since they could not finalise the alternate residential house for them by that date. Eventually, the assessee purchased the residential flat.
The assessee filed his Return of Income showing the amount of Rs. 75 Lakhs as Long Term Capital Gains and claimed exemption under section 54F of the Act in respect of the Long Term Capital Gains on transfer of the right of occupancy by way of extinguishment of the said occupancy rights.
However, the AO held that the amount of Rs.75,00,000/- is taxable in the hands of the assessee as ‘income from other sources’. The reason being that assessee had received this amount not on account of surrender of transfer of tenancy rights as assessee was never the sub-tenant of the said flat by virtue of any legal agreement or by payment of any rent to the tenant. The AO also initiated Penalty proceedings u/s 271(1)(c) for filing inaccurate particulars of income.
The CIT(A) too confirmed the said addition made by the AO.
Though the Tribunal expressed agreement with the AO that the compensation was not chargeable to tax under the head ‘capital gain’ in the hands of the assessee, because only company had a sole right in the tenancy in the property and company alone can show the entire compensation amount as its income from Capital Gain from surrender of tenancy right. However, the Tribunal held that the compensation received by the assessee could not be taxed in the hands of the assessee for the following reasons:
1. Firstly, the amount has been received from the company out of its own income which was received in the form of compensation chargeable to tax under the head ‘capital gains’ entirely in the hand of the company and any amount given to the assessee out of such taxable income amounts to application of income by the company.
2. Secondly, the capital gains for the entire compensation received is taxable in the hands of the company and if any such amount paid to the assessee by the company is out of its income, which cannot be taxed as ‘income from other sources’ in the hands of the assessee. The reason being, the amount had been received by the assessee from the company so that company can honour the consent term with the landlord for peaceful vacation of the flat and assessee had no role in the consent term.
3. the amount to be taxed in the hands of the assessee has to be in the nature of income which assessee had earned from company carrying out any activity or surrendering any right or asset in favour of the company which can be assessable under any head. Here the money had been received by the assessee from the company so that company can discharge its obligations; it had nothing to with the assessee. In the hands of the assessee it was purely a capital receipt which he has received from the company so that company can give undertaking to vacate the premises in the favour of the landlord for which company was paid compensation.
4. If at all, the amount of entire compensation was taxable in the hands of the company which the company had offered as a capital gain in the return of income. However, it had claimed deduction for such payment made to the assessee.
Therefore, the Tribunal held that the amount received from the company was neither chargeable under the head ‘capital gains’ nor as income from other sources, albeit, it was a capital receipt in the hands of the assessee because the amount received from the company out of its own income, was an application of income by the company. The entire amount of compensation was capital gains in the hands of the company, which had been declared.
Accordingly, the Tribunal deleted the addition made by the AO.
Download Full Judgment ABCAUS 3932 (2024) (04) ITAT Click Here >>
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