HARD ALLOWANCE - CAPITAL RECEIPT

[Mr. M. GOVINDARAJAN]

In VINOD MURLIDHAR CHAWAL VERSUS INCOME TAX OFFICER WARD–23 (3) (5) , MUMBAI - 2023 (2) TMI 923 - ITAT MUMBAI, the assessee filed his return of income on 31.03.2013.  In the return he declared an income of Rs.1,21,270/-  The Department received an information that the assessee is in receipt of an amount of Rs.84,05,026, as hardship allowance along with a new flat in a newly developed building admeasuring 1381 sq.ft. in lieu of his old flat admeasuring 505 sq.ft., and an amount of Rs.25,21,508, has been paid to the assessee in the year under consideration.  The assessee has received the said amount as one of the members of the MIG Co-operative Housing Society Ltd and the housing society has entered into a redevelopment agreement with M/s DB MIG Realtors and Builders Private Limited. On this the Department issued a show cause notice to the assessee on 16.03.2018 under section 148 to initiate action under section 147.  

The assessee gave a reply in response to the notice issued to him.  In the said reply he requested the department to consider the said amount as capital receipt.  During this re-assessment proceedings the Department issued show cause notice as to why the amount of Rs.25,21,508, received from DB MIG Realtors and Builders Private Limited be not treated as income from other sources within the meaning of section 56 of the Act. 

The Assessing Officer rejected the request made by the assessee to treat the said amount as capital receipt.  The Assessing Officer vide order dated 18.12.2018, passed under section 143(3) r/w section 147 of the Act holding that the activity carried out by the housing society is in the nature of the commercial activity, the monetary consideration arising out of it is directly distributed to its members being shareholders is akin to the dividend and is therefore eligible to income tax in the hands of the assessee under the head “income from other sources.  Therefore the Assessing Officer added the said amount to the income of the assessee.

Being aggrieved against the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi dismissed the appeal filed by the assessee.  Therefore the assessee filed the present appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short). The ground raised by the assessee  before the ITAT is that the  Commissioner of Income Tax (A) has erred in view of the facts, circumstances and law, in confirming the action of Assessing Officer in making addition of Rs. 25,21,508/- on account of Hardship Compensation received by treating it revenue receipt instead of capital receipt.

The ITAT considered the submissions of the parties to the appeal.  The ITAT analyzed the facts of the case.  The assessee is a member of the MIG Co-operative Housing Society Limited.  The society entered into an agreement for the development of the property with DB MIG Realtors and Builders Private Limited vide agreement dated 31.10.2010.  According to this agreement  the developer shall develop the property in such a manner that each member of the society shall receive a new flat in exchange of the surrender of the old flat depending upon the size of the old flat along with interest in the additional FSI allotted by MHADA.  The developer, as per the agreement has paid to the society and the members an aggregate monetary consideration. The said monetary consideration was distributed among the members of the society being shareholders, depending upon the size of their old flat. During the year under consideration, the assessee has received an amount of Rs.25,21,508, being the consideration for the surrender of his old flat.   Since the assessee treated the said amount as capital receipt and did not offer the same to taxation.  On the basis of information received from ITO-23(2)(3), Mumbai reassessment proceedings were initiated in the case of the assessee and the  assessment order was passed under section 143 (3) read with  section 147 of the Act treating the aforesaid receipt of Rs.25,21,508 as taxable in the hands of the assessee as ‘income from other sources’.   According to the assessee, this compensation is purely to compensate the personal loss and other inconveniences likely to be caused and therefore, can only be a capital receipt and can never be treated as a revenue receipt.

The ITAT relied on the judgment of its co-ordinate Bench in SHRI LAWRENCE REBELLO VERSUS ITO-1 (3) , INDORE - 2021 (10) TMI 63 - ITAT INDORE which placed order similar to the issue of the present appeal.  In this case the ITAT observed that the benefits received by the assessee from a bigger size of flat and impugned amount have been given in pursuance to agreement between the society and the developer and it was hardship compensation.   it is amply clear that where the assessee being a flat owner in a housing society receives certain sum from developer as corpus fund towards hardship caused to flat owners on redevelopment, impugned amount has to be treated as capital receipt simplicitor which as per Section 2(24)(vi) of the Act is not taxable as income of the assessee.  The ITAT held that 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, the appeal of assessee is allowed.

The ITAT observed that in the present case also the taxability of receipt of similar nature, i.e. hardship allowance.  The ITAT set aside the order of Assessing Officer adding the impugned amount to the income of the assessee and confirmed by the Commissioner of Income Tax (Appeals) and allowed the appeal filed by the assessee.