Compensation paid on cancellation of allotment of flat

A flat was booked with a builder and allotment letter was received and allottee paid the full amount of Rs 8,60,500/- flat to the builder. After some years builder cancelled the agreement and paid Rs 1,20,00,000/- as compensation for cancellation of flat booking. Such compensation will be taxable in which head i.e Income from other source or Capital Gain. Please suggest relevant case laws, if any?
Asked 1 year ago in Capital Gains Tax from Mumbai, Maharashtra
Through the Finance Act 2015 ,Section 56 has been amended and clause ix has come into effect from 01/04/2015 . As per this - Any sum of money received as an advance or otherwise in the course of negotiation for transfer of capital assets if  (a) such sum is forfeited  and (b) the negotiation do not result on transfer of such capital assets .

Here in this case , the amount that you have paid has been forfeited and the capital assets ( flat ) has not been transferred .   Hence taxable under the head " Income from other sources " .
Prakash Sinha
CA, Delhi
112 Answers
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Kolkata Income Tax Applelate Tribunal in the case of subhas chandra parmanandaka held that income from transfer of right to purchase a flat is taxable as Capital gains.compensation received over and above the booking amount is equivalent to consideration received on transfer of right to acquire property and is taxable under capital gains.

Also the right if held for more than 36 months will be treated as long term capital gain there by allowing relief from capital gain if invested in residential property.

As per the ruling if the Taxpayer has entered into an agreement it becomes right of the tax payer and if transferred gains arising on transfer is liable as capital gains.
Shyam Sunder Modani
CA, Hyderabad
953 Answers
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As the amount paid is in nature of compensation, it will be assessed under the head : Income from other sources
B Vijaya Kumar
CA, Hyderabad
290 Answers
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From the facts mentioned in the query, it is not clear, whether the flat was booked as investment asset/capital asset or trading asset. If the booking is for personal use or for the purpose of retention as capital asset, then income derived from compensation will be subject to capital gains tax @ 20.6%.  But if the booking is for trading purpose, for example in the hands of real estate broker or similar then it will be taxed as business income after deducting all expenses such as interest or any other incidental expenses @ 30.9%.



Vijay N. Kale
CA, Hyderabad
248 Answers
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