Rent paid by builder on redevelopment is not 'income'

Rajiv, a resident of Mumbai, has been living in the city for a long time. He had a house in a co-operative society  which is being re-developed as it was almost 50 years old. Because of the re-development, the builder pays him rent to stay in another flat till the redevelopment is complete. The Income Tax Department considered that money or rent as his income and demanded tax on it.  But, a recent ruling by the Income Tax Appellate Tribunal will be a relief for people like Rajeev. Let’s find out what that relief is?

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that due to a re-development project, the old flat owner will not have to pay tax on the rent received as compensation from the builder. Now, let’s understand this in simple words.

When an old housing society is redeveloped i.e. it is made afresh, then the builder provides the landlords with a place to live or gives money to live on rent until their own house is available. Usually this money is used to live on rent in another house. Under the Income Tax Act, rental income is taxable. In this case, the issue arises as to whether the rent received in the form of compensatory rental is to be considered as “income” or not.

The tax tribunal said in the decision that in the event of redevelopment, the rent received during the period when the person is displaced i.e. away from his own house will not be taxed. The bench held that the compensation rent is a capital receipt and not any kind of income. That’s why the money in the hands of the flat owner will not be taxed.

So, what is the matter all about?

The decision has come in an appeal by Ajay Parasmal Kothari. His case came up in a computer based scrutiny for the financial year 2012-13, following which the tax officer found that Kothari owed Rs 3.7 lakh as compensation rent received from the builder. However, he did not use this money for paying rent and the tax authority treated this amount as taxable income under the head “Income from other sources”. He had to pay tax as per his tax slab and was liable to pay tax on this amount, against which he appealed to the Commissioner (Appeals) and later to the ITAT.

The Tribunal held that the assessee though lived with his parents, had faced difficulties in vacating his flat for redevelopment. Therefore, the compensation received as rent is not taxable.

Scarcity of land in metro cities and rising property prices are making redevelopment a better option. In this, buildings that are nearing the end of their life span are demolished and reconstructed. This is a good deal for both the landlords and the investors. While home owners get modern amenities, investors get a property at a good location. Home owners make a profit by selling what’s left after giving up their homes.

Not only Rajeev, but if your building is being rebuilt, then this decision is useful for you too. Because this decision will be also be handy in other such cases. Lakhs of families in Mumbai will get a lot of relief from this because a large number of redevelopment projects are going on there.