A husband-wife duo entered into a development agreement with a builder from Mumbai, which stated that they would receive a certain number of apartments in exchange for their land. The agreement included a clause that if the builder failed to deliver the apartments on time, then she and her husband will be entitled to some compensation.
The builder failed to give possession of the apartments on the promised time and so he paid Rs 1.85 crore as compensation to her. He also paid compensation to her husband. She reported this money (Rs 1.85 crore) in her income tax return (ITR) as long-term capital gains (LTCG).
However, the income tax department believed that Section 50C of the Income Tax Act, 1961 is applicable in this case even for the cash compensation received and thus applied the stamp duty valuation at Rs 3.51 crore and calculated her long-term capital gains accordingly.
Dissatisfied with this decision, she appealed to the Commissioner of Appeals (CIT A). The CIT (A) upheld the tax officer’s computation of long term capital gains. She then took her case to the Income Tax Appellate Tribunal (ITAT) Mumbai.
She argued that she and her husband each owned 50% of the land. The tax officer had also added LTCG income in her husband’s case. She pointed out that when the CIT (A) reviewed her husband’s case, they ruled in his favour and held that Section 50C only applies when the land/building is actually transferred. The tax department did not challenge her husband’s case any further.
She argued that in this case, what was transferred was the title to the rights in the land, and the compensation received was for extinguishment of the right to transfer the title of the land.
Manish Garg, Lead-Transfer Pricing and Litigation, AKM Global, a tax and consulting firm says, “The Mumbai ITAT judgment has rightly distinguished between the cash compensation or interest received on account of delay in possession versus the sale consideration received on transfer of land and building for the purpose of taxation under section 50C. Such distinguishment is very crucial for the lawful interpretation of section 50C of the Income tax Act. The Tribunal has finally held that cash compensation received for delay in handing over flats represents interest and not sale consideration. This is an important ruling for homebuyers and investors who often face long project delays and receive delayed possession compensation from builders or developers. It underscores that such receipts, being compensatory in nature, cannot be artificially taxed as capital gains under Section 50C. The Tax authorities may therefore need to re-examine pending cases where similar compensation has been subjected to stamp duty valuation adjustments.”
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