JANANI SUBRAMANYAM SUNDER,MUMBAI vs. THE INCOME TAX OFFICER- 23 (2) (1), MUMBAI

The only effective ground raised by the assessee relates to challenging the order of the learned CIT(A) in upholding the order of the AO treating the hardship compensation amount received by the assessee from the developer as income taxable under Section 56 of the Income-tax Act.

We have heard the learned counsels for both the parties, perused the material placed on record, considered the judgments cited before us, and examined the orders passed by the Revenue Authorities.

At the outset, the learned AR submitted that the issue in question is squarely covered by the orders of the Coordinate Benches of the ITAT in the cases of Ashok Ramchandra Naik in ITA No. 518/Mum/2026 and Krishnakant Sharma, Mumbai in ITA Nos. 417 & 418/Mum/2025, wherein, under a similar set of facts, the Coordinate Benches of the ITAT deleted the additions made by the Assessing Officer.

The operative portion of the Ashok Ramchandra Naik in ITA No. 518/Mum/2026 is reproduced herein below:

We heard the rival submission and considered the documents available in the record. On perusal of the record we find that the assessee had received the “Hardship Compensation” including the “Corpus Fund” amount to Rs.1,06,51,198/- in the A.Y. 2016- 17. The assessee offered the income to tax on proportionate basis. The ‘Corpus’ amount tor Rs.61,30,375/- & the “Hardship Compensation” amount to Rs. 11,50,050/- both were duly offered to tax in A.Y. 2016-17. Related to “Hardship Compensation” for A.Ys. 2017- 18 to 2019-20 were offered to tax in the respective assessment year in proportionate basis. We find that the issue related to taxability of the “Hardship Compensation” received by the assessee from builder in terms of redevelopment agreement is no longer res integra. We find that the Coordinate Bench of ITAT Mumbai in case of Nalini Sanjeev Nadkarni (supra) and also in case of Jitendra Kumar Soneja vs ITO reported in (2016) 72 taxmann.com 318 (Mum Trib.) have settled the issue in favor of the assessee by holding it to be capital receipt not liable to be taxed. We find the issue involved in the instant case is also covered by the order of the Coordinate Bench of ITAT. But the assessee had already considered the alleged “Hardship Compensation” as a revenue receipt and offered to tax in respective years. We find that the assessee had deferred the income in three assessment years & had already offered to tax in respective years related to income of Rs.33,70,773/- . Considering the entire fact the addition amount to Rs. 33,70,773/- was made by the Ld. AO is unjustified as cost by the double taxation. Accordingly, the impugned appellate order passed by the Ld. CIT(A) is set aside. So, the addition made by the Ld. AO amount to Rs.33,70,773/- is deleted.

Now, as far as the merits of the case is concerned. It is noticed that the main grievance of the assessee is against the action of Ld. CIT(A) in confirming the additions made by AO by treating the amount of ‘hardship compensation’ received by the assessee as income.

In this regard, after hearing both the parties at length we found that the issue in question is squarely covered by the decision of the Coordinate Bench of ITAT in ITA No. 2577/Mum/2023, in case titled Kunnama V Balakrishnan Vs. IT0, the operative portion is reproduced here in below:

Brief facts are that the assessee is an individual (Retired Person) who has filed her return of income on 26.07.2011, declaring total income of Rs.1,12,913/- for AY 2011-12. Later, the case of the assessee was reopened u/s 147 of the Income Tax Act, 1961 (hereinafter "the Act") for the reason that even though assessee received Rs.25,21,508/- from developer/builder M/s. DB- MIG Realtors and Builders Pvt. Ltd. (hereinafter "Builder") have not offered for tax the said receipt, which according to the AO escaped assessment. The assessee replied to the AO that she had a flat (C- 12/96) in the residential society [MIG Co-operative Housing Society Ltd, Bandra (East)] and as per terms of the re-development agreement dated 31.10.2010, she received Rs.25,21,508/- from the developer/builder as "Hardship Compensation". According to the assessee, the amount received from the builder was capital receipt and therefore not liable to be tax. However, the AO did not agree. He noted that assessee was a member of the housing society, and that the society was the owner of the properties (flats); and it had entered into agreement for development of the property with the builder vide agreement dated 31.10.2010 and by virtue of such an agreement with the developer for re-developing the property, each member of the society received a new flat in exchange of surrender of old flat. The AO noted the terms of agreement at para no. 6 of his order and further noted that on surrender of flats by members, builder had issued cheque in the name of the member (including assessee) which were handed over to the assessee through the society. According to the AO, thus housing society received total amount of Rs.149.89 crores, which were in-turn, handed over to the individual members as per the re-development agreement. This action of the housing society handing over payment from builder to the individual member/assessee was not in accordance with the "Principle of Mutuality" since the same was received from the developer (a third party); and further described the transaction in his own words "Hence, the activity of entering into an agreement for re-development of the property and receipt of consideration by the society and diverting of the same at source to the individual members is purely a commercial activity". Therefore, he was of the opinion that amount given to the assessee (hardship compensation) is akin to dividend distributed by the housing society and therefore, its character is revenue in nature. And therefore, he added the same i.e. Rs.25,21,508/- as revenue receipt in the form of dividend under the head "income from other sources". Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the action of the AO. Aggrieved, the assessee is before us. 4. We have heard the Ld. DR and perused the records. We note that the assessee was a resident of flat being member of the housing society (supra), who received Rs.25,21,508/- from the developer as "Hardship Compensation" in terms of the re-development agreement dated 31.10.2010, by which the flat occupied by assessee was surrendered and handed over to builder for re - development, and would receive new flat over and above the hard-ship compensation paid to assessee. As per the terms of re-developed agreement, the assessee received the "Hardship Compensation" to the tune of Rs.25,21,508/- which was issued by developer in the name of the member/assessee of the housing society which receipt according to the AO was in the nature of "dividend" from the housing society and therefore, revenue in nature and so he added it under the head "income of other sources". According to the assessee, the amount received i.e. Rs.25,21,508/- received from the developer as Hardship Compensation on account of re-development was in the nature of capital receipt and not as such taxable in the hands of the assessee. According to assessee, since the compensation received by assessee was towards displacement in terms of the re-development agreement; and the compensation was paid by the builder on account of hardship faced by the owner of the flat due to displacement of the occupants of the flat, it is nothing but rehabilitation allowance and constitutes capital receipt as the property has gone into re-development. For such a contention, assessee had relied on the judicial precedent/decision of this Tribunal in ITA. No.2349/Mum/2011 in case of Kushal K. Bangia v ITO (2012) 50 SOT 1/18 taxmann.com 31 wherein Tribunal has held as under: - "3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 4. In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes "any capital gains chargeable under section 45", and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon'ble Supreme Court in the case of Padmraje R. Kardambande vs CIT (195 ITR 877) has observed that "..., we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act...." This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon'ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), "the burden is on the revenue to establish that the receipt is of revenue nature" though "once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish". The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of payment in the hands of payer also ends up determining it's nature in the hands of the recipient. As observed by Hon'ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), "it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer". The consideration for which the amount has been paid by the developer are, therefore, not really relevant in determining the nature of receipt in the hands of the assessee. In view of these discussion, in our considered view, the receipt of Rs.11,75,000 by the assessee cannot be said to be of revenue nature, and, accordingly, the same is outside the ambit of income under section 2(24) of the Act. However, in our considered opinion and as learned counsel for the assessee fairly agrees, 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, grievance of the assessee is upheld. 5. In the result, the appeal is allowed in the terms indicated above. 5. Per-Contra, the Ld. DR relied on the order of the Ld. CIT(A)/AO, however, could not controvert the fact that the assessee received of Rs.25,21,508/- from Builder in terms of the re- development agreement and such compensation was paid by the builder on account of hardship faced by the owner of the flat due to displacement of the occupants of the flats, which payment is in the nature of hardship allowance/rehabilitation allowance. This compensation was over and above the exchange of old flat with new flat. In such a scenario, the amount of Rs.25,21,508/- received by the assessee, as compensation for displacement in terms of re-development agreement is not a revenue receipt and constitute capital receipt, as the property has gone into re-development. We find that the issue as to whether the hardship compensation received by the assessee from builder in terms of the re-development agreement is no longer res- integra and we find that Co-ordinate Bench of this Tribunal in the case of Kushal K. Bangia (supra) have answered the question in favour of the assessee by holding it to be capital receipt not liable to tax. We find that the issue involved in the instant case is squarely covered by the decision of the Tribunal (supra) and therefore, we are of the opinion that "Hardship Compensation" given to the assessee pursuant to the re-development agreement is a capital receipt and cannot be treated as revenue receipt as held by the AO/Ld. CIT(A). The reliance placed by AO/Ld. CIT(A) on the case law of the Hon'ble Supreme Court in the case of M/s. Bangalore Club v CIT 156 Taxman 323 is not relevant on the issue in hand. Therefore, the AO/Ld. CIT(A) erred in law holding that hardship compensation received by the assessee from the builder was in nature of the dividend in the hands of the assessee/member of the housing society. In the light of the aforesaid discussion, we are of the considered view that receipt of "Hardship Compensation" of Rs.25,02,508/- cannot be said to be of revenue nature and accordingly the same is outside the ambit of income u/s 2(24) of the Act. However, in the case of Kushal K. Bangia (supra) as well as in the case of Jitendra Kumar Soneja v ITO, Ward-6(3) (3) (2016) 161 ITD 269 (Mum), the Tribunal has observed in similar case 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 when occasion arises for computing capital gains in respect of said. Subject to these observation, the appeal of assessee is allowed. 5. Since the facts of the present case are similar to the facts in the case of Smt. Kunnama V. Balakrishna Vs ITO (supra) therefore, keeping in view the principles of judicial consistency and judicial discipline and while following the decision of the coordinate bench, we give the same directions in the present case as well.

As the facts and circumstances in these appeals are identical to ITA No 417/Mum/2025 for the A.Y 2011-12 (except variance in figures) and the decision rendered in above paragraph would apply mutatis mutandis for this appeal also. Accordingly, the grounds of appeal of the present appeal also stands allowed. 7. In the result, both the appeals filed by the assessee are allowed. 7. Thus, considering the aforesaid facts and circumstances of the case, and keeping in view the doctrine of binding precedents and the principle of judicial consistency, we direct the AO to delete the impugned additions.

In the result, the appeal filed by the assessee is allowed.