Tax implication for Capital Receipts in lieu of Compensation and Interest.

An assessee entered into an agreement with a builder for the purchase of residential flats – according to the agreement the assessee paid the requisite sum as advance. However, on lapse of considerable time the assessee was not give the possession of the flats. Now according to the agreement the advance along with interest and compensation was returned to the assessee. Now, how shall the assessee treat the same under Income Tax?

The assessee treated the same as Capital Gains availing the indexation benefits. However this was not accepted by the AO and saying that there was not capital asset involved and thus could not be treated as Capital Gain. The AO taxed the entire amount of interest under Other Sources.

The Assessee went forward with appeal -  Here is very interesting ruling by the Income Tax Appellate Tribunal Mumbai bench on the above case –

According to the ruling, only the Income portion with respect to such compensatory interest would be charged under Other Sources. And the excess compensation received from the government would be considered and Capital Gains. However, the compensation portion would be Tax exempt for being received by the government itself.

Click here to view the whole ruling.

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