Compensation received from builder for its failure to deliver flats in time taxable under head capital gains: ITAT

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  • Last Updated on 2 December, 2021

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Capital gains - Chargeable as (Compensation)

Case Details: Smt. Abha Bansal v. PCIT - [2021] 132 taxmann.com 231 (Delhi - Trib.)

Judiciary and Counsel Details

    • Bhavnesh Saini, Judicial Member and O.P. Kant, Accountant Member
    • Gautam Jain, Adv. and Lalit Mohan, CA for the Appellant. Satpal Gulati, CIT DR for the Respondent.

Facts of the Case

Assessee-individual entered into a Builder-Buyer Agreement (BBA) for purchasing a villa. Possession of same was not handed over to assessee within the stipulated time. Thus, BBA was canceled.

Assessee received a certain amount as compensation for the cancellation of BBA on account of the non-delivery of villa. She showed the same as capital receipt and offered it to tax as capital gain under section 45. The Assessing Officer (AO) passed an assessment order accepting the same.

However, the Commissioner invoked revision jurisdiction under section 263 on the ground that such compensation received by the assessee was revenue in nature. CIT held that the transaction of making the investment was a sham transaction, a colorable device to reduce the profit and divert income in order to evade the taxes. The assessee filed the instant appeal before the Tribunal.

ITAT Held

The Delhi Tribunal held that the assessee had made investment for the specific purpose to acquire villa, i.e., capital asset, and had acquired legal right as per BBA. Therefore, the amount received as compensation for giving such a right would amount to capital receipt under section 2(47).

There was a contractual obligation of the builder to pay compensation to the assessee on account of non-delivering of the Villas. The Award was based on scientific examination of the relevant facts.. It may be reiterated again that Arbitration Award was final and binding on the parties and enforceable as it was the Court’s Decree. Therefore, there was no justification to hold that transaction was colored and sham.

Furthermore, compensation did not arise in the course of any trading activity but arose on cancellation of BBA and was not related to any stock-in-trade. Thus, it could not be held as revenue in nature. Accordingly, compensation received by assessee on cancellation of BBA was a capital receipt and taxable as a capital gain.

Case Review

List of Cases Referred to

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