Compensation for removing the nuisance – Can it be a Tax Planning Tool?
Mumbai Tribunal in the case of Mohammed Fakhre Alam Shaikh (ITA No 6513/Mum/2024) has held that Compensation received for removing the nuisance should be treated as a capital receipt and hence not taxable.
Let us have a Short Overview of the case:
Background:
The assessee filed his return of income for the year under consideration, declaring a total income of Rs. 11.04 lakhs.
The AO noticed from AIR information that the assessee had carried out a property transaction valued at Rs. 2.59 crores.
The assessee submitted that he was occupying a portion of land in Survey No. 243 of Tardeo Division, which underwent development by M/s. Neel Kamal Realtors and Builders Pvt. Ltd.
The assessee surrendered his rights on the property and, in lieu of this, was allotted a flat on ownership basis in the building named ‘Orchid Enclave’. The assessee claimed a deduction under section 54F of the Act, resulting in NIL capital gain.
AO’s Findings:
The AO noticed that the assessee was an illegal occupant of the land and was not approved by MCGM and/or MHADA as per the list of tenants certified by these authorities.
The AO held that the assessee was not eligible for deduction under section 54F and assessed the value of the new flat (Rs. 2.59 crores) as income under section 56(2)(vii)(b) of the Act.
CIT(A)’s Observations and Actions:
The CIT(A) confirmed the AO’s order, denying the deduction claimed under section 54F and assessing the value of the flat as income.
Tribunal’s decisions:
The Tribunal noted that the assessee had illegally occupied the land and created a nuisance for the developer.
The Tribunal referred to a similar case (Shri Kishre D.P. vs. Income Tax Officer) where compensation received for creating a nuisance was considered a capital receipt and not taxable.
Following the precedent, the Tribunal held that the value of the flat received by the assessee as compensation for removing the nuisance should be treated as a capital receipt and not taxable.
The Tribunal set aside the order passed by the CIT(A) and directed the AO to delete the cost of the new flat amounting to Rs. 2.59 crores.
The views expressed in this summary are entirely personal and do not reflect those of any professional firm.
An important question now emerges whether the compensation received for removing the nuisance should be treated as a capital receipt and hence not taxable? Let us hold on ..let us see what future unfold now..
The copy of the order is as under:
