2012 (2) TMI 29 - AT - Income Tax

Taxability of Cash compensation received capital receipt vs Revenue receipt - assessee being member of a housing society received flat in new multistoreyed building, displacement compensation and cash compensation in lieu of demolishment of the old residential building owned by the housing society Held that - Capital receipt in principle is outside the scope of income chargeable to tax. It is not even the case of the A.O. 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. Further, Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (1971 (8) TMI 15 - SUPREME Court) has held 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. Therefore, receipt of ₹ 11,75,000 by the assessee cannot be said to be of revenue nature. However it is agreed that the same will be taken as part of cost of acquisition of new flat Decided in favor of assessee.

Summary

Issues:
1. Taxability of cash compensation received by the assessee under the head income from other sources.
2. Whether the cash compensation should be assessed as long-term capital gain instead of income from other sources.

Issue 1: Taxability of Cash Compensation:
The appellant contested the addition of Rs.11,75,000 received as cash compensation, arguing it should be treated as a capital receipt and not taxable income. The appellant, a member of a housing society, received the compensation as part of an agreement with a developer for the reconstruction of a building. The Assessing Officer treated the cash compensation as casual income, leading to the dispute. The tribunal analyzed the legal position, emphasizing that capital receipts are not taxable unless specifically provided for in the Income Tax Act. Referring to case law, the tribunal held that a capital receipt is outside the scope of taxable income unless it falls under specific provisions. The tribunal concluded that the cash compensation, being related to a capital asset, should not be taxed as income but should reduce the cost of acquisition of the asset for future capital gains computation.

Issue 2: Assessment as Long-Term Capital Gain:
The appellant also argued that the cash compensation should be assessed as long-term capital gain instead of income from other sources. The tribunal considered this argument in conjunction with the first issue. While agreeing that the receipt was not of revenue nature, the tribunal noted that the compensation would affect the cost of acquisition of the asset for future capital gains calculation. Therefore, the tribunal upheld the appellant's contention that the cash compensation should not be treated as income but should be considered in computing capital gains when relevant. The tribunal allowed the appeal based on these considerations.

In summary, the tribunal ruled in favor of the appellant, holding that the cash compensation received should not be treated as taxable income but should be accounted for in reducing the cost of acquisition of the asset for future capital gains calculation. The judgment clarified the distinction between capital receipts and revenue receipts, emphasizing that unless specifically provided for, capital receipts are not taxable as income.