Tax liability on compensation given by builder

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A property buyer received a refund and additional compensation from a builder after a dispute, cancelling their unit. They are seeking clarification on whether this extra compensation is taxable, as they believe it should be a non-taxable capital receipt for relinquishing their right to sue. While some case law suggests it could be taxable under 'Income from Other Sources' or as capital gains, the buyer is exploring arguments for it to be treated as a non-taxable capital receipt.

Rohan

Rohan (Querist)
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08 December 2024 Hi All,
I had bought a flat from a builder in Aug'23 by giving a booking amount and got my BBA executed in Mar'23. In the BBA terms there was a dispute b/w builder and the buyer due to which I had lodged a police complaint and a case in RERA against them.

Recently we both have mutually agreed to settle the matter on following terms by a settlement deed. The builder has cancelled my unit and refunded my amount and in Lieu of taking all my complaints back they have given an additional compensation.

Will this additional compensation over and above the amount i have given is taxable? I have gone through cases of such matter and found that it can be considered as a capital receipt as the compensation given is to relinquish my rights to sue and its a one time settlement and it's not my core business. If that is so will there be any tax liability?

The builder is forcing to deduct the 10 percent TDS kindly guide.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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08 December 2024 Yes, now it is taxable under IFOS.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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08 December 2024 It has been taxed as capital gains as per following case.
Refer: 1. https://www.taxmann.com/post/blog/compensation-received-from-builder-for-its-failure-to-deliver-flats-in-time-taxable-under-head-capital-gains-itat

Rohan

Rohan (Querist)
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08 December 2024 Thanks for the reply DhirajLal ji

Can you go through this case and let me know how can this be non taxable very similar case

https://taxguru.in/income-tax/compensation-relinquishment-right-sue-breach-contract-non-taxable-capital-receipt.html

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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08 December 2024 Each case differ on legal issues. There are different case laws based on such issues. some in favor and few in against.
The difference in your case is 'settlement' and not 'termination'.
Still you have option to go for appeal, but AO will consider it as taxable gain.
Refer: 1. https://www.taxscan.in/compensation-from-builder-on-cancellation-of-flat-taxable-as-other-income-itat/72538/

Rohan

Rohan (Querist)
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09 December 2024 The entire settlement agreement is on the basis of relinquish my legal rights that I can't sue them and have to take back my court case and police complaint.

Such a receipt is considered as a capital receipt and there are some good examples given in the below article

https://www.livemint.com/Money/HH8J6nA5zEz6uE71wwxANM/The-only-receipt-that-remains-taxexempt.html

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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09 December 2024 Its trivial issue, rest upon judiciary to decide.

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