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Tax on compensation

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(Querist)
04 September 2014 One of my client has got compensation from consumer court.Is it taxable.Some of books says it is non taxable?
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SANTOSH SAGAR K

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SANTOSH SAGAR K (Expert)
04 September 2014 It all depends on the nature of compensation received. Kindly update.
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kol nirmitee

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kol nirmitee (Querist)
04 September 2014 The builder has given possession of flat which was incomplete from construction point of view. Client has repaired and made the things complete.As per agreement ,builder have to pay daily Rs 1000 up to possession and he has paid huge amount almost 10 lacks for late possession
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SANTOSH SAGAR K

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SANTOSH SAGAR K (Expert)
05 September 2014 Assuming the additional cost to make the flat ready was Rs. 6 lakhs,

My point of view is that:
1. The extent of the cost incurred by your client towards repairs is not taxable in any case and has to be adjusted towards the cost of acquisition of the house, i.e 6 lakhs is not taxable and is thereby adjusted.

There is no confusion as regards this amount.

2. As regards the balance amount of Rs. 4 lakhs, the issue is debatable.

My view point is that as the expenditure incurred and the compensation pertain to a capital asset being a house property, the compensation can be considered as a taxable receipt and hence not taxable. In this case no adjustment is made to the cost of acquisition of the flat.

This view is upheld in Commissioner of Income Tax, Gujarat v M/s Saurashtra Cement Limited.

Alternatively, The entire compensation is adjusted towards the total cost of flat, i.e Amount paid to builder + Amount incurred for repairs + Other expenses - Rs. 10 lakhs. In this this case the cost of acquisition undergoes a change and is not beneficial to the assessee.

I welcome the views of the other experts in this regard.

Thanks.
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SANTOSH SAGAR K

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SANTOSH SAGAR K (Expert)
05 September 2014 Assuming the additional cost to make the flat ready was Rs. 6 lakhs,

My point of view is that:
1. The extent of the cost incurred by your client towards repairs is not taxable in any case and has to be adjusted towards the cost of acquisition of the house, i.e 6 lakhs is not taxable and is thereby adjusted.

There is no confusion as regards this amount.

2. As regards the balance amount of Rs. 4 lakhs, the issue is debatable.

My view point is that as the expenditure incurred and the compensation pertain to a capital asset being a house property, the compensation can be considered as a taxable receipt and hence not taxable. In this case no adjustment is made to the cost of acquisition of the flat.

This view is upheld in Commissioner of Income Tax, Gujarat v M/s Saurashtra Cement Limited.

Alternatively, The entire compensation is adjusted towards the total cost of flat, i.e Amount paid to builder + Amount incurred for repairs + Other expenses - Rs. 10 lakhs. In this this case the cost of acquisition undergoes a change and is not beneficial to the assessee.

I welcome the views of the other experts in this regard.

Thanks.
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kol nirmitee

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kol nirmitee (Querist)
05 September 2014 You mean to say whatever amount is used for re construction will be exempted from the tax also travelling and advocate fees will be also exempted but what about remaining amount?Is that taxable?send me the link of commissioner of income tax Gujarat v M/s saurashtra cement or any case law
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kol nirmitee

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kol nirmitee (Querist)
05 September 2014 You mean to say whatever amount is used for re construction will be exempted from the tax also travelling and advocate fees will be also exempted but what about remaining amount?Is that taxable?send me the link of commissioner of income tax Gujarat v M/s saurashtra cement or any case law
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Aashok Kumar Sharma online

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Aashok Kumar Sharma online (Expert)
26 July 2025 https://docs.google.com/document/d/1Vv9O36zS9iFvL8zTFO7_Z2zI05r4aE0Ytk4NHNFit8o/edit?usp=sharing
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