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Taxability of Compensation on Cancellation of Allotment

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(Querist)
26 September 2008 A residential flat was booked with a builder under “letter of allotment’ in March 2001. There was no other written “Agreement for Sale”. A sum of Rs. 5 lacs was paid at the time of booking the flat. Subsequently, another Rs. 5 lacs were paid in F. Y. 2002 – 03. However, the construction of the building has been stalled. The possession of the flat has not been given till date. Now, the builder has agreed to refund the said Rs. 10 lacs and pay a compensation of Rs. 3 lacs for cancellation of the allotment letter.

Is the compensation (Rs. 3 lacs) taxable as “Income from Other Sources” or the entire amount (Rs. 13 lacs) as “Capital Gains”?

Is there any relevant case law in this matter?

Thanks and Regards, Nikita.
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S.Srinivasaraghavan

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S.Srinivasaraghavan (Expert)
27 September 2008 This compensation is against the right to get a capital asset and therefore would be subject to capital gains tax in my opinion.
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