Amount paid to tenant for vacating the property

Originally posted by : Sumit
	In case company pays an amount to its tenants for getting its property vacated, whether it will be considered as cost of improvement or not ??????

Payments to tenants for vacating premises are deductible

Expenditure incurred by the assessee towards amounts paid to tenants for vacating the premises which is sold has nexus with the transaction of sale, since without the tenants vacating the premises the building cannot be sold. The said expenditure would hence be allowable as deduction in the computation of capital gains - Naozar Chenoy v. CIT [1998] 234 ITR 95 (AP).

Thanks to both of you.

My next question as mentioned is what will be tax implication on the amount received by the tenants for vacating the property. As per my understanding, it cannot be considered either as House Property income or the capital gains, since the basic element of ownership is absent. Neither it can be considered as Income from other sources, since as per my understanding it is a capital receipt and therefore it is not taxable.

Please reply in the light of relevant case laws.

regards

Originally posted by : Sumit
	Thanks to both of you. My next question as mentioned is what will be tax implication on the amount received by the tenants for vacating the property. As per my understanding, it cannot be considered either as House Property income or the capital gains, since the basic element of ownership is absent. Neither it can be considered as Income from other sources, since as per my understanding it is a capital receipt and therefore it is not taxable. Please reply in the light of relevant case laws. regards

Receipt of compensation received by the assessee is a capital receipt.

Smt. Anand Bala Bhushan vs Commissioner Of Income-Tax on 21 August, 1995
 

Thanks Deepak...

What is the accounting treatment of said amount paid by the company

After 1994, the amount received on surrender of tenancy is subject to capital gains tax depending upon the holding period. If the tenancy period is less than three years then the capital gains shall be short term capital gains and shall form a part of the total income of the assessee. However, if the tenancy period is more than three years then the same shall be treated as long term capital gains and shall form a part of the total income thereto subject to deductions under section 54EC, 54F etc