Taxability of Proceeds received upon surrender of Unauthorized Possession of Land

One of the farmer (Land Owner) has sold his agricultural land which was situated within the limits of Municipal Corporation to a Builder for a monetary consideration of Rs.1,10,00,000. On the said land another person was having unauthorized possession. To clear this unauthorized possession builder also made payment of Rs.40,00,000 to that other person and also deducted TDS u/s 194IA. In this case whether amount of Rs.40,00,000 received by that other person will be taxable as Capital Gain? If yes can any exemption be claimed against it?

Replies (1)

In my view, the ₹40 lakh received by the person in unauthorised possession will be taxable. If he had a possessory/right-to-occupy claim and the payment was made for surrendering/vacating such right, it can be treated as consideration for relinquishment/extinguishment of rights in land and taxable under Capital Gains, subject to facts. If the right was held for more than the prescribed long-term period, LTCG treatment and section 54F exemption may be examined, provided all conditions are satisfied. However, if there was no legally recognisable right and the payment was merely a settlement amount for vacating, the department may tax it as Income from Other Sources. TDS under section 194IA does not itself decide the head of income; it only gives TDS credit to the recipient.

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