What is the tax treatment?

It part of cost of asset 

since it is given by building developer so its part of cost inventory  

The general rule under Income tax laws is that if payment is for the purpose of business, it is generally allowed as deduction even if the payment of damages increases profits and reduces future expenses.

Damages / compensation for failure to fulfil the contract in time are deductible, provided the asset involved under the agreement is not a capital asset.

In your case, as building is a stock in trade for the builder, the payment made to occupants should be allowable as a stock-in-trade.  However, one needs to check the contracts / agreements between the builder and the occupant before taking a final decision.

What is the tax treatment in the recipient view?

It will be taxed as income from other sources in the hands of recipient.

Firstly it is an income as per  definition of income under section 2(24) and it is not capital reciepts since it is only temporary income for temporary  period and for temporary purpose.

it will be taxable as other income...

can we claim rent paid from that income as deduction?

IF THE INCOME AS MENTIONED IS TAXABLE UNDER INCOME FROM OTHER SOURCE THEN ANY EXP INCURRED  WILL BE ALLOWED UNDER SECTION 57 IF THAT EXP IS NOT DISALLOWED U/S 58.

no expenses from income will be allowed.. because if rent is paying on house, then it is a personal expenditure.. and not allowed as deduction..

Originally posted by : CA Sourabh Goenka
	no expenses from income will be allowed.. because if rent is paying on house, then it is a personal expenditure.. and not allowed as deduction..

If income earned is in relation of the house for paying rent and it is taxable under the head income from other source then rent paid in relation to such house will be allowed.