The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that ₹82 lakh received by a housing society member as hardship compensation under a redevelopment agreement was not taxable in her hands. 

The bench of Saktijit Dey (Vice President) and Makarand Vasant Mahadeokar (Accountant Member) found that the payment compensated her for displacement, shifting and other inconveniences arising from redevelopment and did not constitute consideration for transferring rights in immovable property.

The bench set aside an appellate direction to compute capital gains on the 56% additional carpet area provided in the redeveloped flat. It held that this direction amounted to enhancement of income and required a reasonable opportunity for the taxpayer to show cause. That issue was remitted to the first appellate authority for fresh consideration after granting a hearing. 

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The taxpayer owned a flat in Radha Kunj Cooperative Housing Society Ltd., Mumbai. On October 14, 2014, the society entered into a redevelopment agreement with Aum Developers.

Under the arrangement, members were required to vacate their flats so that the developer could demolish the existing structure and construct a new building. In return, each member was entitled to a residential flat with 56% additional carpet area, without paying monetary consideration, along with parking commensurate with the area of the flat.

The agreement also provided for a lump-sum payment calculated at ₹5,500 per square foot of the existing carpet area and separate payments to facilitate alternative accommodation during redevelopment.

The taxpayer received ₹82 lakh as compensation after vacating the premises and handing over possession. She treated the amount as a non-taxable capital receipt and did not offer it to tax in her return, which declared income of ₹17,30,550.

The taxpayer maintained that the payment represented hardship compensation for loss of accommodation and the inconvenience of shifting.

The Assessing Officer rejected that explanation. According to the officer, vacating the flat and handing over possession to the developer constituted a transfer of immovable property within the meaning of Section 2(47) of the Income Tax Act, 1961. The officer consequently added the entire ₹82 lakh to her income under the head of capital gains.

The Additional Commissioner of Income Tax (Appeals), Udaipur, upheld the addition in an order dated October 8, 2025.

The first appellate authority also directed the Assessing Officer to include the proportionate value of the 56% additional carpet area in the sale consideration for computing capital gains. It directed that the cost of acquisition of the old flat and deduction under Section 54 be allowed, subject to fulfilment of the applicable conditions.

Before the tribunal, the taxpayer argued that the payment arose from hardship, displacement and inconvenience associated with redevelopment, rather than a transfer of a capital asset.

Her counsel submitted that she continued to be a member of the housing society and remained entitled to receive a redeveloped flat in place of her existing accommodation. It was also argued that the land belonged to the society and that the society, rather than individual members, had granted development rights to the developer.

Alternatively, counsel contended that even if a transfer were assumed, capital gains could not be computed because the acquisition cost of the relevant asset was indeterminate. Reliance was placed on the Supreme Court’s decision in CIT v. B. C. Srinivasa Setty.

Regarding the additional carpet area, the taxpayer submitted that the larger flat formed part of the redevelopment arrangement and represented an exchange of residential accommodation. She also challenged the appellate enhancement on the ground that no show-cause opportunity had been provided under Section 251(2).

The Revenue relied on the findings of the Assessing Officer and the first appellate authority.

The tribunal examined the redevelopment agreement to determine the purpose of the compensation.

Clause 3.5 provided that the developer would deposit the members’ compensation with the advocates and solicitors appointed by the society. The amount was to be distributed when the society handed over peaceful and vacant possession of the property for demolition and redevelopment.

Clause 3.6 explained that the predetermined lump-sum compensation covered hardship associated with shifting and re-shifting, consent to demolition of the existing flats, and agreement to share common areas with a greater number of people after redevelopment.

Reading these clauses together, the tribunal concluded that the payment was intended to mitigate the hardships faced by society members. It was not consideration for the sale or transfer of rights in immovable property.

The bench therefore held that the ₹82 lakh compensation was not taxable in the taxpayer’s hands.

The tribunal relied on its coordinate bench’s decision in Narayan Devarajan Iyengar v. ITO, which dealt with similar compensation received under a housing society redevelopment arrangement.

That decision had considered earlier rulings, including Lawrence Rebello v. ITO, concerning hardship allowances and redevelopment benefits received by flat owners.

Following the reasoning in those decisions, the bench accepted the taxpayer’s claim that the lump-sum hardship compensation was not taxable. Its conclusion rested on the nature of the payment established by the agreement and the precedents addressing comparable receipts.

The tribunal dealt separately with the proposed taxation of the 56% additional carpet area.

It observed that Section 2(47)(i) includes sale, exchange or relinquishment of an asset within the definition of transfer. Whether the additional carpet area received in the redeveloped flat arose from an exchange of the existing flat therefore required examination.

However, the Assessing Officer had not considered this issue during assessment. It was introduced independently by the first appellate authority, which directed computation of capital gains on the additional area.

The tribunal held that the direction resulted in enhancement of the taxpayer’s income. Although Section 251(1)(a) empowers the first appellate authority to enhance an assessment, Section 251(2) requires a reasonable opportunity for the taxpayer to show cause against such enhancement.

The taxpayer’s counsel asserted that no such opportunity had been granted. On examining the appellate order, the tribunal found no observation recording issuance of a show-cause notice before enhancement.

It consequently set aside the direction concerning the additional carpet area and remitted the issue to the first appellate authority for reconsideration after providing a due and reasonable opportunity of hearing.

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