Tax on Penalty amt paid by Builder for Delayed Possession

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  1. Seeker

    Seeker New Member

    Would request other fellow CAs to post their views also apart from ZED, as soon as possible, since i have to decide & conclude with in 1-2 days.
  2. ZED

    ZED Well-Known Member

    In starting posts, I gave a reference to a judgement according to which it should not be taxable. But the question is are you willing to take the chance and appeal it?

    If genuine expenses were incurred to obtain the penalty (like litigation expenses) then it can be adjusted provided you are treating it as revenue income.

    Opinion may differ, even different High Courts have different judgements.
    Unless you are yourself willing to take the risk I can not advise to treat it as capital gain.

    It is not a matter of what I think, I should advise.
    It is whats the most beneficial to the advisee and this is something which advisee should also consider.

    I wish to caution you that if you are going to claim any expense then you must have proof.

    We can only give advice, judgement is still up to court.
    If the amount is small, don't at all bother. The cost of litigation and tension is much higher than the amount of tax sought.
  3. Seeker

    Seeker New Member

    Dear ZED, than you for responding, practical aspect is what we are looking for, including the non tangibles like peace of mind & risk-reward ratio.
    For additional tax amount of around 90k, is the risk worth it.

    Some people are of the opinion, since the CA community is also divided on this & it's a grey area from government side also, the thinking is " we are doing self assessment & basis the limited knowledge, we can treat as capital gain . If the notice comes then we will pay the tax with interest. " People might be naive to take chance, i don't know if additional penalties will be levied, or they can simply plead ignorance with the income tax dept., & can settle things simply by paying the tax & interest but no penalty.

    What do you think. if the AO's opinion is otherwise can they resolve by paying the tax & interest but no penalty, for tax of around 90k. What can be most probable outcome..
  4. ZED

    ZED Well-Known Member

    Ignorance of the law is not an excuse.
    As far as penalty is concerned then the department will definitely levy the penalty, it will be upto the assessee to prove that penalty should not be levied.

    I have special interest in the matter of capital gains and have read many judgements. What you are saying is partly correct. Unless we can prove that departments own stand is not adamant or if there are conflicting decisions from various High courts, then we can plead that. Currently, it's not like this.

    If you wish to take chances then you must also consult an advocate.

    When we act as consultants then our intention is to see what's most beneficial to the assessee. If there are loopholes, we consider whether it's appropriate to exploit it.

    Similarly when AO is doing an assessment, then his intention is to see the interest of the revenue.

    If I were AO, even I would take the chance and would issue a notice to explain why the penalty should not be levied because when most of the other assessees in the industry are offering it to tax, then why are you not?. UNLESS your jurisdictional High Court has passed any judgement in favour of the assessee, there are high chances that A.O. will levy penalty also. [This is my personal opinion.]

    It will be the court, which will decide if the penalty should be levied or not.

    I recently talked to an assessee having the same issue. He told me that he will take the chance.

    If it was my own case and the amount was high, then I would take the chance (but this is not what I am recommending).
    Last edited: Jul 30, 2017
  5. Seeker

    Seeker New Member

    Dear Zed, so nice of you to explain things from practical point of view also & not only technically. Am almost sure that people should pay tax on penalty & compensation to be safe.
    Those who are doing otherwise are taking chance, now they may be fortunate & lucky to save money, or they may not, depends on AO & Court judge, & advocate is he able to defend the case.

    "If it was my own case and the amount was high, then I would take the chance (but this is not what I am recommending)."

    We don't know cost of litigation & other costs, but is notional tax amount of Rs 90 thousand , is high or not, as per you, considering the intangibles also, we are asking for your personal opinion whether for this amount it's not worth taking the risk or vice versa.
  6. ZED

    ZED Well-Known Member

    It's not a big amount.
    Recall how much time and efforts are involved in litigations.
    Seeker likes this.
  7. Seeker

    Seeker New Member

    Ok thank you so much ZED for your inputs & practical advice, sound judgement.
    ZED likes this.
  8. ZED

    ZED Well-Known Member

    Tribunal in the case of Jitendra Kumar Soneja v/s. ITO held following the earlier judgment of Tribunal in the case of Kushal K. Bangya v/s. ITO that the compensation received by the owner of the resident flat in the society building is not taxable as the same is related to the Capital Asset and accordingly the same is outside the ambit of income u/s.2(24) of the Income Tax Act.
    My view was also same but I am still waiting for more judgement.
    [Kindly also note that these judgements are at ITAT level.]
    Last edited: Dec 4, 2017
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