2025 (9) TMI 895 - AT - Income Tax

Hardship, rehabilitation and displacement payments from redevelopment held capital, not taxable; section 270A penalty deleted due to hardship

ITAT held that payments characterized as hardship/rehabilitation/displacement allowances arising from dispossession due to redevelopment were not revenue ... Penalty levied u/s 270A - Characterization of receipts - receipts in the form of Hardship Allowance / Rehabilitation Allowance / Displacement Allowance, paid by the developer / landlord to the tenant who suffers hardship due to dispossession HELD THAT:- In the facts of present case there is no dispute regarding the nature of receipt by the assessee that the same was Hardship Allowance for here dispossession in the wake of redevelopment of the building wherein, she was a resident, thus, such receipt is not revenue in nature, so as to liable to be taxed. It is also a fact that the assessee had furnished Form 68, but with some procedural errors. Since, the assessee had already paid taxes and interest even on an income which does not warrants any tax liability, imposing further penalty would cause hardship. Penalty levied on the assessee for under reporting of an income which actually was not a taxable income of assessee, where assessee had paid taxes and interest only for buying of peace would be undue hardship, the same therefore cannot survive. The decision of Ld. CIT(A) in the impugned order in confirming the penalty order of assessee thus set aside and the penalty-imposed stands deleted. Appeal of assessee, stands allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts characterized as Hardship/ Rehabilitation/ Displacement Allowance received on account of redevelopment constitute taxable revenue receipts or non-taxable capital receipts. 2. Whether penalty under section 270A (for under-reporting) can be sustained where the alleged under-reported amount relates to a receipt that is not chargeable to tax and the assessee paid taxes and interest voluntarily (post-reopening) for 'peace of mind.' 3. Whether rejection of an immunity application under section 270AA on procedural/technical grounds (submission error) justifies sustaining penalty under section 270A where taxes and interest have been paid and the underlying receipt is non-taxable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of Hardship/ Rehabilitation/ Displacement Allowances Legal framework: Receipts are taxable if they are revenue in nature; capital receipts are not chargeable to tax. The determination requires examining the factual matrix and legal character of the payment - whether compensation is for loss of capital asset/right or is consideration for services or income-yielding activity. Precedent treatment: Tribunal and High Court decisions (as relied upon by the assessee) have held that amounts paid as Hardship/ Rehabilitation/ Displacement Allowance to tenants displaced by redevelopment are not revenue receipts but capital in nature, not liable to tax. The Court follows these authorities. Interpretation and reasoning: The Court examined the factual finding that the payment arose from redevelopment and was paid as hardship/rehabilitation/displacement allowance to a resident displaced by redevelopment. Given absence of dispute on the nature of the receipt and presence of authorities treating such payments as non-revenue, the Court concluded the receipt is not taxable income. Ratio vs. Obiter: Ratio - where a payment is made to a displaced tenant as hardship/rehabilitation/displacement allowance in terms of redevelopment, it is a capital receipt not chargeable to tax. Obiter - none additional beyond reliance on precedent and factual application. Conclusion: The amount in question is a non-taxable capital receipt (Hardship Allowance) and does not constitute taxable income for the relevant assessment year. Issue 2 - Liability to penalty under section 270A for under-reporting where the alleged under-reported amount is non-taxable and taxes/interest were paid Legal framework: Section 270A penalizes under-reporting and misreporting of income. Under-reporting is measured by comparison of income assessed and income returned/processed; penalties are attracted when income is under-reported or misreported. Relief may be available where additions are voluntarily admitted and corrected before initiation of reassessment, or under immunity provisions (see Issue 3). Precedent treatment: The Tribunal and appellate orders distinguish between voluntary corrections made before reopening and admissions made after issuance of notice under section 148; admissions after reopening have been treated as under-reporting arising from misreporting. However, where the underlying addition is not a taxable income, penal consequences may be unjustified. Interpretation and reasoning: The assessing authority treated the increased income declared after reopening as under-reporting, invoking clause (a) of sub-section (2) of section 270A since the assessed income exceeded income determined in the return. The appellate authority below sustained penalty on the basis that the admission came after issuance of reopening notice, placing it within misreporting. The Court, however, reasoned that if the underlying receipt is not chargeable to tax (see Issue 1) then treating it as under-reported income is unsustainable. Further, the assessee paid the taxes and interest (albeit voluntarily) on an amount that did not warrant taxation; imposing an additional penalty in such circumstances would cause undue hardship. The Court therefore distinguished the strict temporal rule (voluntary correction pre-reopening) on equitable grounds where the payment is non-taxable and taxes have been paid to buy 'peace of mind.' Ratio vs. Obiter: Ratio - penalty under section 270A cannot survive where the alleged under-reported amount is not taxable income and the assessee has already paid taxes and interest on that amount; imposing penalty in such circumstances is undue hardship. Obiter - remarks on the usual treatment of admissions post-reopening as misreporting remain but are displaced by the present factual matrix. Conclusion: The penalty under section 270A imposed for under-reporting is not sustainable and is deleted because the addition pertains to a non-taxable receipt and the assessee had paid the taxes and interest. Issue 3 - Effect of procedural/technical error in filing immunity application under section 270AA Legal framework: Section 270AA (and related procedural rules) provides for immunity from penalty where an application is properly made and conditions are satisfied. Proper filing requirements and portals/processes must be followed as per statutory/administrative procedure. Precedent treatment: Procedural lapses in filing can lead to rejection of immunity applications, but courts may examine substance over form where rejection is purely technical and outcome otherwise inequitable. Interpretation and reasoning: The assessee filed an immunity application in Form 68 but attached it erroneously to an online reply rather than uploading via the prescribed e-portal - a procedural error. Although the procedural error could justify rejection, the Court placed this issue in the context of the primary conclusion that the receipt was non-taxable and that taxes and interest had been paid. Given that the underlying tax liability was not sustainable, and the payment of tax plus interest would render imposition of penalty harsh, the Court found it unnecessary to sustain penalty on account of a technical rejection of immunity. The Court therefore did not rest the decision on the procedural lapse but treated the rejection as a further reason why penalty would be inequitable. Ratio vs. Obiter: Obiter - the finding that a mere procedural error in filing immunity ought not to culminate in penalty where the substantive tax liability is absent; the Court's dismissal of penalty is grounded primarily in the non-taxable nature of the receipt rather than formal defects in immunity filing. Conclusion: The procedural/technical error in filing the immunity application does not justify sustaining penalty in the circumstances where the underlying receipt is non-taxable and taxes/interest have been paid; penalty stands deleted notwithstanding the filing error. Overall Conclusion The penalty under section 270A for under-reporting is set aside because the challenged addition pertains to Hardship/ Rehabilitation/ Displacement Allowance which is a capital (non-taxable) receipt; the assessee had paid taxes and interest on that receipt and a technical filing error on the immunity application does not warrant sustaining penalty. The appeal is allowed and the penalty deleted.