Compensation for delayed property performance treated as long-term capital gains, not income from other sources.

Compensation received under the Real Estate (Regulation and Development) Act, 2016 for delay or failure in performance in relation to a booked property was treated as having a direct nexus with the assessee's rights in the capital asset and the amounts invested in it. Section 18(1) of the RERA was read as fixing compensation with reference to a prescribed interest rate, but the receipt was characterised by reference to the asset itself. Because extinguishment of rights in relation to a capital asset falls within "transfer" under section 2(47)(ii) of the Income-tax Act, the amount was held to be chargeable as long-term capital gains and not as income from other sources under section 56.

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Issues: Whether compensation received under the Real Estate (Regulations and Development) Act, 2016 for delayed/failed performance in relation to booked property is taxable as income from other sources under section 56 of the Income-tax Act, 1961, or as long term capital gains on the basis that it represents consideration connected with transfer and extinguishment of rights in a capital asset.

Analysis: The compensation was treated as having a direct nexus with the assessee's rights in the booked plot and the amounts already invested in acquiring that capital asset. Section 18(1) of the Real Estate (Regulations and Development) Act, 2016 was read as providing compensation computed with reference to the prescribed interest rate, but the character of the receipt was examined in the context of the capital asset itself. The receipt was held to fall within the concept of transfer under section 2(47)(ii) of the Income-tax Act, 1961 because extinguishment of rights in relation to a capital asset is included within transfer. On that footing, the amount could not be assessed as income from other sources under section 56 of the Income-tax Act, 1961.

Conclusion: The compensation was rightly declared as long term capital gains and was not taxable as income from other sources.

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