I had written in my column dated August 30, 2020, about how the newly introduced Taxpayers´ Charter is likely to be more effective as it is now a part of the main Income Tax Act itself and carries the sanction of Parliament.
Here, I am outlining a very fit case of double taxation of Hardship Compensation received on redevelopment, which deserves to be taken up for resolution under the Taxpayers´ Charter.
This pertains to the taxation of hardship compensation paid by developers to homeowners in connection with the redevelopment of old residential properties.
Mumbai is the city where this is widespread, though redevelopment takes place in other cities as well. A redevelopment project normally works somewhat like this: The existing dilapidated building is typically owned by a Cooperative Housing Society, which is a separate legal entity but is basically a collective of the homeowners who come together to form the society.
An appropriate resolution is passed to appoint a developer to demolish the existing structures and build fresh buildings.
The existing homeowners are given flats free of cost in these new buildings.
The excess area in the new buildings is sold off to new buyers to allow the developer to make a profit.
Apart from the new flat, it is usual for the existing homeowners to be paid compensation for the hardship undergone by them in vacating their flats, renting out alternative accommodation during the construction period, and bearing the intense uncertainty associated with getting possession of their flats back from the developer on time.
Scores of redevelopment projects have been delayed by unscrupulous builders and many are in limbo.
But that is not the only problem affecting the homeowners.
To add insult to injury, the tax department has, in most cases, taxed the hardship compensation received by the homeowners in the hands of the homeowners themselves and also in the hands of the society.
The homeowners thus end up paying tax twice on the same hardship compensation first in their individual capacity and then their prorata share to the society.
Some societies and homeowners litigate against the demand but must pay the notorious 20 per cent of the demand in both places once as a homeowner and once as a member of the society.
There are several tribunal decisions that lay down that the hardship compensation is not taxable at all as it is a capital receipt.
But this article is not about those legal decisions.
Even if we accept that hardship compensation is taxable, surely it cannot be the tax department´s case that it is taxable twice.
This double taxation of the same amount is carried out by the assessing officers to fulfil their onerous revenue targets.
Also, in some cases, the assessing officer looks narrowly at the taxpayer (either the homeowner or the society) who falls under his jurisdiction and is not bothered about whether the assessing officer of the other taxpayer has charged tax on the same amount.
No assessing officer wants to take a decision on this flagrant instance of double taxation although all of them, in private, agree that it is incorrect.
This double taxation hits at the very first promise made in the Taxpayers´ Charter that the tax department will provide fair and reasonable treatment to taxpayers.
I hope many affected taxpayers make a request so that the tax department listens.
The writer heads Fee Only Investment Advisers LLP, a SEBI registered investment adviser
Even if we accept that hardship compensation is taxable, surely it cannot be the tax department´s case that it is taxable twice