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I am an individual and have invested Rs1 crore as advance in a residential flat which is under construction. The builder is in financial trouble and cannot complete the project within the stipulated time. The agreement was signed almost five years back. The builder has agreed to terminate the contract with refund of Rs1 crore along with additional compensation of Rs1.5 crore. Can I treat this additional amount as compensation for long-term capital gain? Can you explain the tax implication on receipt of this compensation? 

Jayesh Dadia 
Chartered Accountant

From your question it is very clear that the builder has not honoured the purchase agreement entered with you. The agreement has created your right in the proposed residential flat. Thus, on cancellation of the agreement, your right in the property get extinguished. Extinguishment of right in a capital asset is a transfer within the meaning of Section 45 of the Income Tax Act. Since you were holding rights for more than three years, the said right in the property is deemed long-term capital asset. 

Therefore, in my opinion, Rs1.5 crore is long-term capital gain, for which a benefit under Section 54 can be availed by you i.e. reinvestment of the entire Rs1.5 crore in a new residential premise. The Bombay Tribunal, in a recent decision in the case of Ashwin S Bhaliekar, 74 ITR (Trib) 5 (Mum), has held the above view by following the decision of the Delhi High Court in the case of Ram Gopal, 372 ITR 498. However, at the assessing officer’s level it would be a debatable issue but in appellate proceedings you have a fair chance of succeeding in view of the above decisions. 

I am a shareholder in a closely held company having 25% stake. The face value of the share is Rs10 per share and the break-up value of one share is Rs2,200. The company has allotted additional shares to all the existing shareholders at face value. Can the assessing officer tax the difference between the face value of Rs10 and the book value of Rs2,200 i.e. Rs2,190 per share as income under the head ‘Income from Other Sources’ under Section 56(2)(x) of the Income Tax Act? 

From your question it is very clear that the additional shares have been issued and allotted to all the existing shareholders in the same proportion of their existing shareholding. In other words, the issue was a rights issue and offered to all the shareholders at face value. Provision of Section 56(2)(x) cannot be applied to a transaction where shares have not been acquired but allotted by the company to its shareholders on a rights basis. In your case, you have not acquired shares from any other shareholder but through the company’s allotment. Therefore, in my opinion, the assessing officer cannot invoke provision of Section 56(2)(x) of the Income Tax Act and cannot tax Rs2,190 per share as ‘Income from Other Sources’. 

I have entered into an agreement for sale of my residential flat for a total consideration of Rs5 crore. The buyer has paid me Rs1 crore as per the agreement. However, the buyer subsequently backed out and could not complete the transaction. Accordingly, as per the agreement, I forfeited Rs1 crore. What is the tax implication in such a transaction? Will it be considered capital receipt, not subject to tax? 

The entire Rs1 crore which you have forfeited is taxable under the head ‘Income from Other Sources’ in view of the clear provision of Section 56(2)(ix) of the Income Tax Act. Thus, there is no escape for you and the entire Rs1 crore would be taxed. To avoid penalty and prosecution, I advise you to offer voluntarily Rs1 crore in your return of income and pay the taxes accordingly. 

I am an individual and in employment with a multinational company (MNC). Due to difference of opinions, the MNC wants to terminate my employment contract. However, the MNC is ready to pay compensation of Rs1 crore on termination of my contract. Could you let me know whether Rs1 crore is taxable in my hand? If yes, whether it would be taxed as salary income or capital gain? 

Compensation of Rs1 crore which you are likely to receive on termination of your employment by MNC is taxable in your hand as income from other sources. Section 56(2)(xi) of the Income Tax Act defines this type of compensation under the head ‘Income from Other Sources’. Therefore, it is neither a salary income nor capital gain nor an exempt income. 

I am an Indian resident currently employed with a company in India. From January 1, 2020 I will move to Singapore and take up employment with another company on a salary basis. I will also get a signing bonus on the date of appointment. Will my salary income and signing bonus earned in Singapore from January till March 2020 be taxed in India?

 Your status for purposes of income tax would still be that of a resident in India for the financial year 2019-20 since in that period you would have been in India for more than 182 days. Under Section 5 of the Income Tax Act, an Indian resident is charged tax for all the income which is received or deemed to be received or accrue or arise or deemed to be accrued or arise in India or outside India. In other words, the global income is taxable in the case of an Indian resident. Therefore, the income received and earned by you in form of salary and signing bonus from your Singapore employer during the period January to March 2020 would be taxed in India. However, the credit for the taxes paid by you on salary income in Singapore would be available for tax credit in India while offering the salary income for taxation for the financial year 2019-20.

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