Tax Column

Every year, I receive money from different people on various occasions, which I invest in the stock market. Do I need to disclose such amounts in my ITR? If I have not reported them in earlier filings, could it lead to issues in the future? If yes, what steps can I take now to rectify the situation? [EasyDNNnews:PaidContentStart]

Receipt of money from different people in aggregate of `50,000 per year is Taxable as income from other sources. However, if this amount is received from a relative as defined in Section 56(2)(x) of the Income Tax Act, then the same is exempt and not taxable. So just verify the person from whom you have received the amount on various occasions and if it exceeds `50,000 and is not from a relative, then the same should be offered for taxation in your Return of Income. 

Further, if your total income, after considering all these amounts from different people on various occasions, is still below the taxable limit, then there is no need to file a Return of Income. However, if the total income exceeds the taxable limit, then you have to disclose it in your Return of Income, i.e., ITR. 

Earlier Returns of Income, i.e., up to the financial year 2024-25, cannot be filed now as the time limit is over. However, for the current financial year, i.e., 2025-26 onwards, you can disclose the amount received from a non-relative as taxable, add it to your other income and file the Return of Income within the due date. 

The only way to rectify the mistake committed by you by not offering the amount in the Tax Return of earlier years is to file the updated Return under Section 139(8A) of the Income Tax Act. Here you have to pay additional 25 per cent or 50 per cent taxes, if the Return is filed after two years or more than two years respectively. However, you may take help from your Chartered Accountant/Tax Consultant to compute the tax liability and compliance procedures. 

I am an individual and sold my residential house comprising land and building for a consideration of `5 crore in the financial year 2025-26. The agreement was registered, possession given and the consideration was received. Subsequently, due to certain legal hurdles, the sale transaction got reversed in the same financial year. The cancellation agreement was registered, possession was taken back and the sale consideration was repaid. Whether do I still have to offer capital gain earned on the sale agreement and pay tax thereon? 

Under the Income Tax Act, capital gains tax arises only if a transfer under Section 2(47) of the Income Tax Act, 1961 actually takes place and remains effective. In your case, initially you registered a sale deed, gave possession of your house comprising land and building and also received full consideration. The buyer has also paid stamp duty and deducted applicable TDS. At this point, transfer took place and capital gain arose. However, subsequently the sale transaction was cancelled and reversed by entering into a cancellation deed, repayment of consideration and taking back possession of the residential house. As such, effectively, the transfer which happened initially at the time of sale did not subsist at the year end. Therefore, technically the ownership of the residential house comprising land and building was restored back to you at the end of the financial year. Therefore, in my opinion, no effective transfer took place and accordingly no capital gain arises in the financial year 2025-26. 

However, the Assessing Officer may tax you on the basis of registration of the sale, but by producing both the sale deed and the cancellation deed and proof of refund of consideration and possession reversal, you may get relief at the Assessing Officer level itself. If the Assessing Officer does not agree, then at the appellate level you have a very good chance of succeeding. There are case laws, including judgements of the Apex Court and the Bombay High Court, where it has been held that if a transaction is rescinded or cancelled in the same year or subsequently, no real income has accrued to the taxpayer. 

I have received a compensation of `3 crore plus interest of `2 crore from a tenant for using my premises illegally. The compensation was awarded by the Court where the dispute was settled after almost 10 years. Could you let me know whether the amount received is taxable and if yes, under which head? 

What you have received is termed as mesne profit received from a tenant for unauthorised occupation of property. This is a very common nature of compensation a landlord receives. Taxability of mesne profit is a controversial issue under the Income Tax laws. The Courts have delivered conflicting rulings. Some Courts have treated this as a capital receipt while others have classified it as a revenue receipt. However, interest of `2 crore is certainly taxable under the head Income from Other Sources. 

In view of conflicting judgements, my personal view is that the entire amount is taxable as Income from Other Sources. It cannot be taxed under the head Income from House Property because it is in the nature of damages for wrongful occupation and not rent or annual value. 

Further, it is received as a result of litigation. Therefore, it cannot be treated as additional rent but is in the nature of compensation. In the absence of any Supreme Court ruling which directly settles this issue, my opinion is that you should kindly offer it to tax to avoid litigation.

We would be happy to address your tax-related queries. Kindly share them with us at editorial@dsij.in

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