Bombay HC: Transit rent not taxable, not subject to TDS

Bombay HC rules transit rent received from builders during redevelopment projects is not taxable, exempting it from TDS obligations.

Mumbai: The Bombay high court recently ruled that rental compensation also termed as “Transit rent,” received from a builder during a redevelopment project, is not taxable and hence not subject to Tax Deducted at Source (TDS). A single bench of justice Rajesh S Patil said that rental compensation constitutes a ‘capital receipt’ rather than a ‘revenue receipt’, thereby exempting it from TDS obligations.

Mumbai, India – Oct 06, 2023: Labourers are seen working at a construction site, at Crawford Market, in Mumbai, India, on Friday, Oct 06, 2023. (Photo by Bhushan Koyande/HT Photo)

This order, which follows two ITAT (Income Tax Appellate Tribunal) orders, comes as a relief to several residents in the city considering the number of redevelopment projects undertaken across the city.

In his ruling, justice Patil said, “Transit rent is commonly referred to as Hardship Allowance/Rehabilitation Allowance/Displacement Allowance, which is paid by the Developer/Landlord to the tenant who suffers hardship due to dispossession.” Consequently, he affirmed that transit rent is not a revenue receipt and is therefore not liable to be taxed, negating the need for a TDS deduction.

The verdict came from a case concerning Sarafraz Sharafali Furniturewalla, a resident of Flat no. 5, Saigal House, South Mumbai. The property underwent redevelopment in 2017 following a safety concern flagged by the corporation. Legal disputes arose among Furniturewalla and his stepbrothers, who claimed rights over the property and the transit rent payable.

Subsequently, the developer requested a copy of Furniturewalla’s PAN Card to deduct TDS from the payable amount as “transit rent.” However, Furniturewalla’s counsel, Advocate Rustom Pardiwala contested this, citing precedents set by two Income Tax Appellate Tribunal orders.

Justice Patil examined Section 194(I) of the Income Tax Act, emphasising that the term ‘transit rent’ in the context of rent defined under the IT Act must be construed. He also referenced the ITAT orders in the cases of Smt. Delilah Raj Mansukhani and Ajay Parasmal Kothari established that such compensation is not taxable.