If a Mumbaikar books a flat and then cancels the deal with the builder, and benefits by receiving a sum higher than the earnest amount paid, the excess will not be treated as a tax-free income. In tax parlance, it will not constitute a capital receipt.

The next issue which arises is whether it will be treated as ‘income from other sources’ or ‘capital gains’. In its recent order, Income-Tax Appellate Tribunal (ITAT)’s Mumbai bench has held the excess consideration received is in the nature of ‘capital gains’.

This is a more favorable scenario than that drawn by the income-tax officer, who in the course of assessment had treated the excess amount or that received minus the booking and earnest money as ‘income from other sources’.

In the absence of any contrary jurisdictional decisions, this ITAT order will also play a significant role in assessment of cases outside Mumbai.

Under Section 54 of the Income-Tax Act, if the long-term capital gains arising on a house sale are invested in another residence in India within a stipulated period of time, then to the extent of such investment, the taxable component of capital gains is reduced. This results in a lower tax outgo. Thus, if the entire amount of long-term capital gains is invested, no tax is payable.

Anil Harish, an advocate specializing in real estate told TOI: “I agree with the ITAT view and it is a good decision. Years ago, in 1979, Bombay HC had held that when a part-payment was made and a right was acquired, this amounted to a capital asset, even though the transaction had not been completed. On the sale of the asset, the surplus was to be treated as a capital gain. This HC order has been the foundation for several other decisions referred to in the recent ITAT order.”

In this case heard by ITAT, Mukesh Sohanraj Vardhan, the taxpayer, had treated the benefit of Rs 18.75 lakh received from the builder on cancellation of his deal—flat booked in Vardhaman Heights, Byculla—as a long-term capital gain.