On 17 September 2026, the Income Tax Appellate Tribunal (ITAT), Mumbai, deleted that addition. The Bench held that hardship and transit money paid because a flat owner has to vacate his own home is a capital receipt. It is not taxable merely because the member did not spend an equal amount on rent.

The order is useful for thousands of Mumbai society members who receive similar cheques during redevelopment — and then worry when a tax notice arrives.

What the member received

Dr. Girish Suresh Walavalkar owned a flat in MIG Co-operative Housing Society, Bandra (East), Group IV Ltd. The society entered into a registered tripartite redevelopment agreement with Keystone Realtors Pvt. Ltd.

Under that agreement he received ₹13,50,216 as hardship / transit / displacement allowance while the building was being rebuilt. He said he spent ₹11,97,900 on rented accommodation and offered only the difference of ₹1,52,316 in his return.

How a redevelopment cheque can trigger a tax notice

Redevelopment payments often show up in the department’s information system. In this case, information that the assessee had received money linked to a redevelopment agreement led to reopening of Assessment Year 2017-18.

A notice under section 148 was issued. The Assessing Officer completed reassessment under section 147 read with section 144B and raised the assessed income substantially.

This is the pattern society members should understand: the developer’s payment is visible. If the return does not treat it the way the Assessing Officer expects, a notice can follow — sometimes years later.

What the tax department did

The Assessing Officer did not tax the entire ₹13.50 lakh in one go. He accepted rent paid to one landlord (₹7.92 lakh) and rejected rent said to have been paid to a second landlord. He treated the leave-and-licence agreement for the second premises as unreliable and the bank trail as incomplete.

After giving credit for the amount already offered by the assessee, he added ₹4,05,896. The Commissioner of Income-tax (Appeals) confirmed the addition.

In short, the department’s case was: you received transit money; prove you spent it on rent; the unproved or unspent part is income.

What ITAT held

The Tribunal said that approach starts at the wrong place.

The first question is the character of the receipt, not how the money was later spent. The ₹13.50 lakh was paid because the member had to leave his residential flat for redevelopment. The Revenue did not show that the payment was for any independent service or was revenue in nature.

Following earlier Mumbai ITAT decisions (including Ajay Parasmal Kothari, which itself followed Delilah Raj Mansukhani and Devshi Lakhamshi Dedhia), the Bench held that compensation for hardship and displacement in redevelopment is a capital receipt, not chargeable to tax.

Taxability does not depend on:

• whether the member took another flat on rent,
• whether he lived with family,
• or whether every rupee of the allowance is matched with a rent receipt.

Once the receipt itself is not taxable, the dispute over the second landlord’s registered agreement and bank statements ceases to decide the tax. The Tribunal refused to send that issue back to the Assessing Officer and directed deletion of the ₹4,05,896 addition.

The fact that the assessee had himself offered a small differential amount after the 148 notice also does not convert a non-taxable capital receipt into taxable income.

Two other additions were also deleted

The same order also deleted:

• ₹8,87,904 added as salary difference between Form 26AS and taxable salary — the Assessing Officer had applied an outdated ₹3.50 lakh gratuity ceiling instead of the ₹10 lakh limit applicable after the 2010 amendment; Form 16 and the employer’s full-and-final settlement were accepted.
• ₹8,775 disallowed under sections 80G and 80TTA after the assessee produced the donation receipt, bank debit and showed that savings-bank interest had already been offered.

Those points matter for the assessee. For society members, the redevelopment finding is the one that travels.

Why members need not panic

A tax notice after redevelopment is common enough to cause anxiety. It does not automatically mean the hardship or transit money is taxable.

Points that emerge from this order:

• The nature of the payment matters more than the label “rent from builder.”
• Living with relatives or spending less than the allowance does not, by itself, make the balance income.
• A registered redevelopment agreement and the fact of displacement are central.
• Offering a small amount in a later return under a mistaken understanding does not lock the tax character forever.
• This is a coordinate-bench line in Mumbai ITAT, not a High Court judgment binding across India — but it is consistent with how Mumbai benches have treated such receipts.

Members should still keep the redevelopment agreement, society correspondence, bank credits from the developer, and any rent documents. Those papers help if a notice comes. They are not a requirement that every rupee of compensation must be spent on rent for the receipt to stay non-taxable.

The settlement

ITA No. 4848/Mum/2026 was heard on 16 July 2026 and pronounced on 17 September 2026. The appeal was allowed. All three additions were deleted.

For housing societies in the redevelopment pipeline, the practical message is simple: the developer’s hardship cheque can attract the tax department’s attention. That is not the same as a final demand that the unspent portion is income. In this Bandra East case, the Tribunal said it is not.

Also Read: Vacant Flat Can Still Attract Income Tax Notice: Mumbai ITAT Remands Case on Notional Rent

The post Builder paid ₹13.5 lakh in redevelopment; taxman taxed member on unspent part appeared first on Square Feat India.

The Purchase

The registered sale agreement, dated 4 April 2012, recorded the total consideration for the flat at ₹72 lakh. Katkade filed his income tax return for Assessment Year 2012-13 declaring an income of ₹2,71,280. The IT Department processed the return and accepted it without objection. For Katkade, the matter was closed.

The Raid He Knew Nothing About

On 24 September 2014 — more than two years after Katkade had taken possession of his flat — the IT Department’s investigation wing conducted a search and seizure operation at the offices of Cosmos Group, the builder. Cosmos Group was engaged in real estate development and construction across the Mumbai Metropolitan Region.

During the raid, investigators claimed to have found Excel sheets containing flatwise and shopwise cash payment records, emails in the builder’s Gmail and Yahoo accounts, and what they described as a cash book of on-money received from buyers. Two key persons were questioned — Karuna Khambayat, the Sales Head of Cosmos Group, who made a general admission that cash payments were often involved in the sale of flats and shops, and Suraj Parmar, son of promoter Ramesh Parmar, who spoke about cash transactions in the business.

Flat No. 802 — Katkade’s flat — appeared in those Excel sheets with cash figures against it.

Katkade was not present during the raid. He was not questioned. No one from the IT Department contacted him. He had no knowledge that a file bearing his flat number now existed inside the investigation wing.

Five Years of Silence, Then a Bombshell

For nearly five years after the raid, nothing happened. Then, on 29 March 2019 — seven years after the original flat purchase and five years after the Cosmos Group raid — Katkade received a notice under Section 148 of the Income Tax Act. The IT Department was reopening his already-closed assessment for AY 2012-13.

The basis was information passed by the Directorate of Income Tax (Investigation), Unit 1(4), Mumbai. The Assessing Officer (AO) had obtained prior approval from the Principal Commissioner of Income Tax (Pr. CIT-2), Thane. The allegation was stark — that Katkade had paid ₹34.5 lakh in cash over and above the registered agreement value, split as ₹28.5 lakh in AY 2012-13 and ₹6 lakh in AY 2013-14. Since Katkade held a 50% share in the flat, the AO proposed to add ₹14.25 lakh — 50% of ₹28.5 lakh — to his income for AY 2012-13 as unexplained money under Section 69A of the Income Tax Act.

The Letter the IT Department Refused to Believe

Katkade fought back. He filed a fresh return in response to the notice, denied paying any on-money, and asked the AO to refer the matter to the District Valuation Officer for an independent valuation. The AO rejected that request, saying the case did not pertain to flat valuation.

When the AO issued a show cause notice asking Katkade to explain why ₹14.25 lakh should not be added to his income, Katkade did something significant. He went back to Cosmos Group and obtained a written confirmation letter from the builder stating that the total amount received from Katkade and his wife for Flat No. 802 was ₹72 lakh — nothing more, nothing less. The very builder whose internal records the IT Department was relying upon to allege cash payment was now confirming in writing that no such additional payment existed.

The AO dismissed the letter entirely and made the addition anyway, relying instead on the Excel sheet from the raid and the statements of Suraj Parmar and Karuna Khambayat.

There was one more problem — the actual incriminating documents, the Excel sheets, the emails, the cash book, were never shown to Katkade at any stage of the assessment. He was being taxed on the basis of evidence he had never seen.

Appeal Rejected, Fight Continues

Katkade appealed to the Commissioner of Income Tax (Appeals) — CIT(A) — at Panaji. He raised three arguments: that the reopening of the assessment after seven years was itself legally invalid; that the addition was baseless since no evidence had ever been produced before him; and that he had been denied the right to cross-examine Karuna Khambayat and Suraj Parmar, whose statements were being used against him.

The CIT(A) rejected all three. On the cross-examination request — a right firmly established by the Supreme Court in Andaman Timber Industries vs CCE — the CIT(A) gave a puzzling response, holding that the addition was not based only on the incriminating material and therefore cross-examination was not required. The order was passed on 26 September 2025.

ITAT: The Addition Was Never Sustainable

Katkade’s chartered accountant, Subodh Ratnaparkhi, filed an appeal before the ITAT Mumbai in November 2025. The case came up for hearing on 18 March 2026 before a two-member bench of Judicial Member Pawan Singh and Accountant Member Makarand Vasant Mahadeokar.

Before the Tribunal, Ratnaparkhi placed on record five previous ITAT orders where identical additions had been made against other Cosmos Group flat buyers — and deleted in every single case. The buyers included Bharat Laxman Bhiwapurkar, Mamta Sharad Gupta, and Monika Anand Gupta. In each case, the basis was the same Excel sheet, the same statement of Suraj Parmar, and the same methodology. In each case, the Tribunal had ruled against the IT Department.

The Revenue’s Senior Departmental Representative, Usha Gaikwad, supported the lower authorities and argued that the statements and seized material were sufficient basis for the addition.

The Tribunal was unconvinced. In its order pronounced on 4 June 2026, the bench held that the addition was based solely on third-party statements, which cannot be used as evidence against a buyer without cross-examination. It further held that the Excel sheet was inadmissible as electronic evidence since it had not been authenticated under Section 65B of the Indian Evidence Act. The actual seized documents — the emails and cash books — had never been brought on record before any authority at any stage. The builder’s own confirmation letter confirming ₹72 lakh had been ignored without any valid reason. Following five coordinate bench decisions on identical facts, the Tribunal deleted the addition entirely.

Since Katkade had won on merit, the bench did not even find it necessary to rule on whether the 2019 reopening was legally valid in the first place.

What This Means for Homebuyers

The Katkade case is not an isolated incident. It is part of a pattern. The ITAT has now deleted on-money additions linked to Cosmos Group in at least six cases, consistently finding that the Excel sheets seized during the 2014 raid are inadmissible, that general admissions by builder insiders cannot be attributed to specific buyers without corroboration, and that denying buyers the right to cross-examine witnesses whose statements are used against them is a violation of natural justice.

For homebuyers across India, the case carries a broader warning. A builder raid can trigger tax demands against buyers years or even decades after a purchase. The IT Department can reopen assessments using information from someone else’s search. And the buyer — who had no part in that raid, never saw those documents, and may have paid every rupee above board — can find themselves fighting a tax addition based entirely on a figure in someone else’s spreadsheet.

The only protection is documentation. A registered agreement, a complete payment trail through banking channels, and written confirmations from the builder at the time of purchase are a homebuyer’s best defence if the taxman comes knocking years later.

For Katkade, that defence ultimately worked — but it took fourteen years, two appeals, and a Tribunal order to prove it.

The order is dated June 4, 2026.

Also Read: ITAT Mumbai Clears Real Estate Developer of Fraud Allegations, Allows ₹1.79 Crore Tax Deduction

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