Amount received to indemnify the payer against claims of parties - taxable under the head ‘other sources’

In Manoj B.Joshi v. ITO (2009) 23 DTR (Bom) 292 the assessee entered into an MOU with a person for development and construction of flats for a consideration of Rs.29.11 lakh. Since the party failed to keep his commitment as per MOU, the assessee received Rs.29.11 lakh (being amounts collected made from prospective buyers) and a sum of Rs.2 lakh being his own contribution. The assessee yet received sum of Rs.29.11 lakh as compensation and executed a release deed. The receipt of the additional sum of Rs.29.11 lakh was the subject matter of dispute before the court. The revenue taxed the receipt as capital gain. The court held that the amount received was meant to safeguard the party (who failed to keep his commitment) in the event of any claim being made by the parties who booked the flats. Accordingly, it was held that the amount received by way of compensation is taxable as ‘income from other sources’. The contention of the assessee that the said receipt is not taxable as income at all was rejected by the court.