2008 (7) TMI 1007 - HC - Income Tax

Classification or categorization of the income - income from long-term capital gain OR income from other sources - amount in issue was paid to the appellant only to safeguard Mr. Dalvi from any claim(s) likely to be made against him by the person who had booked the flats through the appellant, since Mr. Dalvi did not construct the flats as agreed by him earlier - HELD THAT - It is clear that the appellant has not received the amount in issue from Mr. Dalvi towards either acquiring or releasing or relinquishing any right or title or interest whatsoever, in the immovable property. The appellant was paid separately for relinquishing his interest in the immovable property, appropriate amount along with interest. Obviously therefore, the amount in issue cannot be said to be an amount received by the appellant as a compensation for relinquishing his interest in the immovable property and therefore cannot be considered under the head Capital gain . We agree with the observation of the Tribunal that the amount in issue was paid to the appellant only to safeguard Mr. Dalvi from any claim(s) likely to be made against him by the person who had booked the flats through the appellant, since Mr. Dalvi did not construct the flats as agreed by him earlier. Thus, considering over all facts and circumstances of the case and the factual findings recorded by all the three lower authorities, we are unable to accept the contentions of the appellant, firstly that the amount in issue received by the appellant is not an income at all, as defined u/s 2(24) of the said Act and that alternatively this income of the appellant is required to be treated as income from long-term capital gain and not as income from other sources as contemplated by section 14 r/w section 56 of the said Act. We hold that all the three lower authorities were fully justified in treating the receipt of amount in issue by the appellant, not only as an income but also as income received by the appellant from other source as contemplated by section 14 r/w section 56 of the said Act and subject the same to taxation accordingly. The appellant has thus, failed to raise any question of law by the present appeal. The appeal is therefore dismissed, accordingly.

Issues Involved:
1. Whether the amount of Rs. 29,11,000 received by the appellant is an income subject to income tax under section 2(24) of the Income-tax Act.
2. Whether the amount received should be classified as "income from long-term capital gain" or "income from other sources."

Issue-wise Detailed Analysis:

Issue 1: Whether the amount of Rs. 29,11,000 received by the appellant is an income subject to income tax under section 2(24) of the Income-tax Act.

The appellant argued that the amount of Rs. 29,11,000 received was not an income under the definition of section 2(24) of the Income-tax Act. However, the court noted that section 2(24) provides an inclusive definition of income, which is not exhaustive. Section 14 of the Act categorizes income for tax purposes, and if the income cannot be classified under the heads (A) to (E), it falls under head (F) as "Income from other sources." Section 56 further clarifies that income not excluded from total income under the Act shall be chargeable under "Income from other sources" if it does not fall under any other specified heads.

The court observed that the appellant received the amount from Mr. Dalvi based on the Memorandum of Understanding (MOU) and the Release Deed. Given these facts, the court concluded that the amount received is indeed income under section 2(24) read with sections 14 and 56 of the Act. The court thus rejected the appellant's contention and confirmed the findings of the lower authorities that the amount is taxable income.

Issue 2: Whether the amount received should be classified as "income from long-term capital gain" or "income from other sources."

The appellant claimed the amount as "income from long-term capital gain," while the department classified it as "income from other sources." The court examined the nature of the transactions between the appellant and Mr. Dalvi. Initially, the appellant paid Rs. 31,11,000 to Mr. Dalvi for the development and construction of flats. Due to legal issues, Mr. Dalvi could not fulfill his commitments, leading to another MOU where Mr. Dalvi agreed to refund the amount with interest and an additional Rs. 29,11,000 as compensation for the cancellation of the arrangement.

The court found that the appellant received the refund and interest separately for relinquishing his interest in the immovable property. The additional Rs. 29,11,000 was paid to indemnify Mr. Dalvi against any future claims from the proposed housing society members. The court emphasized that this amount was not paid for acquiring or relinquishing any right, title, or interest in immovable property, and thus, cannot be considered under "Capital gain."

The appellant's counsel argued that even the right to obtain conveyances of immovable property falls within the definition of "property" under section 2(14) of the Act. However, the court noted that the appellant failed to correlate the payment of Rs. 29,11,000 to any such right. The court concluded that the amount was paid to prevent future claims against Mr. Dalvi and not for any present right or interest in property.

The court agreed with the Income-tax Appellate Tribunal's observation that the amount was paid to safeguard Mr. Dalvi from potential claims due to his failure to construct the flats. Thus, the court upheld the classification of the amount as "income from other sources" under section 14 read with section 56 of the Act.

Conclusion:

The court dismissed the appeal, holding that the amount of Rs. 29,11,000 received by the appellant is taxable income under section 2(24) of the Income-tax Act and should be classified as "income from other sources" rather than "income from long-term capital gain." The appellant failed to raise any question of law, and the findings of the lower authorities were fully justified.

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