2018 (9) TMI 2113 - AT - Income Tax

Reopening of assessment u/s 147 - TDS u/s 195 - assessee invested in an upcoming project of Omaxe Ltd. along with four other investors - assessee made payment of 95% of the sale price and was provisionally allotted fourth and fifth floors in a proposed commercial complex and in lieu of such 95% advance payment Omaxe Ltd. was to pay assured return on monthly basis to assessee till the time possession of the commercial space was handed over - Such payment was made by Omaxe Ltd after deduction of tax u/s 195 @ 15% under the India-U.K. Double Taxation Avoidance Agreement (DTAA) - HELD THAT - A perusal of the copy of the reasons recorded reveals that the AO has not used the word interest income rather he mentioned that he had the information that the assessee had been receiving assured returns on the investment made in Omaxe Ltd. Accordingly he reopened the assessment and determined the nature of income as income from other sources and computed the income of the assessee accordingly. It cannot be said that the Assessing officer was supposed to assume that the assessee was not required to file the return of income as per the provisions of section 115A sub-section (5) or that the AO was of the view that the assessee has been receiving interest income only. In view of this the reopening of the assessment is held valid. Additions upon the definition of interest as provided under article 12 of the India U.K. DTAA - As it was a financial transaction and the assured money return received by the assessee was nothing else than the interest received by the assessee on the finances made by the assessee to the Omaxe Ltd to be used for the construction of the property. Omaxe Ltd had rightly deducted the tax @ 15% of the interest / assured return paid to the assessee. Even the assessee on being asked to file the return has also treated the said receipts as interest income. Subsequently the assessee changed his stand and come with a plea that the assured return is only in the nature of capital receipt. The assessee in this respect has placed reliance on several decisions of the High Courts and Supreme Court. Without referring to each of the decision we may point out that the decisions referred to by the assessee are not applicable to the facts and circumstances of the case e.g. in the case of CIT Vs. Saurashtra Cement Ltd 2010 (7) TMI 11 - SUPREME COURT assessee in that case had received liquidated damages for delay in supply of plant and machinery. The Hon ble Supreme Court held that the damages were directly and intrinsically linked with the procurement of the capital assets i.e. cement plant. Neither any damages were paid by the Omaxe Ltd. to the assessee for late delivery of the possession of the commercial floors in question nor any advance money was paid by the assessee to get the commercial floors at some concessional rate or on an early date rather as discussed above as per the clause of the agreement even after payment of 95% of the price the assessee did not get right or lien in the property and as discussed above this was a financial transaction between the assessee and Omaxe Ltd. In view of this we hold that the assured return received by the assessee was in the nature of interest and the assessee has rightly returned / offered the same as interest income. No justification on the part of the lower authorities in treating the receipts of the assessee as income from other sources . We accordingly set aside the impugned order and direct that the assessee in this case has rightly paid the taxes as India U.K. DTAA. No further addition is warranted. However the claim of the assessee that it is a capital receipt not liable for taxation is rejected. The appeal of the assessee is therefore treated as allowed.

Summary

Issues:
- Validity of reopening the assessment
- Nature of assured return received by the assessee
- Tax treatment of the assured return

Validity of Reopening the Assessment:
The appeals involved different assessees challenging separate orders of the Commissioner of Income Tax (Appeals). The common issue was heard together and disposed of in a single order. The lead case for narration of facts was chosen for convenience. The validity of the reopening of the assessment was challenged by the assessees. The Assessing officer had reopened the assessment based on information received, requiring the assessees to file their returns of income. The assessees contended that the reopening was not valid as per Section 115A(5) and that the Assessing officer's reasons were insufficient. However, the Tribunal held that the reopening was valid as the nature of income was determined as 'income from other sources' based on assured returns received.

Nature of Assured Return Received:
The assessees had invested in an upcoming project and received assured returns from the developer. The Assessing officer treated the assured return as income from other sources, adding it to the assessees' income. The Tribunal analyzed the terms of the investment and the nature of the returns. It was found that the assessees did not have a lien or interest in the property until specific conditions were met. The assured return was considered a financial transaction, akin to interest received on the funds advanced to the developer. The Tribunal concluded that the assured return was rightly treated as interest income, as per the India-UK DTAA, and the assessees had correctly paid taxes on it.

Tax Treatment of the Assured Return:
The Assessing officer relied on the definition of 'interest' under the India-UK DTAA and specific clauses in the allotment letter to determine the nature of the assured return. The Tribunal noted that the assured return was not linked to the property's income potential and was essentially interest on the funds advanced. The assessees' argument that the return was a capital receipt was rejected, citing various court decisions that were not applicable to the case. The Tribunal held that the assured return was rightly treated as interest income, and the assessees had fulfilled their tax obligations as per the DTAA. The lower authorities' decision to treat the receipts as income from other sources was set aside, and the appeals were allowed accordingly.

In conclusion, the Tribunal found that the reopening of the assessment was valid, the assured return received was akin to interest income, and the assessees had correctly paid taxes as per the India-UK DTAA. The appeals were allowed, and the decision applied to all the appeals with identical directions.