2013 (12) TMI 776 - AT - Income Tax

Validity of assessment u/s 143(3) - Held that - The assessee received the refund along with interest of the amount paid by him under the agreement - Following DDA v. ITO 1995 (1) TMI 126 - ITAT DELHI - Compensation paid by the Developer to the allottees under a self-financing scheme, for delay in the construction was considered by the Revenue as income in the nature of interest u/s. 2(28A). The assessee s right is limited to recover the amount paid (for the purchase of flats) at the contracted rate of interest, on being so demanded by the buyer on the construction having not been completed by the specified date - The proposition that the interest received is chargeable to tax as income will also apply where the interest is payable under the terms of the agreement, express or implied, and the court or arbitrator gives effect to the terms of the agreement and awards interest which has been agreed to be paid - The part of amount is chargeable u/s 56 as interest income - Partly allowed in favour of assessee.

Summary

Issues:
Assessment u/s.143(3) of the Income Tax Act, 1961 for A.Y. 2006-07 - Nature of amount received by assessee from Builder - Capital or revenue receipt - Tax treatment of interest received - Appeal against CIT(A) order.

Analysis:

1. Nature of Amount Received:
The case involved an appeal by the assessee against the CIT(A)'s order dismissing the appeal contesting the assessment u/s.143(3) of the Income Tax Act, 1961 for A.Y. 2006-07. The assessee entered into an Agreement for purchase of two residential flats but did not receive possession even after ten years. The District Consumer Redress Forum directed the Builder to refund the entire amount paid by the assessee along with interest and compensation. The assessee claimed the amount received as 'long term capital gain,' but the A.O. treated the excess amount as income from other sources.

2. Adjudication by ITAT:
The ITAT analyzed the nature of the amount received by the assessee. It was observed that the assessee sought a refund of the amount paid under the contract along with interest through legal recourse due to the Builder's default. The ITAT concluded that the excess amount received was not a transfer consideration for any capital asset but a compensation for non-performance under the contract. The interest received was considered compensatory in nature and assessed as revenue income u/s. 56 of the Act.

3. Legal Precedents and Interpretation:
The ITAT referred to various legal precedents to support its decision. It highlighted cases where interest received was treated as revenue income and distinguished cases where interest was granted as damages. The ITAT emphasized that the nature of the transaction and the purpose of the amount received determined its tax treatment. The ITAT confirmed the receipt of a certain amount as revenue income and exempted a portion as capital income.

4. Final Decision and Relief:
Based on the analysis and legal precedents, the ITAT confirmed the receipt of a specific amount as revenue income assessable under section 56 of the Act. A portion of the amount was considered on capital account and deemed tax-exempt. The ITAT partially allowed the assessee's appeal, providing relief in the tax treatment of the received amounts.

In conclusion, the ITAT's judgment clarified the tax treatment of the amount received by the assessee from the Builder, emphasizing the distinction between capital and revenue receipts based on the nature of the transaction and legal implications.