2015 (4) TMI 184 - AT - Income Tax

Revenue receipt v/s capital receipt - amount received at the time of execution of the sub lease - booking advances - Held that - If a receipt is having a direct nexus with the acquisition of capital asset then the expenditure is capital in nature. Even if an amount is received against that capital asset then naturally such receipt is a capital receipt. A general Rule is that the amount received in lieu of a capital asset is a capital receipt and if an amount is received in lieu of circulating capital/stock-in-trade then it is a Revenue receipt. A compensation in lieu of a profit is a Revenue receipt but if the source of the profit is completely parted then such a gain is a capital receipt. Likewise if a receipt is towards a loss of earning or business or relinquishment of rights, prima facie, it takes a character of a capital receipt. As far as present appeal is concerned the amount received at the time of execution of the sub lease is concerned, the same is definitely in the nature of capital receipt. Specially when the Assessee has incurred a huge amount of ₹ 38.5 crore for acquiring the lease rights from GIDC. The said lease amount was to be recovered from the members joining the scheme by sub leasing the land to them. Upto this extent, we hereby hold that the Assessee was required to demonstrate by a separate account in its books to earmark the amount received against the sub lease from the members of the scheme. This fact still can be verified by perusing the sub lease agreements. Otherwise also the admitted factual position is that the Assessee was receiving ₹ 8 lac from each member on granting sub lease to them. Therefore there should not be any defect in ascertaining the year-wise sub lease amount received by this Assessee. Whether the principle of mutuality shall apply on the present set of facts - Held that - We are not in agreement with the contentions of learned A.R. because of the simple reason that the principle of mutuality is based upon the concept of sharing the expenditure as well as sharing the profits. In the present case, nowhere it was demonstrated that the surplus, if any generated from the running of the scheme, shall be distributed amongst the members of the scheme. In the absence of such evidence we hereby hold that the principle of mutuality shall not apply on this Assessee. The basic principle is that the unaccounted income should be taxed in the hands of the Assessee on the basis of the incriminating material unearthed at the time of search or survey. However, in this case no lease was executed during the assessment year 2010-11, but the AO has taxed ₹ 11.27 crore. If we apply the principle of natural justice then the unaccounted income should be taxed on the basis of the incriminating material found. Because of this reason, we hereby direct the AO to restrict the assessment only to the extent the incriminating material found as per survey and not to extrapolate. Therefore, the part relief granted by learned CIT(A) was merely on the basis of a hypothecation that against 94 plots a proportionate expenditure might have been incurred. Such hypothecation cannot be upheld especially when the Assessee is in a position to demonstrate the year-wise financial position. Resultantly, grounds raised against the part relief by both the sides are hereby set aside back to the stage of the AO to be decided de novo as per the directions.- Decided in favour of Assessee and the Revenue allowed for statistical purpose.

Issues Involved:
1. Nature of the receipt (capital vs. revenue).
2. Applicability of the principle of mutuality.
3. Taxability of the on-money component.
4. Method of accounting for the project (project completion vs. percentage completion).
5. Proportionate expenditure allocation.

Detailed Analysis:

1. Nature of the Receipt (Capital vs. Revenue):
The primary issue was whether the amount received by the Assessee for sub-leasing plots should be treated as a capital receipt or revenue receipt. The Assessee argued that the premium received was a capital receipt, as it was for the allotment of plots and related to the acquisition of a capital asset. The Tribunal agreed that the amount received at the time of execution of the sub-lease was a capital receipt, given the substantial payment made to GIDC for acquiring lease rights. The Tribunal emphasized that receipts directly linked to the acquisition of a capital asset are capital in nature.

2. Applicability of the Principle of Mutuality:
The Assessee contended that the principle of mutuality applied, as the project was developed on a cost-sharing basis among members. However, the Tribunal rejected this argument, stating that the principle of mutuality requires sharing both expenditure and profits among members, which was not demonstrated in this case. There was no evidence that any surplus generated would be distributed among the members, thus the principle of mutuality was not applicable.

3. Taxability of the On-Money Component:
The Assessee admitted to receiving an unaccounted cash component ("on-money") of Rs. 4 lakh per plot, which was not recorded in the books. The Tribunal directed the AO to restrict the assessment to the extent of incriminating material found during the survey and not to extrapolate the unaccounted income uniformly across all plots. The Tribunal emphasized that unaccounted income should be taxed based on the incriminating material unearthed during the survey, adhering to the principle of natural justice.

4. Method of Accounting for the Project:
The Tribunal discussed two recognized methods of accounting for such projects: the project completion method and the percentage completion method. The Tribunal noted that the project was ongoing and the Assessee could provide year-wise financial data. The AO was directed to ascertain whether the Assessee acted as a "contractor" or "developer" and apply the correct method of accounting accordingly. This issue was remanded back to the AO for a fresh examination based on the guidelines provided.

5. Proportionate Expenditure Allocation:
The CIT(A) had proportionately allocated the expenditure incurred on the project to the number of plots for which money was received. The Tribunal found this approach hypothetical and not based on actual financial data. The Tribunal directed that the correct financial position should be determined based on the Assessee's year-wise accounts. The part relief granted by the CIT(A) was set aside, and the issue was remanded back to the AO for a de novo decision.

Conclusion:
The Tribunal allowed both the Assessee's and the Revenue's appeals for statistical purposes, directing a fresh examination by the AO based on the guidelines provided. The key directives included treating the sub-lease amounts as capital receipts, rejecting the principle of mutuality, restricting the assessment of unaccounted income to the incriminating material found, and applying the correct method of accounting based on the Assessee's role and financial data.

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