2018 (11) TMI 125 - AT - Income Tax

Capital gain u/s 45 - agreement for purchase of property could not matured - whether the amount received by the assessee over and above the advance amount is interest or a capital receipt? - fraudulent transaction without having right, title or interest in the property, there was neither a capital asset u/s 2(14) nor was there any transfer of the said asset u/s 2(47) - Held that - In this matter there is no transaction of lending or borrowing nor the disputed amount was received by the assessee towards any service, fee or other charges in respect of the moneys borrowed or debt incurred or in respects any credit facility which has not been utilized. The receipt under consideration in these appeals does not, therefore, clearly fall within the definition of interest provided under the Act. In view of the decisions referred to above and inasmuch as this receipt does not fall within the definition of interest under the Act, we are of the considered opinion that this receipt is not towards interest but only a capital receipt. Admittedly, the flat was never acquired by the assessee nor has it been transferred so as to give rise to the income under dispute, as such, it does not fall within the definition of capital gain. As is held in the case of Dhruv N. Shah 2003 (5) TMI 478 - ITAT MUMBAI a capital receipt is not an income u/s 2(14) unless it is chargeable to tax as capital gain u/s 45 of the Act and clearly in this matter, the impugned receipt is not a capital gain and, therefore, it is outside the definition of income u/s 2(24) of the Act. The assessee entered into the memorandum of settlement does not seem to be an act of unwiseness. The memorandum of settlement is the result of the sellers foregoing their right to approach the Hon ble Apex court and the assessee purchasing peace by putting end to the seemingly endless litigation. By no stretch of imagination could it be said that the assessee did not act as a prudent man in entering the said memorandum. We are convinced that all these circumstances do not suggest anything suspicious surrounding the settlement. We, therefore, hold that the assessee not earning a particular income is not without any reason and it is not for the AO to say that the assessee should have earned such income also or that even otherwise to pay tax on such amount which was never realized by the assessee. With this view of the matter, we reach a conclusion that the Ld. AO is not justified in bringing the notional interest to tax and, therefore, learned CIT(A) is perfectly justified in deleting the same. In so far as ₹ 70 lacs received by the assessee over and above the advance amount of ₹ 50 lacs is concerned, for the reasons recorded in the preceding paragraphs, we find that it is in the nature of capital receipt which can be brought to tax only if the case falls u/s 45 of the Act as capital gains and since it is conspicuously a different case, such capital receipt cannot be brought to tax. We accordingly holding so, allow the appeal of the assessee.

Summary

Issues Involved:
1. Nature of the receipt in the hands of the assessee.
2. Taxability of the notional interest added by the Assessing Officer (AO).

Detailed Analysis:

1. Nature of the Receipt in the Hands of the Assessee:
The primary issue revolves around whether the amount received by the assessee over and above the advance amount is interest or a capital receipt. The assessee, an advocate, had entered into a construction agreement in 1994 with Cordell Estates P. Ltd. for a residential flat and paid an advance of ?50 lakhs. Due to the seller's failure to deliver the property, the assessee filed a suit and received a decree for the advance plus interest, totaling ?1,37,25,869/-. However, the final settlement was for ?1.20 crores, resulting in a claimed long-term capital loss of ?17,25,869/-.

The AO opined that the assessee should have received ?2,35,15,753/- as per the decree and added the difference of ?1,85,15,753/- to the taxable income, treating it as a diversion of income before it reached the assessee. The CIT(A) partially agreed, treating the amount over the advance as interest but notional interest was not taxed. The Tribunal, referencing cases like Dhruv N. Shah vs DCIT and CIT vs J. Dalmia, found that the amount received was a capital receipt, not interest, as it was compensation for the cancellation of the contract and not income under Section 2(14) or 2(24) of the Act.

2. Taxability of the Notional Interest Added by the AO:
The AO added notional interest, arguing that the assessee waived part of the income voluntarily, thus it should be taxed. The CIT(A) disagreed, noting that the settlement was to avoid prolonged litigation. The Tribunal upheld this view, citing the principle that income must result in reality, not hypothetically (Godhra Electric Co. Ltd. Vs CIT). It was concluded that the assessee acted prudently in settling and notional income should not be taxed.

Conclusion:
The Tribunal concluded that the receipt over the advance amount was a capital receipt, not interest, and not taxable as capital gains under Section 45. The notional interest addition by the AO was unjustified. The appeal of the revenue was dismissed, and the appeal of the assessee was allowed.