2023 (10) TMI 297 - AT - Income Tax

Disallowing the interest expenditure u/s 36(1)(iii) on account of interest not having been received - As per CIT interest income declared by the assessee in computation of income under the head income from other sources and declared that the assessee is not into money lending business - where the assessee was following mercantile system of accounting, why it has not accounted for such interest accrual in his profit/loss account and offered the same to tax for the financial year 2011-12 relevant to impugned assessment year 2012-13? - HED THAT - As noted that the loan was advanced in financial 2010-11 and the year under consideration is financial year 2011-12, therefore, the case of the assessee is that in the second year itself, the loan has become bad, there is nothing on record to substantiate said claim and the explanation so offered by the assessee. The explanation in absence of any corroborative evidence/documentation which can provide beyond reasonable doubt that during the financial year 2011-12, the debt has become bad will remain mere an unsubstantiated claim or an assertion on part of the assessee. Infact, if we look at the confirmation so filed by M/s City Beautiful Engineering Company Pvt limited, it states that It is hereby confirmed that an amount was due to Mr Sukhwant Singh Ahluwalia resident of 205, Sector 36-A, Chandigarh as on 31 March 2012. The said amount was received on 31 December 2010 vide cheque no. 401687. This was an interest bearing borrowing, however, no interest has been paid/credited on the said dues The said confirmation infact shows not just the existence of the loan transaction entered into by the borrower company with the assessee but also an affirmation by the borrower company that the amount of loan is payable by them to the assessee as on the close of the financial year 2011-12. It nowhere reflects or makes any statement which in any way reflect that the loan transaction has become bad as on 31/03/2012. The fact that the interest has not been paid as so stated therein doesn t lead to any conclusion that the loan transaction itself has become bad. Therefore, in absence of any other document on record, this confirmation by M/s City Beautiful Engineering Company Pvt limited supports the case of the Revenue more than the assessee. Where the assessee was admittedly following mercantile system of accounting and is in the money lending business, he was required to account for such interest accrual in his profit/loss account and offered the same to tax for the financial year 2011-12 relevant to impugned assessment year 2012- 13. In terms of rate of interest, there is nothing on record in terms of agreed upon rate of interest between the parties, therefore, being a case of unsecured loan, the matter is set-aside to the file of the AO for the limited purposes of determining the appropriate rate of interest on the unsecured loan as prevailing in the relevant point in time and bringing the same to tax. The assessee is at liberty to provide relevant information/documentation to assist the AO in determining the appropriate rate of interest. Ground of appeal is disposed off in light of aforesaid directions. Correct head of income - Capital Gains or income from other sources - Nature of compensation received - HELD THAT - As per the contents of the compromise agreement, in view of the fact that the seller is unable to get the sale deed of said land executed in favour of the assessee, both the parties have decided to settle their dispute without recourse to litigation and for that purposes, have decided to abandon their respective claims under the agreement to sell and in particular, the assessee shall forgo his right to get the land registered in his name and for the purposes, shall be entitled to a payment and consequently, the original agreement to sell dated 11/07/2005 shall become null and void and none of the parties will be entitled to any further claim thereunder. Therefore agree that the amount so received by the assessee is towards relinquishment of his rights to get the property registered in his name acquired originally in terms of the agreement to sell and the same will qualify as property of any kind and thus, a capital asset. Where such an asset is transferred by way of relinquishment, the compensation for such relinquishment so received is chargeable to tax under the head Capital gains and the amount initially paid shall be treated as cost of acquisition for acquiring such rights. The decisions of Vijay Flexible Containers 1989 (9) TMI 16 - BOMBAY HIGH COURT and K.R. Srinath 2001 (8) TMI 299 - ITAT MADRAS-C support the case of the assessee. Therefore, the income has been rightly offered to tax under the head Capital gains and the same cannot be brought to tax under the head Income from other sources . Thus, the ground of appeal is allowed.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii).
2. Treatment of gain from sale of capital asset as income from other sources.

Summary:

Issue 1: Disallowance of Interest Expenditure under Section 36(1)(iii)

Ground no. 2 relates to disallowance of Rs. 9,09,340/- under section 36(1)(iii). The assessee argued that he is engaged in the business of money lending and had booked interest income, but the borrower had defaulted on interest and principal payments. The AO disallowed the interest expenditure, applying the decision in Abhishek Industries, asserting that the loan was interest-free. The CIT(A) upheld the AO's decision, noting that the assessee was not in the money-lending business and the borrower was related to the assessee. The Tribunal found that the loan was indeed interest-bearing, evidenced by interest payment and TDS deductions in subsequent years. However, the Tribunal noted that the assessee failed to substantiate the claim that the debt turned bad during the relevant financial year. The Tribunal set aside the matter to the AO to determine the appropriate rate of interest and bring it to tax.

Issue 2: Treatment of Gain from Sale of Capital Asset as Income from Other Sources

Ground no. 3 relates to treating the gain from the sale of a capital asset as income from other sources. The assessee had entered into an agreement to purchase property in 2005, paying Rs. 14 Lacs, which was refunded as Rs. 28 Lacs in 2012 upon cancellation of the agreement. The AO and CIT(A) treated the differential amount as income from other sources, arguing that the agreement was unregistered and invalid. The Tribunal disagreed, stating that the amount received was for relinquishment of rights to acquire the property, qualifying as a capital asset. The Tribunal held that the income should be taxed under "Capital gains," not "Income from other sources," and allowed the ground of appeal.

Conclusion:

In the result, the appeal of the assessee is partly allowed for statistical purposes.

(Order pronounced in the open Court on 04/08/2023)