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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI G.D. AGARWAL & SHRI K.NARASIMHA CHARY
2 ORDER PER BENCH These two appeals, Assessee and filed by the revenue are directed against the order dated 25.08.2015 passed by the Ld. Commissioner of Income- tax (Appeals)-20, New Delhi (for short hereinafter called “Ld. CIT(A)”).
Briefly stated, relevant facts are that the assessee is an advocate by profession and was deriving income from business and profession apart from certain other income from house property and other sources. For the Asstt. Year 2011-12, he has filed the return of income on 30.9.2011 declaring a total income of Rs.3,70,00,806/-. During the assessment proceeding, AO found that the assessee had claimed a long term capital loss of Rs.17,25,869/- on account of the receipts from Cordell Estates P. Ltd. Pursuant to court order and on being asked, the following calculation was furnished for the loss: “Cordell Estates P. Ltd. Advance for residential apartment paid in FY 1994-95 50,00,000/- Receipts in 2010-11 pursuant to court order 1,20,00,000/- Indexed cost (711/259) 1,37,25,869/- (17,25,869/-)”
3 3. Case of the assessee is that the assessee being interested in buying one residential flat at Bangalore, entered into the construction agreement dated 7.10.1994 with M/s Cordell Estate (P) Ltd. and made an advance payment of Rs.50 lacs. The said agreement provides for deduction of a penalty interest at 24% p.a. on the total amount paid in case the seller fails or neglects to handover possession of the property as stipulated in the agreement. The seller never honoured the obligation under the contract, hence, the assessee had to file a suit for recovery of the advance amount of Rs.50 lacs with ante latem interest at Rs.86,65,773/- . the said suit was decreed for such amount with pendent latum and post latum interest @ 24% on the principal amount of Rs.50 lacs which the assessee calculated at Rs.1,37,25,869/-. The seller approached the Hon’ble High Court against the decree of the Bangalore Civil Court and such appeal was dismissed. Subsequently, the assessee entered into a memorandum of settlement dated 10.9.2010 and received Rs.1.20 crores towards the full and final settlement of the entire claim and claimed the difference between Rs.1,37,25,869/- and Rs.1,20,00,000/- as long term capital loss.
The AO, however, did not agree with the assessee and opined that as per the decree of the Civil Court, the assessee should have received a sum of Rs.2,35,15,753/- but by way of memorandum of 4 settlement, the assessee waived the income to the tune of Rs.1,85,15,753/- and it amounts to diversion of income before it reached the assessee. On this premise, learned AO brought to tax an amount of Rs.1,85,15,753/-.
Assessee challenged the same before the learned CIT(A) stating that the AO was not justified in making addition of the notional interest of Rs.1,15,15,752/- which have never been received by the assessee. Assessee further contended before the learned CIT(A) that out of Rs.1.20 crores received by the assessee under the memorandum of settlement, Rs.50 lacs represents the amount paid towards the advance and the balance of Rs.70 lacs represents the capital receipt. According to the assessee, since he never possessed the capital asset relatable to this transaction, the question of capital gain does not arise in the absence of any capital receipt is not taxable at all.
Learned CIT(A) agreed with the learned AO on the nature of the receipt and held that whatever the assessee received over and above the advance amount paid i.e. in the nature of interest, as such, it is liable for tax. However, learned CIT(A) did not agree with the learned AO on the aspect of notional interest and recorded a finding that the AO is not justified in taxing the unearned interest income on notional basis inasmuch as the parties entered into the 5 memorandum of settlement had given up their several options of litigations and for purchasing peace entered into such a settlement. On this premise, learned CIT(A) sustained the addition to the extent of Rs.70 lacs and gave relief to the assessee in respect of the balance amount.
Assessee is in appeal before us in of 2015 disputing the finding of the learned CIT(A) that the amount received by the assessee over and above the advance amount of Rs.50 lacs is in the nature of interest and thereby sustaining the addition to the tune of Rs.70 lacs. According to the assessee, whatever the amount that was received by the assessee under the settlement with the seller for cancellation of the agreement or for relinquishment of rights to purchase the capital assets, as such, such amount assumes the character of capital receipt and in the absence of any capital gain, such capital receipt is not liable to tax; whereas challenging the relief granted by the learned CIT(A) to the assessee in restricting the addition to Rs.70 lacs, Revenue preferred ITA No.5884/Del/2015 stating that the voluntary waiver of the income amounts to diversion of income, as such, the learned AO was justified in bringing it to tax. Learned CIT(A) committed an error in deleting the same. Since the issues involved in both the appeals is in respect of the nature of 6 receipt in the hands of the assessee, we deem it just and proper to answer this issue by way of this common order.
On a careful consideration of the record and the arguments on either side, we are convinced that in so far as the facts are concerned, absolutely there is no dispute. The entire dispute in this matter revolves around the question whether the amount received by the assessee over and above the advance amount is interest or a capital receipt and if so, whether eventually received part of the amount under the decree in view of the memorandum of settlement is also liable to be brought under tax.
Learned AR placed reliance on the decisions reported in the case of Kettlewell Bullen & Co. Ltd. Vs CIT (10\964) 53 ITR 261 (SC); CIT vs Prabhu Dayal, 82 ITR 804 (SC); Eklingji Trust vs CIT 158 ITR 810 (Raj); CIT vs Bombay Burmah Trading Corporation (1986) 161 ITR 386 (SC); Saurashtra Cements Ltd., 325 ITR 422 (SC); Senairam Doongermal vs CIT, 42 ITR 392 (SC); K.R. Srinath vs ACIT, 268 ITR 436 (Madras), CIT vs Barium Chemicals Ltd., 168 ITR 164 (AP); Dhruv N. Shah vs DCIT, 88 ITD 118 (Mum)(TM); CIT vs J. Dalmia, 149 ITR 215 (Del); Sterling Construction and Investments vs ACIT (2015) 232 Taxman 185 (Bom); Cadell Wvg. Mill Co.(P) Ltd. Vs CIT 249 ITR 265 (Mum) etc. in support of their contention that where the payment was made to compensate a person for cancellation of contract, it is 7 in the nature of capital receipt. On a careful perusal of these orders, we find that the decision of the Mumbai Bench of the Tribunal in the case of Dhruv N. Shah vs CIT (supra); CIT vs J. Dalmia (supra); and Sterling Construction and Investments (supra) are nearer to the facts of this case.
In the case of Dhruv N. Shah vs DCIT (supra), the assessee entered into an agreement with MBPL for purchase of a flat. However, MBPL had no right or title in the flat. MBPL, therefore, made a settlement out of court and returned the amount paid by the assessee and also a sum as damages. It was held in this case that since MEPT made a 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), hence the damages received by the assessee could not be brought to capital gains tax. A capital receipt is not income u/s 2(14) unless it is chargeable to tax as capital gain u/s 45. In other words, capital gains not chargeable to tax u/s 45 fall outside the definition of income u/s 2(24) and are not liable to tax.
In the case of CIT vs J. Dalmia, (supra), the question, whether capital gains could be said to arise to the assessee where on breach of a contract to build and sell property to the assessee, the assessee received an amount awarded as damages by the arbitrator, was 8 referred to the Hon’ble High Court of Delhi. Hon’ble Delhi High Court answered the same in favour of the assessee. SLP preferred by the Revenue against such judgment was dismissed by the Hon’ble Supreme Court in SLP(Civil) No.17158 of 1985 (CIT vs J. Dalmia, 189 ITR (St.) 122).
In the case in hand also Clause 3 of the agreement which entitles the purchaser to deduct penalty by way of interest at 24% p.a. for the period of delay if any in handing over the possession of the apartment to the assessee if such apartment is not handed over to the assessee as per the time schedule agreed upon by the parties. This clause clearly shows that the benefit that shall ensure to the assessee, though calculated by way of interest at 24% p.a. but in fact was intended to be by way of reduction of the price of the capital asset. No doubt, in this matter the apartment intended to be purchased by the assessee is a capital asset in any case, the assessee does not deal in real estate nor could such apartment be stock in as trade. When there is a clear intention on the part of the parties that the performance or non performance shall affect the value of the capital assets, mentioning of the wording “interest @24%” is only a measure or method of calculation to quantify the receipt but is not decisive of the character of the payment. It does not partake the character of interest within the meaning of the Act.
9 13. Further Section 2(28A) defines interest as follows: “Section 2(28A) : “Interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized;”
Admittedly, 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 (supra), 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.
10 16. Further, the Revenue does not dispute that the assessee received only Rs.1.20 crore under the memorandum of settlement and the assessee did not receive anything over and above this amount. However, learned AO added the notional interest on the premise that the assessee was entitled to this amount but had voluntarily foregone to receive the same, as such, there is an element of diversion of that income and consequently, is liable to tax. In the case of Godhra Electric Co. Ltd. Vs CIT, 225 ITR 746 (SC), the Hon’ble Apex Court held that the Income-tact Act takes into account two points of time at which the liability to tax is attracted viz. the accrual of income or its receipt, but the substance of the matter is the “income”. If income does not result at all, there can be no tax even though it is possible to reach a hypothetical income which was never materialized. Further in CIT vs Govind Agencies (P) Ltd. (2007) 295 ITR 290 (All), it was held that the earning of income whether actual or notional, has to be seen from the view point of prudent assessee and if in a given circumstance, the assessee decides to forego any income on justifiable grounds, there does not arise any question of bringing to tax any such notional income. The real income theory stated in the case of State Bank of Travancore vs. CIT, 158 ITR 102, 154 (SC), is that whether an accrual has taken place or not has to be judged in appropriate cases on the principle of real income. In view of the settled proposition of law, what has to be 11 seen is that whether the assessee had foregone any income for justifiable reasons as a prudent man or not.
Learned CIT(A) in the impugned order recorded that after having lost the case before the Civil Court and the High Court of Karnataka, the seller had the option to approach the Hon’ble Apex Court for remedy and, at the same time, the assessee also had seen a prolonged legal battle for a while over 15 years and still there was the possibility of facing the litigation before the Hon’ble Apex Court. In the circumstances, 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.