Business income and revenue receipt treatment upheld for land development rights, with bogus purchase disallowance increased.

For a builder and developer, surplus from transfer of land and development rights was treated as business income because the rights were acquired and dealt with as part of business activity, and accrual was held to occur in the year the agreements were executed, registered, and possession was given under the mercantile system. Compensation received on relinquishment of rights in land was characterised as revenue receipt, as it represented loss of future profits and trading advantages rather than destruction of the profit-making structure. On alleged bogus construction-material purchases, the assessee's failure to produce bills and vouchers meant the disallowance could be enhanced to 75%.

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Issues: (i) Whether the disallowance made on alleged bogus purchases of construction material should be confined to 50% or enhanced; (ii) Whether surplus arising on transfer of land and development rights to builders was taxable as business income or as long-term capital gains, and in which year it accrued; and (iii) Whether compensation received on relinquishment of rights in land under a civil decree was a capital receipt or revenue receipt.

Issue (i): Whether the disallowance made on alleged bogus purchases of construction material should be confined to 50% or enhanced.

Analysis: The assessee failed to produce supporting bills and vouchers for the disputed purchases and did not discharge the burden of proving that the expenditure was wholly and exclusively incurred for business. Mere payment by account payee cheque was held insufficient to establish genuineness. The appellate allowance of only 50% lacked adequate reasoning, and remand would serve no purpose on the facts found.

Conclusion: The disallowance was rightly enhanced to 75%, and this issue was decided in favour of the Revenue.

Issue (ii): Whether surplus arising on transfer of land and development rights to builders was taxable as business income or as long-term capital gains, and in which year it accrued.

Analysis: The agreements and surrounding documents showed that the assessee, a builder and developer, acquired and transferred development rights for business purposes. The land and rights were treated as business assets rather than capital assets, and the mere passage of time did not change their character. The Tribunal also held that the relevant agreements were executed and registered during the year and possession was given during the year, so the income accrued on an accrual basis in the same year under the mercantile system. The view that the transactions remained capital in nature or that taxability should await full receipt of consideration was rejected.

Conclusion: The surplus was held to be business income chargeable in the impugned assessment year, and this issue was decided in favour of the Revenue.

Issue (iii): Whether compensation received on relinquishment of rights in land under a civil decree was a capital receipt or revenue receipt.

Analysis: The amount was received in settlement of claims arising out of the land transaction and represented compensation for the loss of future profits and trading advantages, not for destruction of the profit-making apparatus itself. The receipt was therefore treated as a trading receipt rather than a capital receipt. The authorities relied on by the assessee were held to be distinguishable on the facts.

Conclusion: The compensation was held to be revenue in nature and taxable, and this issue was decided in favour of the Revenue.

Final Conclusion: The appeal succeeded on the substantive tax characterisation issues and was allowed only to the extent indicated, with the disallowance on purchases also sustained at a higher figure.

Ratio Decidendi: Where a builder or developer acquires and transfers development rights as part of its business activity, the surplus is taxable as business income, and compensation received for loss of future profits from such a transaction is a revenue receipt; the assessee bears the burden of proving the genuineness of claimed expenditure.

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