Assured return on advance allotment funds treated as interest income under the treaty, not a capital receipt

Reopening of assessment was examined on recorded reasons alleging receipt of assured returns and non-filing of a return, and the challenge based on section 115A(5) and section 139 was rejected on the facts. The note further explains that an advance paid for allotment of commercial space, where no vested right, lien, or possession had arisen, created only a debt claim against the developer. A fixed assured return on such funds was therefore treated as interest under Article 12 of the India-U.K. DTAA, not as a capital receipt, damages, or compensation. The additions were deleted.

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Issues: (i) Whether the reopening of assessment was valid; (ii) whether the assured return received on advance payment for allotment of commercial space was taxable as interest income or could be treated as a capital receipt.

Issue (i): Whether the reopening of assessment was valid.

Analysis: The recorded reasons showed that the Assessing Officer proceeded on information that the assessee had received assured returns from the investee company and had not filed a return. The reopening was not based on a mere fishing inquiry or on an assumption that the receipts were already accepted as interest income. The objection based on section 115A(5) and section 139 was rejected on the facts, as the reassessment was founded on the nature of the receipts and escapement concerns.

Conclusion: The reopening of assessment was held to be valid.

Issue (ii): Whether the assured return received on advance payment for allotment of commercial space was taxable as interest income or could be treated as a capital receipt.

Analysis: The allotment terms showed that, until execution and registration of conveyance, the allottee had no lien or interest in the unit and the amount paid was only an advance toward purchase. The property was not yet in existence and the assessee had only a debt claim against the developer. The fixed monthly assured return was therefore linked to the finance made available to the developer and answered the description of interest under Article 12 of the India-U.K. Double Taxation Avoidance Agreement. The receipts did not represent damages, compensation, or a reduction of capital cost, and the authorities treating them as income from other sources were not justified.

Conclusion: The assured return was held to be interest income, not a capital receipt, and no further addition was warranted.

Final Conclusion: The assessee succeeded in appeal and the additions were deleted on the basis that the assured return was taxable as interest under the treaty regime.

Ratio Decidendi: Where an allottee has no vested right, lien, or possession in the property and the developer pays a fixed assured return on advance funds, the receipt is attributable to a debt claim and is taxable as interest, not as a capital receipt.

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