2018 (11) TMI 125 - AT - Income Tax

Assessee's Advance Considered Capital Receipt, Not Taxable as Capital Gains

ACIT, Circle 61 (1), New Delhi Versus Shri Chittranjan Dua

ACIT, Circle 61 (1), New Delhi Versus Shri Chittranjan Dua - TMI 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 Rs. 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 Rs. 1,37,25,869/-. However, the final settlement was for Rs. 1.20 crores, resulting in a claimed long-term capital loss of Rs. 17,25,869/-.The AO opined that the assessee should have received Rs. 2,35,15,753/- as per the decree and added the difference of Rs. 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.