2024 (9) TMI 1722 - AT - Income Tax

Builder compensation for property non-delivery ruled capital receipt, not taxable interest income under section 2(28A)

ITAT Delhi held that compensation received from builder for non-delivery of property constitutes capital receipt, not interest income. Following SC ... Characterization of receipt - treating the amount of compensation received from DLF Company for non delivery of property - interest income OR capital receipt - HELD THAT:- As decided in M/s. West Bengal Housing Infrastructure development Corporation Limited [2019 (4) TMI 541 - SC ORDER] applying the provisions of section 2(28A) of the Income-tax Act held that the compensation paid to the builder to the flat allottee cannot be construed as interest at all and hence, there is no question of deduction of tax at source in terms of section 194A of the Act thereon. Similar view was taken in the case of Delhi Development Authority vs. ITO [1995 (1) TMI 126 - ITAT DELHI], decision of Beacon Projects Pvt. Ltd.[2015 (6) TMI 939 - KERALA HIGH COURT] and Sawhney Builders Pvt. Ltd. [2023 (4) TMI 473 - ITAT DELHI] Thus, we hold that the compensation received by the assessee from DLF for delayed handing over of the property in the sum is not chargeable to tax in the hands of the assessee - Appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the compensation received by the assessee from DLF Commercial Complexes Ltd. for the non-delivery of property should be treated as a capital receipt not chargeable to income tax or as interest income.Whether the disallowance of interest expenditure by the Assessing Officer (AO) was justified under section 57(iii) of the Income Tax Act, 1961.ISSUE-WISE DETAILED ANALYSIS1. Nature of Compensation ReceivedRelevant Legal Framework and Precedents: The primary legal question revolves around whether the compensation received by the assessee is a capital receipt or interest income. The legal framework involves the interpretation of section 2(28A) of the Income Tax Act, which defines 'interest.' The judgment references the decision of the Himachal Pradesh High Court in the case of H.P. Housing Board, which distinguished between interest and compensation.Court's Interpretation and Reasoning: The Tribunal examined the agreement between the assessee and DLF, which stipulated compensation in the form of interest if the property was not delivered within three years. The Tribunal noted that the compensation was calculated using an interest rate as a parameter and not as actual interest income.Key Evidence and Findings: The Tribunal considered the agreement dated 29.10.2007, which outlined the terms for compensation. It also reviewed the payments made by the assessee to DLF and the subsequent non-delivery of the property.Application of Law to Facts: The Tribunal applied the legal principles from the Himachal Pradesh High Court decision, concluding that the compensation was not interest income but rather damages for non-delivery. The Tribunal emphasized that the payments made by the assessee were not loans or deposits warranting interest.Treatment of Competing Arguments: The Tribunal addressed the Revenue's argument that the compensation should be treated as interest under section 2(28A) but found it unconvincing, relying on the precedent set by higher courts.Conclusions: The Tribunal concluded that the compensation received by the assessee was a capital receipt and not chargeable to tax as interest income.2. Disallowance of Interest ExpenditureRelevant Legal Framework and Precedents: The issue involves the application of section 57(iii) of the Income Tax Act, which allows deductions for expenses incurred wholly and exclusively for earning income from other sources.Court's Interpretation and Reasoning: The Tribunal reviewed the AO's decision to disallow interest expenditure linked to loans taken for property purchases. The AO disallowed a portion of the interest, reasoning that it was not incurred for earning the interest income in question.Key Evidence and Findings: The Tribunal considered the linkage between the loans and the properties for which they were taken, noting the AO's partial allowance and disallowance of interest deductions.Application of Law to Facts: The Tribunal upheld the AO's decision to disallow a portion of the interest expenditure, finding that the disallowed amount was not directly linked to the income being taxed.Treatment of Competing Arguments: The assessee's argument for full deduction was not accepted, as the Tribunal found the AO's rationale for partial disallowance to be justified.Conclusions: The Tribunal upheld the disallowance of Rs.5,17,206/- in interest expenditure as determined by the AO.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal referenced the Himachal Pradesh High Court's reasoning that compensation calculated using an interest rate does not constitute interest income but is a method to quantify damages.Core Principles Established: The judgment reinforces the principle that compensation for non-delivery of property, calculated using an interest rate, is not taxable as interest income if it represents damages rather than a return on investment or deposit.Final Determinations on Each Issue: The Tribunal allowed the appeal of the assessee, concluding that the compensation received was a capital receipt and not subject to tax as interest income. The disallowance of certain interest expenditures by the AO was upheld.