Notional commission and interest deleted as no real income accrued; capital gains taxed only on actual registration

ITAT Delhi-AT allowed the assessee's appeal and deleted additions towards notional commission of Rs. 1,34,07,964 and interest on unpaid commission of Rs. 1,25,07,426. The Tribunal held that no real income had accrued, as CPRPL had neither provided for nor paid any commission, lease rent, or interest, and the assessee had only raised an unacted-upon claim by letter. The delay in registration was attributable to the Noida Authority, and when the dispute was resolved in AY 2020-21, the assessee duly offered capital gains on actual registration for taxation.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether commission and interest on unpaid commission allegedly accruing under a business agreement could be brought to tax on a notional basis in the absence of actual receipt, accrual, or acknowledgement of liability by the payer.

1.2 Whether the mere issuance of a unilateral demand letter for commission and interest, without response or accounting recognition by the counter-party, constitutes sufficient basis for treating such amounts as taxable income for the relevant assessment years.

1.3 Whether, in the context of a property agreed to be sold and advance received, the delay in execution of transfer by a statutory authority permits an inference that the assessee continued to earn commission and interest from the managing party for the intervening period.

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2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Taxability of commission and interest on unpaid commission on a notional basis; effect of unilateral demand letter

Interpretation and reasoning

2.1 The Court noted that the assessee had entered into a business agreement with the managing company for receipt of commission/lease rent in respect of the property, followed by a subsequent agreement to sell the same property for a fixed consideration of Rs. 4.40 crores, against which Rs. 4 crores was received as advance.

2.2 It was found as a matter of fact that: (i) the managing company had not made any provision for commission/lease rent or interest on unpaid commission in its books for the relevant years; (ii) no amount towards such commission or interest had actually been paid to the assessee; and (iii) the assessee had not, in fact, received any commission or interest for the years under consideration.

2.3 The additions by the Assessing Officer were based solely on a letter dated 09.11.2017 issued by the assessee to the managing company claiming outstanding commission and interest. The managing company did not act upon this letter, and a confirmation from it expressly stated that no such commission/lease rent/interest had been provided for or paid.

2.4 The Court held that a unilateral claim or demand by the assessee, not accepted or acknowledged by the counter-party and not supported by actual payment or accounting entries, cannot, by itself, give rise to taxable income. There was no material to show real accrual of income or crystallisation of any enforceable right in the relevant assessment years.

2.5 The Court rejected the approach of taxing "notional income" in the form of commission and interest on unpaid commission, when the factual record established that neither accrual nor receipt nor contractual acknowledgment of such sums had occurred.

Conclusions

2.6 The commission of Rs. 1,34,07,964/- and interest on unpaid commission of Rs. 1,25,07,426/- could not be taxed in the hands of the assessee on a notional basis for the assessment year 2016-17.

2.7 The unilateral letter dated 09.11.2017 could not, in the absence of corresponding acceptance or accounting recognition by the payer, constitute a valid foundation for bringing the claimed amounts to tax as income of the assessee.

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Issue 3: Effect of delayed transfer of property by statutory authority on assumption of continued commission/interest income

Interpretation and reasoning

3.1 The property was agreed to be sold to the managing company on 22.07.2002 for Rs. 4.40 crores, and an advance of Rs. 4 crores was received. The transfer of title, however, was delayed due to the inaction and requirements of the development authority, and not due to any default by the assessee.

3.2 The revenue authorities presumed that, because the property was not formally transferred for an extended period, the assessee must have continued to receive commission and interest in terms of the earlier business agreement, and therefore such amounts were taxable as income for the relevant years.

3.3 The Court held that the mere fact of delayed registration of property by the statutory authority does not, by itself, justify the presumption that commission and interest continued to accrue to the assessee. The actual conduct of the parties and the absence of any payment, provision, or recognition of such commission or interest by the managing company were determinative.

3.4 It was also noted that when the dispute with the authority was ultimately resolved in the year relevant to assessment year 2020-21, the property was duly registered in favour of the managing company for the agreed consideration of Rs. 4.40 crores and capital gains were offered and assessed in that year, confirming that the transaction of sale, and not any continuing commission arrangement, governed the parties' relationship.

Conclusions

3.5 Delay by the statutory authority in effecting transfer of the property did not entitle the revenue to infer or tax any notional commission or interest as having accrued to the assessee.

3.6 On these findings, the additions on account of commission and interest on unpaid commission were unsustainable and were deleted.

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Issue 4: Applicability of findings for subsequent assessment year

Interpretation and reasoning

4.1 The grounds for the subsequent assessment year were identical, save for variation in figures, and arose from the same factual matrix and reasoning adopted by the revenue authorities.

4.2 The Court applied the reasoning and conclusions reached for the earlier year to the subsequent year, there being no distinguishing facts or legal issues.

Conclusions

4.3 The additions on account of commission and interest on unpaid commission for the subsequent assessment year were also deleted, following the decision for the earlier year mutatis mutandis.

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