11/6/2018 Compensation for builder's failure to give flat possession held non taxable

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Compensation received from builder for failure to give possession of flat held not taxable
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Compensation received from builder for failure

to give possession of flat held not taxable
 administrator |  November 5, 2018 |  Income Tax, ITAT |  No Comments

Compensation received from

builder under settlement for
failure to give possession of
flat within stipulated time
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Cited/relied upon:
November 2018
Kettlewell Bullen & Co. Ltd. Vs CIT (10\964) 53 ITR 261 (SC); CIT vs Prabhu Dayal, 82
ITR 804 (SC); Eklingji Trust vs CIT 158 ITR 810 (Raj); CIT vs Bombay Burmah Trading M T W T F S S
Corporation (1986) 161 ITR 386 (SC); Saurashtra Cements Ltd., 325 ITR 422 (SC);
Senairam Doongermal vs CIT, 42 ITR 392 (SC); K.R. Srinath vs ACIT, 268 ITR 436 1 2 3 4
(Madras), CIT vs Barium Chemicals Ltd., 168 ITR 164 (AP); Dhruv N. Shah vs DCIT, 88
5 6 7 8 9 10 11
ITD 118 (Mum)(TM); CIT vs J. Dalmia, 149 ITR 215 (Del); Sterling Construction and
Investments vs ACIT (2015) 232 Taxman 185 (Bom); Cadell Wvg. Mill Co.(P) Ltd. Vs CIT 12 13 14 15 16 17 18
249 ITR 265 (Mum) ; Godhra Electric Co. Ltd. Vs CIT, 225 ITR 746 (SC); CIT vs Govind
19 20 21 22 23 24 25
Agencies (P) Ltd. (2007) 295 ITR 290 (All); State Bank of Travancore vs. CIT, 158 ITR
102, 154 (SC) 26 27 28 29 30

« Oct

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11/6/2018 Compensation for builder's failure to give flat possession held non taxable

Both the assessee and the Revenue had filed appeals against the order passed by the
Commissioner of Income- tax (Appeals) with respect to the treatment of compensation
received under settlement for failure of the builder to give possession of flat within
stipulated time

The assessee was an advocate by profession. During the course of the assessment
proceedings for the relevant year, the Assessing Officer (AO) found that the assessee
had claimed a long term capital loss on account of the receipts from builder pursuant to
court order.

When asked, the assessee explained that he being interested in buying a residential flat,
had entered into the construction agreement with a builder and made an advance
payment of Rs. 50 lacs. The said agreement provided for a penal interest at 24% p.a. on
the total amount paid in case the seller fails or neglects to handover possession of the
property as stipulated in the agreement. The seller failed to honoured the obligation
under the contract, hence, the assessee had to file a suit for recovery of the amount
advanced with penal interest. The suit was decreed for Rs. 50 lacs with penal interest @
24% on the principal amount. The seller approached the Hon’ble High Court against the
decree of the Civil Court but the appeal was dismissed. Subsequently, the assessee
entered into a memorandum of settlement and received Rs. 1.20 crores towards the full
and final settlement of the entire claim which was approximately 50 per cent lower than
the amount decreed by the Court.

The assessee worked out the indexed cost of the investment of Rs. 50 lacs and
deducted therefrom the amount of final settlement treating the difference as long term
capital loss.

The AO, however, did not agree with the assessee and opined that as per the decree of
the Civil Court, the assessee should have received an higher amount but by way of
memorandum of settlement, the assessee waived the income which amounted to
diversion of income before it reached the assessee.

Accordingly, the AO taxed the difference between the amount decreed by the Court and
as received under the settlement.

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Do you agree that section 234C interest

The Assessee challenged the same before the CIT(A) stating that the AO was not calculation in excel utilities of income tax
justified in making addition of the notional interest which have never been received by the department is faulty and need immediate
assessee. Assessee further contended that out of Rs. 1.20 crores received by the rectification?
assessee under the memorandum of settlement, Rs.50 lacs represented the amount paid Read more at : goo.gl/7osXyR
10:02 PM - Sep 18, 2018
towards the advance and the balance of Rs. 70 lacs represented the capital receipt.
According to the assessee, since he never possessed the capital asset relatable to this 75% Yes it is faulty

transaction, the question of capital gain does not arise in the absence of any capital 13% No it is perfectly right
receipt was not taxable at all.
12% Can't say, Not verified

8 votes • Final results

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11/6/2018 Compensation for builder's failure to give flat possession held non taxable

The CIT(A) agreed with the AO on the nature of the receipt and held that whatever the
assessee received over and above the advance amount paid i.e. in the nature of interest, 2 See ABCAUS's other Tweets

as such, it was liable for tax.

However, the CIT(A) did not agree with the AO on the aspect of notional interest and
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recorded a finding that the AO was not justified in taxing the unearned interest income on
notional basis inasmuch as the parties entered into the memorandum of settlement had ABCAUS Excel  105
given up their several options of litigations and for purchasing peace entered into such a Depreciation Calculator
settlement. On this premise, the CIT(A) sustained the addition to the extent of Rs. 70 lacs FY 2017-18 under …
and gave relief to the assessee in respect of the balance amount. June 8, 2018

Before the Tribunal the assessee submitted that whatever amount was received by him Excel Form 10E-Salary  69
under the settlement was for cancellation of the agreement or for relinquishment of rights Arrears Relief calculator
to purchase the capital assets, as such, it assumed the character of capital receipt and in AY …
the absence of any capital gain, such capital receipt was not liable to tax. January 19, 2018

The Tribunal observed that the relevant clause of the agreement providing interest at Time limit for filing  56
24% p.a. in fact was intended to be by way of reduction of the price of the capital asset. belated income tax …
The apartment intended to be purchased by the assessee was a capital asset and the March 6, 2016
assessee did not deal in real estate nor could such apartment be stock in as trade. The
Tribunal opined that when there was a clear intention on the part of the parties that the
performance or non performance shall affect the value of the capital assets, mentioning EPS 1995-Benefit of  56
of the wording “interest @24%” was only a measure or method of calculation to quantify actual salary exceeding
the receipt but was not decisive of the character of the payment. It did not partake the wage …
character of interest within the meaning of the Act. March 24, 2017

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Further, the Tribunal observed that there was no transaction of lending or borrowing nor May 26, 2016
the disputed amount was received by the assessee towards any service, fee or other
charges in respect of the moneys borrowed or debt incurred or in respects any credit EPS-95 Benefit of  22
facility which has not been utilized. Therefore, the receipt did not fall within the definition Supreme court order
of interest as provided u/s 2(28A) of the Act. to …
May 31, 2017
In view of the various decisions and inasmuch as the receipt did not fall within the
definition of “interest” under the Act, the Tribunal opined that the receipt was not towards  18
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interest but only a capital receipt. and Guide for e-filing
of …
Again, the Tribunal noted that admittedly, the flat was never acquired by the assessee March 20, 2016
nor had it been transferred so as to give rise to the income under dispute, as such, it did
not fall within the definition of capital gain. As held in the decision relied upon by the
assessee, a capital receipt is not an income u/s 2(14) unless it is chargeable to tax as
capital gain u/s 45 of the Act therefore the impugned receipt was not a capital gain and,
therefore, it was outside the definition of income u/s 2(24) of the Act.

On the issue of notional interest added by the AO, the Tribunal pointed out that the
Hon’ble Supreme Court held that the Income-tact Act takes into account two points of

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11/6/2018 Compensation for builder's failure to give flat possession held non taxable

time at which the liability to tax is attracted viz. the accrual of income or its receipt, but
the substance of the matter is the “income”. If income does not result at all, there can be
no tax even though it is possible to reach a hypothetical income which was never
materialized.

Further the Tribunal observed that the Allahabad High Court held that the earning of
income whether actual or notional, has to be seen from the view point of prudent
assessee and if in a given circumstance, the assessee decides to forego any income on
justifiable grounds, there does not arise any question of bringing to tax any such notional
income.

The Tribunal relied on the real income theory stated by the Hon’ble Supreme Court that
whether an accrual has taken place or not has to be judged in appropriate cases on the
principle of real income. In view of the settled proposition of law, what has to be seen is
that whether the assessee had foregone any income for justifiable reasons as a prudent
man or not.

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The Tribunal opined that the memorandum of settlement was the result of the sellers
foregoing their right to approach the Hon’ble Apex court and the assessee purchasing
peace by putting end to the seemingly endless litigation. By no stretch of imagination
could it be said that the assessee did not act as a prudent man in entering the said
memorandum. We are convinced that all these circumstances did not suggest anything
suspicious surrounding the settlement.

The Tribunal, therefore, held that the assessee not earning a particular income was not
without any reason and it was not for the AO to say that the assessee should have
earned such income also or that even otherwise to pay tax on such amount which was
never realized by the assessee.

Held:

(i) The AO was not justified in bringing the notional interest to tax

(ii) Amount of Rs. 70 lacs received over and above the advance amount of Rs.50 lacs
was in the nature of capital receipt which could be brought to tax only if the case falls u/s
45 of the Act as capital gains and since it was conspicuously a different case, such
capital receipt could not be brought to tax

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11/6/2018 Compensation for builder's failure to give flat possession held non taxable

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