Benefit of indexed cost of acquisition available based on payments dates

Bhupinder Singh Julka Vs ACIT (ITAT Delhi)

ITAT Delhi held that held that benefit of indexed cost of acquisition should be available to assessee based on payments made. Accordingly, AO directed to re-compute gain.

Facts- The assessee is a non-resident Indian. The case was selected for scrutiny and notice u/s. 143(2) of the Act, was issued and duly served upon the assessee. In response thereto, the assessee company filed the requisite details to the Assessing Officer.

Thereafter, AO after considering the submission of the assessee passed a draft Assessment Order u/s. 144C of the Act on 28.09.2021 thereby, he proposed to make an addition of INR 3,37,202/- in respect of the Short Term Capital Gain and a sum of INR 24,86,030/- treating the compensation received as income from the other sources. The assessee filed his objection before the DRP who vide order dated 11.05.2022, disposed off the objection and directed AO to verify regarding transfer of the property.

In pursuance of directions of DRP, AO proceeded to frame the final assessment order. During the course of Assessment proceeding, AO noticed that the assessee had disclosed in his return of income a sum of INR 4,56,070/-under head income from House Property and INR 81,317/- under head income from other sources. In his computation of income, the assessee had declared long term capital loss of INR 81,42,760/-. Therefore, the AO show caused the assessee to explain and furnish the requisite details to substantiate the basis of sale consideration of INR 1,09,00,000/- how it was arrived at. The explanation as offered by the assessee was not found acceptable by the Assessing Authority, on the basis that the assessee in its computation of income declared total sale consideration of his unit No. 03-012A in Digital Greens at Gurgaon as on 19.02.2018 at INR 1,33,86,030/-. The said property was booked in year 2007 and its payment was made on various dates starting from 2007-08 to the Assessment Year. Its final payment of INR 3,88,746/- was made on 23.02.2018 thus, the effective date of purchase of the property was taken as on 23.02.2018. Thus, the Assessing Officer made addition of INR 3,37,202/- on account of Short Term Capital Gain.

Further, AO show caused the assessee as to why the compensation of INR 24,86,030/- received from M/s MGF Limited, shout not be treated as interest / income from other source. In response thereto, the assessee filed its reply. However, that reply was not found acceptable by the AO. He made addition of INR 24,86,030/-. He thus, assessee the income of the assessee at INR 33,60,600/- against the returned income at INR 5,37,371/-.

Aggrieved against the order, the assessee appealed before the tribunal.

Conclusion- Bombay High Court in the case of PCIT vs Vembhu Vidyanathan it was held that benefit of indexed cost of acquisition should be available to assessee based on payments made.

In the instant case, admittedly, the allotment letter was issued back in the year 2007 and substantial payment had been made before the year 2018 when final payment was made. Therefore, looking to the facts of the present case and above-mentioned judicial precedents relied by the assessee, we find merit into the contention that the AO erred in treating the surplus to be short term capital gain without giving benefit of indexation. We therefore, direct the AO to re-compute gain, if any after giving benefit of indexation as provided under law and decide the issue in the light of judgement of Hon’ble Bombay High Court in the case of PCIT vs Vembhu Vidyanathan.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by Assessee is directed against the order of Assistant Commissioner of Income Tax passed under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (“the Act”) dated 26/06/2022 for Assessment Year 2018­19. The assessee has raised following grounds of appeal:-

“ 1. That the learned Assistant Commissioner of Income Tax, Circle-INT-Tax-2(1), Delhi (“AO”) has erred both in law and on facts in determining total income of the appellant at Rs. 33,60,600/-as against declared income of Rs. 5,37,371/- in an order of assessment dated 26.6.2022 under Section 143(3)/ 144C(13) of the Act.

2. That the learned AO/ DRP has further erred both in law and on fact in making an addition of Rs. 3,37,202/- representing alleged short term capital gain as against claim of long term capital loss of Rs. 81,42,760/- on sale of capital asset by the appellant in the instant year.

2.1 That the learned AO/DRP has failed to appreciated that appellant had acquired the capital asset in the shape of right in an office space in 2007 and therefore sale of such capital asset in financial year 2017-18 constituted long term capital asset and as such any loss arising on sale had to be computed as long term capital loss after indexation and not short term capital loss.

2.2. That the finding that “the assessee could have transferred the said property as absolute owner only after having such a title in first place, could have matured only after completion of due payments” is factually incorrect, legally erroneous and wholly untenable.

(Tax Effect Rs. 69,463/-)

3. That the learned AO/DRP has also erred both in law and on fact in making an addition of Rs. 24,86,030/- representing capital receipt accrued to the appellant in the shape of compensation from Emaar MGF Ltd. and, erroneously held as income for the instant year.

(Tax Effect Rs. 7,55,264/-)

4. That the learned AO/DRP has included amount of Rs. 24,86,030/- twice both in capital gain calculation and also as income from other sources. Inspite of Hon’ble DRP direction to record reason on the alleged treatment of impugned amount, no justification has been given in assessment order dated 26.06.2022 u/s 143(3) read with section 144C of the Act.

5. That the learned AO / DRP has grossly erred in law and on facts in not allowing deduction of Rs. 10,000/- under Section 80TTA of the Act in computation sheet.

(Tax Effect Rs. 2,060/-)

6. That the learned Assessing Officer has further erred both in law and on facts in levying interest of Rs. 9,486/- u/s 234B of the Act which is not leviable on the facts and circumstances of the case of the appellant.

Prayer: It is therefore, prayed that the addition made along with interest levied may kindly be deleted and appeal of the appellant be allowed. It be further held enhanced compensation is capital receipt and is not taxable.”

2. The facts of the present appeal are that the assessee is a non-resident Indian filed his original return of income on 26.07.2018 declaring gross total income of INR 5,37,371/-. The case was selected for scrutiny and notice U/s 143(2) of the Act, was issued and duly served upon the assessee. In response thereto, the assessee company filed the requisite details to the Assessing Officer.

2.1 Thereafter, the Assessing Officer after considering the submission of the assessee passed a draft Assessment Order U/s 144C of the Act on 28.09.2021 thereby, he proposed to make an addition of INR 3,37,202/- in respect of the Short Term Capital Gain and a sum of INR 24,86,030/- treating the compensation received as income from the other sources. The assessee filed his objection before the Ld. DRP who vide order dated 11.05.2022, disposed off the objection and directed the Assessing Officer to verify regarding transfer of the property when the title of such property was transferred further in respect of the other objection, the Assessing Officer was directed to verify the claim of the assessee.

2.2 In pursuance of directions of Ld. DRP, the Assessing Officer proceeded to frame the final assessment order. During the course of Assessment proceeding, the Assessing Officer noticed that the assessee had disclosed in his return of income a sum of INR 4,56,070/-under head income from House Property and INR 81,317/- under head income from other sources. In his computation of income, the assessee had declared long term capital loss of INR 81,42,760/-. Therefore, the AO show caused the assessee to explain and furnish the requisite details to substantiate the basis of sale consideration of INR 1,09,00,000/- how it was arrived at. The explanation as offered by the assessee was not found acceptable by the Assessing Authority, on the basis that the assessee in its computation of income declared total sale consideration of his unit No. 03-012A in Digital Greens at Gurgaon as on 19.02.2018 at INR 1,33,86,030/-. The said property was booked in year 2007 and its payment was made on various dates starting from 2007-08 to the Assessment Year 2017-18. Its final payment of INR 3,88,746/- was made on 23.02.2018 thus, the effective date of purchase of the property was taken as on 23.02.2018. Thus, the Assessing Officer made addition of INR 3,37,202/- on account of Short Term Capital Gain. Further, the Assessing Officer show caused the assessee as to why the compensation of INR 24,86,030/- received from M/s MGF Limited, should not be treated as interest / income from other source. In response thereto, the assessee filed its reply. However, that reply was not found acceptable by the AO. He made addition of INR 24,86,030/-. He thus, assessee the income of the assessee at INR 33,60,600/- against the returned income at INR 5,37,371/-.

3. Aggrieved against the order, the assessee preferred an appeal before the Tribunal.

4. Apropos to grounds of appeal, the Ld. Counsel for the Assessee reiterated the submissions as made in the written submissions. For the sake of clarity, the submissions of the assessee are reproduced as under:

1. “ That the appellant is a non-resident.

1.1 That on 26.07.2018, the appellant e-filed his income tax return returning gross total income at Rs. 5,27,370/- as per details below:

1.2 That aforesaid return was selected for scrutiny by way of notice dated 28.09.2019 u/s 143(2) of the Act.(Please refer page 1 of Draft Assessment Order). That thereafter notices u/s 142(1) of the Act were issued which were duly complied with. (Please refer page 34 of Paper book).

1.3. That on 28.09.2021 the learned Assessing Officer passed draft order u/s 144C of the Act wherein assessed income is proposed at Rs. 33,60,600/-, proposing following additions:

1.4. That on 25.10.2021 appellant filed an objection to the proposed draft order of assessment dated 28.09.2021. (Page 39-55 of paper book).

1.5. That on 11.05.2022 the DRP issued order issuing Directions u/s 144C of the Act. (Page 56-61 of paper book)

1.6. That on 26.06.2022 the learned Assessing officer passed final order u/s 143(3) rws 144C(13) of the Act assessing income at Rs. 33,60,600/-, making following additions:

1.7. That on 20.07.2022 assessee filed an appeal before Hon’ble Tribunal against the order dated 26.06.2022 passed u/s 143(3) rws 144C(13) of the Act.

2. That ground no 2 to 2.2 relates to grievance of appellant in respect of addition of Rs. 3,37,202/- representing alleged short term capital gain as against claim of long term capital loss of Rs. 81,42,760/- on sale of capital asset by the appellant in the instant year.

2.1. Sequence of transactions relating to purchase and sale of office Space in Project Digital Greens of M/s Emaar MGF Land Ltd. at Sector-61,Gurgaon, Haryana.

2.2. It is submitted that appellant claimed Long Term capital loss of Rs. 81,42,780 in respect of sale of office space in Project Digital Greens of M/s Emaar MGF Land Ltd. at Sector 61, Gurgaon, Haryana, details of Calculation of Capital Loss is as under:

2.3 It is submitted that the Learned Assessing officer in the draft assessment order dated 28.09.21 disallowed the claim of Long Term Capital Loss of Rs. 81,42,760/- instead made an addition of Rs. 3,37,202/- on account of Short Term Capital Gain stating as under:

The reply of the assessee was perused but not found tenable. The assessee in its computation of income has shown total sale consideration of his Unit No. 03-012A in Digital Greens at Gurgaon as on 19.02.2018 at Rs. 1,33,86,030/-. The said property was booked in 2007 and its payment was made on various dates in between 2007-08 to 2017-18. Its final payment of Rs. 3,88,746/- was made on 23.02.2018 and thus, a total payment of Rs. 1,30,48,428/- for the said property was made. As right in property has occurred on final payment of Rs. 3,88,746/- on 23.02.2018, hence, the effective date of purchase of the property is taken as 23.02.2018. Hence, it is apparent that it is a case of short term capital gain not a case of Long term capital loss as claimed by the assessee in its computation of income and the same is calculated as under:

(Para 5 on page 2 of final order dated 26.06.2022)

2.4. It is submitted that the DRP in its directions has although agreed the schedule of payment can be a basis for indexation having relied Lakshman M Charanjiva vs ITO by ITAT Mumbai Bench, but also have issued directions told AO to verify as to when the title of the property was transferred in the name of Assessee by passing a speaking order. The Ld AO thus in the final order dated 26.02.2022 has held as under.

9. In view of the above directions of Hon’ble DRP, the documents placed on record has been reconsidered. The buyer’s agreement submitted by the assessee states on its page 16 that sale deed/ conveyance deed shall be executed and got registered in favour of the Allottee(s) subsequent to the date of receipt of full Sale consideration. Similar statement is made under para 16(b) on page 26. On page 35 of the agreement, in para no. 27, it is stated that this agreement or any interest of Allottee(s) in this agreement in this agreement shall not be assigned by the Allottee(s) without prior consent of the company.

Further the assessee also entered into a lease dated as lessor with M/s Complete Solutions on 8 May 2017. This lease dated states that the lessor is the absolute, legal and beneficial owner of the said property.

Subsequently. The assessee got into an agreement to sell & purchase on 5th December 2017 wherein the vendor i.e. assessee, agreed to sell the said commercial space.

Based on the above observations, it is clear that the assessee could have transferred the said property as an absolute owner only after having such a title in first place, could have matured only after completion of due payments. Thus, the capital gains is short term.

(Para 9 on page 13 of final order dated 26.06.2022)

2.5 It is thus submitted that the basis of addition of Rs. 3,37,202 on account of Short Term Capital Gain as determined by learned Assessing officer is consideration of effective date of purchase of the property to be the date of payment of last installment’ which is an incorrect proposition.

2.6 It is submitted that date of acquisition of property has to be reckoned from date of allotment of property i.e. 14.08.2008 and benefit of indexed cost of acquisition should be available to assessee based on payments made. In this regard assessee places reliance on below mentioned judgments:

i) ITA No. 1459 of 2016 of Bombay High Court in the case of PCIT vs Vembhu Vidyanathan affirmed by Apex Court in 265 Taxman 535 (SC) PCIT vs. Vembhu Vidyanathan (Pages 1-4 of JPB)

The High Court has held as under:

4. Having heard learned counsel for the parties, we notice that the CBDT in its circular No.471 dated 15th October, 1986 had clarified this position by holding that when an assessee purchases a flat to be constructed by Delhi Development Authority (“D.D.A.” for short) for which allotment letter is issued, the date of such allotment would be relevant date for the purpose of capital gain tax as a date of acquisition. It was noted that such allotment is final unless it is cancelled or the allottee withdraw from the scheme and such allotment would be cancelled only under exceptional circumstances. It was noted that the allottee gets title to the property on the issue of allotment letter and the payment of installments was only a follow-up action and taking the delivery of possession is only a formality.

5. This aspect was further clarified by the CBDT in its later circular No.672 dated 16th December, 1993. In such circular representations were made to the board that in cases of allotment of flats or houses by co-operative societies or other institutions whose schemes of allotment and consideration are similar to those of D.D.A., similar view should be taken as was done in the board circular dated 15th October, 1986. In the circular dated 16th December, 1993 the board clarified as under:

2. The Board has considered the matter and has decided that if the terms of the schemes of allotment and construction of flats/houses by the co-operative societies or other institutions are similar to those mentioned in para 2 of Board’s Circular No.471, dated 15-10-1986, such cases may also be treated as cases of construction for the purposes of sections 54 and 54F of the Income- tax Act.”

It can thus be seen that the entire issue was clarified by the CBDT in its above mentioned two circulars dated 15th October, 1986 and 16th December, 1993. In terms of such clarifications, the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property. There is nothing on record to suggest that the allotment in construction scheme promised by the builder in the present case was materially different from the terms of allotment and construction by D.D.A. In that view of the matter, CIT appeals of the Tribunal correctly held that the assessee had acquired the property in question on 31st December, 2004 on which the allotment letter was issued.

ii) 344 ITR 501 (P&H) Vinod Kumar Jain vs CIT (Pages 8 – 11 of JPB)

12. It would also be advantageous to refer to Circular No. 471, dated 15-10-1996 [162 ITR (St.) 41] issued by CBDT on which heavy reliance has been placed by the assessee whereby instructions have been issued regarding treatment of capital gains tax in case of a flat purchased under Self-Financing Scheme. It reads thus:-

“Circular No. 471

Capital gains tax Whether investment in a flat under the Self-Financing Scheme of the Delhi Development Authority would be construction for the purpose of sections 54 and 54F of the IT Act, 1961.

15-10-1986
Capital gains
Sections 54, 54F.

Sections 54 and 54F of the Income-tax Act, 1961, provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case of purchase of a house, the benefits available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of a house, the benefit is available if the investment is made within three years from the date of transfer.

2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme of the Delhi Development Authority amounts to purchase or its construction by the Delhi Development Authority on behalf of the allottee. Under the Self-Financing Scheme of the Delhi Development Authority the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the Scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the Delhi Development Authority to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.

3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the Delhi Development Authority takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the Scheme, the tentative cost of construction is already determined and the Delhi Development Authority facilitates the payment of the cost of construction in instalments subject to the conditions that the allottee has to bear the increase, if any, in the cost of the construction. Therefore, for the purpose of capital gains tax, the cost of the new asset is tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the Delhi Development Authority shall be treated as cases of construction for the purpose of capital gains.”

13. On careful reading of the Circular issued by the Board, para 2 thereof describes the nature of right that an allottee acquires on allotment of flat under Self-Financing Scheme. According to it, the allottee gets title to the property on the issuance of an allotment letter and the payment of instalments is only a consequential action upon which the delivery of possession flows.

iii) 149 Taxmann.com 160 (Delhi-Trib.) Ms. Renu Khurana vs. ACIT. (Pages 5-7 of JPB)

7. Thus, from the aforesaid facts, it is very clear that in the allotment letter not only a specifically identifiable residential flat was allotted to the assessee but the assessee had made payments in accordance with the terms and conditions of the allotment letter. In Circular No. 471, dated 15-10-1996, the Central Board of Direct Taxes (CBDT) has clarified that in respect of flats allotted under the self-financing scheme of the Delhi Development Authority (DDA), the date of issuance of allotment letter would be considered to be the date of acquisition of the property. This is so because, the allotment is final unless it is cancelled or the allottee withdraws from the scheme. In case of assessee before us, as well, the allotment letter issued by the developer/builder is final, as, it is in respect of a specifically identifiable property and has ultimately culminated in execution of apartment buyer’s agreement in financial year 2010-11. Therefore, in our view, the date of acquisition of the residential flat has to be reckoned from the date of the allotment letter. While coming to the aforesaid conclusion, we have drawn support from the decisions cited before us by learned counsel appearing for the assessee. Therefore, in our view, the benefit of indexed cost of acquisition should be available to the assessee based on the payments made beginning from financial year 2005-06and not from the execution of the apartment buyers ‘ agreement, as directed by learned DRP.

iv) ITA NO. 2558/Del/2010 dated 13.08.2010 in the case of Mr. Praveen Gupta vs. ACIT (Pages 73-80 of JPB)

29. According to the aforementioned definition, capital asset means property of any kind held by an assessee whether or not connected with the business or profession and it excludes certain items which while considering the facts of the present case are not relevant. Therefore, it has to be seen that whether by entering into an agreement vide which the assessee was allotted a particular flat by allotment letter whether the assessee has held any asset or not? By entering into an agreement to allot a flat, the assessee has identified a particular property which he is intended to buy from the builder and the builder is also bound to provide the applicant with that property by accepting certain advance amount and making agreement for balance payment as scheduled in the agreement. Thus, going into the provisions, it is not necessary that to constitute a capital asset the assessee must be the owner by way of a conveyance deed in respect of that asset for the purpose of computing capital gain. The assessee had acquired a right to get a particular flat from the builder and that right of the assessee itself is a capital asset. The word ‘held’ used in Section 2 (14) as well as Explanation to Section 48 clearly depicts that assessee must have some right in the capital asset which is subject to transfer. By making the payment to the builder and having received allotment letter in lieu thereof, the assessee will be holding capital asset and. therefore, the benefit of indexation has to be granted to the assessee on the basis of payments made by him for acquiring the said asset and the assessee has rightly claimed the indexation benefit from the dates when he has made the payments to the builder. Therefore, we see force in the claim of the assessee. The Assessing Officer is directed to provide the benefit of indexation to the assessee in the manner in which the assessee has claimed.

30. In the result, the appeal filed by the assessee is allowed.

2.7 In view of above the addition made of Rs. 3,37,202/- representing alleged short term capital gain may please be deleted and claim of appellant of long term capital loss of Rs. 81,42,760/- on sale of capital asset may please be allowed.

3. That Ground no. 3 and 4 relates to the grievance of appellant in making an addition of Rs. 24,86,030/- representing capital receipt on account of compensation from Emaar MGF Ltd duly considered by appellant in computation of capital gain and erroneously held as income from other sources.

3.1 It is submitted that on 21.02.2007 the assessee booked an office space in Project Digital Greens of M/s Emaar MGF Land Ltd at Sector 61, Gurgaon, Haryana. On 22.08.2009 a Buyer’s agreement was executed between appellant and M/s Emaar MGF Land Ltd.(Page 76­123 of paper book)

i) As per Clause 15 of Buyer’s agreement, possession of the Unit shall be handed over to assessee within 36 months. (Page 102 of paper book)

ii) As per Clause 17 of Buyer’s agreement, assessee was entitled for compensation for delay in possession offered calculated @9% per annum simple interest. (Page 105 of paper book)

3.2. In pursuance of aforesaid clauses of agreement dated 22.08.2009, as per Emaar MGF statement of account dated 19.02.2018, credit of net compensation Rs.22,37,431 was given to assessee. The same is adjusted with total cost payable by assessee. Gross Compensation 24,86,030 Less TDS u/s 194A 2,48,603 =22,37,431 Net Compensation credit.

3.3 It is submitted that the aforesaid compensation is duly treated as capital receipt and considered as part of sale consideration for the purpose of computing capital gain, details tabulated as under:

3.4     The Ld AO in the final order dated 26.06.2022 has held as under:

10. The assessee received amount of Rs. 24,86,030 form Enact MGF Land Limited and the deductor had duly deducted TDS on such payment u/s 194A which is in the nature of interest other than “Interest on securities”. The assessee has stated that it is well settled according principle that amount received against a capital asset shall be treated as capital receipt and not a revenue receipt. Similarly amount said against a capital asses is added to cost of asset and not allowed as deduction Income.

Tax act also sustainable this in Section 36(1)(ii). The submission of the assessee is not accepted as the assessee has not received this sum in lieu of the capital asset. The asset continued to exist and the said payment is in nature of mere compensation. As stated in clause no. 17 of the buyer’s agreement the compensation was payable only at the time of payment of last installment. Since it is in nature of compensation for delay in handling over the possession, regardless of whether the assessee has applied the same or not, this amount is being added under the head income from other sources.

3.5 It is submitted that the Ld Assessing officer an addition of Rs. 24,86,030/- by erroneously considering the same as interest/income from other sources, which is an incorrect proposition of law.

3.6. It is submitted that compensation received from builder on account of delayed possession to be treated as capital receipt. In this regard assessee relies on below mentioned judgments:

i) 413 ITR 82 (Calcutta) Pr CIT vs West Bengal Housing Infrastructure Development Corpn. Ltd SLP Dismissed in 263 Taxman 237 (SC) in Pr CIT vs West Bengal Housing Infrastructure Development Corpn. Ltd (Page 81-87 87 of J PB)

16. From the above definition it appears that the term ‘interest’ has been made entirely relatable to money borrowed or debt incurred and various gradations of rights and obligations arising from either of the two. The parenthesis in the section is in the nature of a qualification of the borrowing of money/incurring of debt and what it includes. The issue which falls for decision therefore is whether payment for delayed allotment of a plot of land by the Housing Board to an allottee will fall under the definition of ‘interest’ under section 2 (28A) of the Act.

17. The decision of the Himachal Pradesh High relied on by Mr Khaitan is on a very similar set of facts. In that case, the H.P. Housing Board floated a scheme under which flats were to be constructed by the Board/assessee from the money deposited by the allottees and which stipulated that the assesse would have to pay interest to the allottees if the flats were not provided within a certain time frame. Upon there being a delay in the construction of flats, the assessee paid interest at the agreed rate to the allottees in terms of the letter of allotment. The AO viewed the payment to be interest under section 2(28A) which was set aside by the Commissioner who held that the payment made was in the nature of compensation for the delay in handing over possession of the flats. This view was affirmed by the Tribunal. Confirming the decision of the Tribunal, the High Court held that the money was paid on account of damages suffered by the allottee for delay in completion of the flats. Notably. in coming to its finding, the High Court considered the decision of the Madras High Court in Viswapriya relied on by Mr Ghosal for the Revenue in the instant case- and held that the nature of the assessee’s business in Viswapriya involved a return on investment made by the investor which was assured to be over and above a fixed percentage. The High Court in H.P. Housing Board’s case (supra) also relied on a decision of the Hon’ble Supreme Court reported in Bikram Singh v. Land Aquisition Collector [1996] 89 Taxman 119/1997] 224 ITR 551 where the interest paid to persons whose land had been compulsorily acquired was held to be a revenue receipt (and not a capital receipt) and therefore not falling within the purview of section 194A. The Court also relied on Ghaziabad Development Authority v. Dr N.K. Gupta [2002] 258 ITR 337 (NCDRC) where it was held that section 194A had no application to payment of interest made to the allottees for delayed completion of flats. Hence, although the Madras High Court decision in Viswapriya Financial Services & Securities Ltd.’s case (supra) gives a more inclusive definition of the term ‘interest’, the Himachal Pradesh High Court decision is more persuasive having considered the former and resting on an identical set of facts. Even if there were to be a doubt in the face of these two decisions, that doubt must be resolved in favour of the assessee tax-payer; Reference may be made to the Apex Court in Central India Spg. & Wvg & Mfg. Co. Ltd.’s case (supra). Besides agreeing with the reasons given by the Himachal Pradesh High Court for holding that payment for delayed allotment of flats cannot be brought under Section 2(28A) of the Act, the said decision is of a co-ordinate Bench and subsequent to the Madras High Court decision in Viswapriya Financial services & Securities Ltd.’s case (supra) and hence has greater persuasive value bearing in mind the principle of comity of Courts.

18. We accordingly are of the view that the payment made by the assessee to the allottee was in terms of the agreement entered between them where the liability of the assessee would arise only if it failed to make the plots available within the stipulated time. Hence, the payment made under the relevant clause was purely contractual and as rightly held by the Tribunal, in the nature of compensation or damages for the loss caused to the allottee in the interregnum for being unable to utilise or possess the flat. The flavour of compensation becomes evident from the words used in the particular clause. The expression ‘interest’ used in Clause 7 (reproduced above) may be seen merely as a quantification of the liability of the assessee in terms of the percentage of interest payable by the State Bank of India. Since there is neither any borrowing of money nor incurring of debt on the part of the assessee, in the present factual scenario, interest as defined under section 2 (28A) of the Act can have no application to such payments. Consequently, there was no obligation on the part of the assessee to deduct tax at source and consequently no disallowance could have been made under section 40 (a) (ia) of the Act.

ii) 132 com 231 (Delhi- Trib.) Smt. Abha Bansal vs. The Pr. CIT (Central), Gurgaon

9.12 It is clear that the compensation received by the assessee on cancellation of the Builder-Buyer Agreement is capital receipt and taxable as capital gains. The view of the A.O. was, therefore, in accordance with Law and cannot be impeached by the Learned PCIT. In view of the above, we do not subscribe to the view of the Ld. D.R. that since no compensation is mentioned in the Builder-Buyer Agreement are to be payable as per agreement, then, the compensation is revenue in nature. It is devoid of merit as discussed above. We also do not agree with the submissions of the Ld. D.R. that payment of compensation was a colourable device to evade the taxes. The Ld. D.R. referred to the emails and other papers seized from the computer of Shri Gaurav Jain, Ex-Employee of the M3M Group to support the case of the Revenue. However, we do not agree with such view and discuss this issue separately about the admissibility of the documents found from the computer of Shri Gaurav Jain. In view of the above findings, we hold that the compensation received by the assessee on account of cancellation of the Builder Buyer agreement is capital receipt and was rightly offered as capital gain in the return of income and correctly accepted by the A.O. in the impugned assessment order dated 18-12-2018. Therefore, the Order of the assessment is in accordance with Law. This issue is decided in favour of the assessee.”

iii) Hon’ble Delhi High Court – PCIT vs. Aaran R. Infrastructure Ltd. (2018) 404 ITR 318 (Del)

“5. In the present case too, the purpose of the ultimate use of the assessee’s land when acquired was rendered irrelevant on account of the seller/JMA Build com Private Ltd. defaulting in its commitment. This rendered the amount expanded by the assessee immobile. The eventual receipt of the amounts determined as compensation/damages, therefore, clearly fell into the capital stream and not revenue as was contended by the Revenue/ appellant in this case.”

4. In view of the aforesaid, addition made and sustained may kindly be deleted and appeal of the appellant be allowed.”

5. On the other hand, Learned Departmental Representative (“Ld. DR”) opposed the submissions and supported the order of the authorities below.

6. We have heard the rival submissions and perused the material available on records. The entire dispute in the present appeal relates transfer of capital asset and compensation received on account of delay in construction by the builder of property. The assessee claimed consideration received by him out of transfer of capital asset as capital loss and compensation for delay in possession as capital receipt. On the other hand, the AO treated the surplus as short term capital gain and compensation as revenue receipts and taxed it as income from other sources. So far question whether the assessee is entitled for set off of capital loss on account of transfer of capital asset is concerned, the assessee’s contention is that the year of acquisition of capital assets should be taken as the year when the allotment for office space was issued to the assessee. In this regard, the assessee pointed out that he had booked office space in project Digital Greens of M/s Emaar MGF Land Ltd. at Sector-61, Gurgaon, Haryana and he was allotted the office space vide allotment letter issued by M/s. Emaar MGF Land Ltd. for a sale consideration of INR 131.25 lacs on 14.08.2008. The assessee had paid booking amount of INR 15,00,000/- to the builder and thereafter, he made payment of installment on various dates from Financial Year 2006-07 to 2017-18. Total payment made was INR 1,30,48,828/- and indexed cost claimed by the assessee was INR 2,15,28,790/-. Thus, as per Ld. Counsel for the assessee, the assessee had infact incurred loss. The AO treated transfer of asset in favour of the assessee on 23.02.2018 when the last installment was paid and he treated it as short term capital gain and disallowed capital loss of INR 81,42,760/-. The submission of the assessee is that date of acquisition of property would be reckoned from date of allotment of property i.e. 14.08.2008 and the benefits of indexation should be available to the assessee on the payment made basis. Reliance placed on the judgement of Hon’ble Bombay High Court in the case of PCIT vs Vembbhu Vidyanathan of ITA No.1459 of 2016 which was affirmed by the Hon’ble Supreme Court in the case of PCIT vs Vembhu Vidyanathan reported in 265 Taxman 535 (SC). Further, reliance was placed on the decision of Hon’ble Punjab & Haryana High Court in the case of Vinod Kumar Jain vs CIT 344 ITR 501 (P&H). Reliance was placed on Circular No.471, dated 15.10.1996 [162 ITR (St.) 41]. We find that Ld. DRP disposed off the objections of the assessee by observing as under:-

4.2.1. “The assessee has submitted that in our view, the asset is long term capital asset, holding period shall be calculated from date of allotment and Indexed cost shall be deducted to derive the amount of Capital Gain / Loss.

4.2.2 The Assessing Officer has stated that the said property was booked in 2007 and its payment was made on various dates in between 2007-08 to 2017-18. Its final payment of Rs.3,88,746/- was made on 23/02/2018 and thus, a total payment of Rs. 1,30,48,828/- for the said property was made. As right in property has occurred on final payment of Rs.3,88,746/- on 23/02/2018,hence, the effective date of purchase of the property is taken as 23/02/2018. Hence, it is apparent that it is a case of short term capital gain not a case of Long term capital loss as claimed by the assessee.

It is seems from the above that 97% of the total cost of acquisition @ Rs 1,27,11,626/- has been paid prior to date 23.02.2018 which has been taken as the effective date of purchase. Basically, the AO would have verified the date of purchase being the date on which ownership of the property was transferred in the name of the assessee, modality of the payment for acquiring or owning the property is not relevant here.

The acquisition of the property is related to date of transfer of the property as per Transfer of the Property Act. In fact, as per section 2(47) of the IT Act, the term of transfer in relation to a capital asset bears an inclusive definition. This may be important for indexing cost of acquisition of property which is to be calculated, based on the schedule of payments made. The same observation has been made in case of Lakshman M. Charanjiva Vs ITO by ITAT, Mumbai Bench. The AO is directed to verify as to when the title of the property was transferred in the name of the assessee by passing a speaking order. Accordingly, the AO may decide whether the capital gains arise out of sale of the property is short term or long term. The objection is accordingly disposed of.”

7. We find that Ld. DRP had directed to AO for deciding the issue afresh after ascertaining as to when the title unto the property was transferred in favour of the assessee. But the AO without adverting to objection of the assessee, treated the date of last payment of installment as the date of transfer of title. Admittedly, in this case, no Sale Deed was executed, the assessee sold his rights unto the capital asset in question vide agreement to sell dated 05.12.2017. The vendee took possession of the unit from the builder on 17.10.2018. Hence, as per the assessee himself possession of property in question was taken in the year 2018. Now let us examine as to when transfer of capital asset was made in favour of the assessee by the builder. Section 2(47) of the Act defines transfer. For the sake of clarity, section 2(47) of the Act is reproduced as under:-

2(47) “transfer”, in relation to a capital asset, includes,—

(i) the sale, exchange or relinquishment of the asset ; or

(ii) the extinguishment of any rights therein ; or

(iii)the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or

(iva) the maturity or redemption of a zero coupon bond; or

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation 1.—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.

Explanation 2.—For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.”

8. In the instant case, admittedly, the allotment letter was issued back in the year 2007 and substantial payment had been made before the year 2018 when final payment was made. Therefore, looking to the facts of the present case and above-mentioned judicial precedents relied by the assessee, we find merit into the contention that the AO erred in treating the surplus to be short term capital gain without giving benefit of indexation. We therefore, direct the AO to re-compute gain, if any after giving benefit of indexation as provided under law and decide the issue in the light of judgement of Hon’ble Bombay High Court in the case of PCIT vs Vembhu Vidyanathan (supra). The ground raised by the assessee is allowed for statistical purpose.

9. The next issue is whether the compensation received amounting to INR 24,86,030/- by the assessee from the builder whether it is a capital receipt or a Revenue receipts. Hon’ble Delhi High Court in the case of PCIT vs Aaran R. Infrastructure Ltd. [2018] 404 ITR 318 (Del.) decided the issue by observing as under:-

“The facts are that the assessee engages itself in the business of real estate and had entered into a consortium agreement with its associates which defines the role, rights and responsibilities. This consortium entered into an agreement to sell with one JMA Build com Private Limited for purchase of 10 acres of land for a consideration of Rs. 15 crores. The seller JMA Build com defaulted in its commitment within the prescribed and extended time limit. Ultimately, upon parties resorting to the Dispute Settlement Arbitration; a settlement was arrived at and an award was made based upon the parties’ eventual settlement. The amount received by the assessee as a part of its entitlement (as consortium) was credited in its books of account as a capital stream. The Assessing Officer and the Commissioner of Income-tax (Appeals) held that the amounts were revenue in nature as the land would have been part of the stock-in-trade. The Income-tax Appellate Tribunal in its judgment after noticing the Supreme Court’s judgment in Universal Radiators v. CIT [1993] 201 ITR 800 (SC) held that in the facts of this case, the amount which was intended to be ultimately used as stock-in-trade purposes were immobile and sterilised, hence rendered non-offer able and therefore when received, as part of the arbitration award, fell into the capital stream. The relevant discussion in the impugned order of the Income-tax Appellate Tribunal is as follows:

“It was damaged for non-performance of the contractual obligation by the AIK. It was contended that the authorities below while deciding the issue against the assessee have not appreciated the injury caused to the profit making apparatus and that the know-how was foundation of the business of the assessee. Appreciating the same, huge compensation was awarded by the arbitrator. The basis of award remained the lost profit due to non-supply of the know-how and not on loss of profit and that newly installed machinery in absence of supply of know-how have gone completely wasted. Reliance was placed on several decisions. After dealing with the issue in detail, the Income-tax Appellate Tribunal has decided the issue in favour of the assessee. When we examine the facts of the present case in view of the above cited decisions of Pune Bench of the Income-tax Appellate Tribunal, we find that in the present case before us also the injury was caused to the profit making apparatus as the land which was profit making apparatus for the assessee was not supplied by JMA Build com (P.) Ltd. as per the agreement entered into between the assessee and associates, and JMA Build com (P.) Ltd. Appreciating the same, compensation was awarded in the arbitration proceedings initiated against JMA Build com (P.) Ltd. In other words, the basis of award remained the lost profit due to non-supply of the land, i.e. profit making apparatus and not on loss of profit. We thus find that the only inference can be drawn is that the compensation received by way of reward due to non-supply of land by JMA Build com (P.) Ltd. under the agreement was capital receipt. We hold as such. The ground No. 2 is accordingly allowed. In view of this finding, the remaining grounds 5, 67 and 9 have become academic only and these grounds are accordingly disposed off.”

The judgment in Universal Radiators (supra) pertinently examines both situations first, where a direct link exists between the products or the ultimate purpose which the assessee intends to put the equivalent and second, expanding the amounts and what is the eventual income on one hand, and on the other hand, conclusions on the stock-in-trade as well. The relevant observations are extracted as follows (page 806 of 201 ITR):

“The assessee carried on the business of manufacturing radiators and not ingots. They were imported to be converted into strips and sheets at Bombay. The link which could create direct relationship between the finished goods and raw material was snapped even before it reached Bombay. Payment made for loss of such goods did not bear any nexus with the assessee’s business. May be that if it had reached, it could have been, after conversion into strips and sheets, used as raw material. But so long as it did not reach Bombay and was not converted into raw material, the connection it bore with the assessee’s business was remote. And any payment made in respect of it could not be said to accrue from business. In Strong & Co. of Ramsey Ltd. v. Woodifield (Surveyor of Taxes) [1906] 5 TC 215 (HL), a converse case where the assessee claimed deduction of certain payments made to a customer, for the injury caused to him by falling off a chimney due to the assessee’s servant’s negligence,…

Even assuming it was stock-in-trade, it was held by this court in Canara Bank Ltd.’s case (supra) that stock-in-trade, gets blocked and sterilised and no trading activity could be carried with it, then it ceased to be stock-in-trade, and any devaluation surplus arising on such capital due to exchange rate would be capital and not revenue. Applying the ratio of this case, the copper ingots, even if assumed to be stock-in-trade, were blocked and sterilised due to hostilities between India and Pakistan, and, therefore, they ceased to be stock-in-trade and any surplus arising due to exchange ratio in the circumstances was a capital receipt only.” Similar observations were made by the Supreme Court in CIT v. Bombay Burmah Trading Corpn. [1986] 161 ITR 386 (SC); in an earlier point of time; are extracted as follows (page 401): “It is, therefore, necessary as mentioned hereinbefore to examine whether the acquisition of forest leases by the assessee were acquisition of capital assets. Though, we will refer to some of the decisions to which our attention was drawn and which were referred to by the High Court, it is well to bear in mind the basic principles. These are: if there was any capital asset, and if there was any payment made for the acquisition of that capital asset, such payment would amount to a capital payment in the hands of the payee. Secondly, if any payment was made for sterilization of the very source of profit-making apparatus of the assessee, or a capital asset, then that would also amount to a capital receipt in the hands of the recipient. On the other hand if forest leases were merely stock-in-trade and payments were made for taking over the stock-in-trade, then no question of capital receipt comes. The sum would represent payment of revenue nature or trading receipts. Whether in a particular case, for the contracts of the type with which we are concerned, payment were capital receipts or not would depend upon the facts and circumstances of the case. In this connection it is important to bear in mind that normally in trade there are two types of capital, one circulating capital and the other fixed capital. Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit by parting with it and letting it change hands. Therefore, circulating capital is capital which is turned over and in the process of being turned over, yields profits or loss. It is well settled as the High Court observed in the judgment under appeal that what is capital assets in the hands of one person may be trading assets in the hands of the other. The determining factor is the nature of the trade in which the asset was employed. Compensation received for immobilization, sterilization, destruction or loss, total or partial, of a capital asset would be capital receipt. If a sum represented profit in a new form then that was income but where the agreement related to the structure of the assessee’s profit-making apparatus and affect the conduct of the business, the sums received for cancellation or variation of such agreement would be a capital receipt.”

In the present case too, the purpose of the ultimate use of the assessee’s land when acquired was rendered irrelevant on account of the seller/JMA Build com Private Ltd. defaulting in its commitment. This rendered the amount expanded by the assessee immobile. The eventual receipt of the amounts determined as compensation/damages, therefore, clearly fell into the capital stream and not revenue as was contended by the Revenue/ appellant in this case.

In the circumstances, no question of law arises because the findings of the Income-tax Appellate Tribunal are well reasoned and based upon appreciation on the point of law.

The appeals are consequently dismissed.”

10. In the light of the above-mentioned binding precedents, we are of the considered view that the lower authorities were not justified in treating the amount as revenue receipts, the same deserves to be deleted. The ground raised by the assessee is thus, allowed.

11. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 07^th August, 2023.