Assured return received on flat booking from Builder was interest income not capital receipt or income from other sources
ABCAUS Case Law Citation:
ABCAUS 2539 (2018) 09 ITAT
Important Case Laws Cited/relied upon by the parties:
CIT Vs. Saurashtra Cement Ltd (2010) 325 ITR 042 (SC) : 192 taxman 300 (SC)
The appellant assessee was a tax resident of United Kingdom (U.K). During the relevant financial year, assessee booked the commercial floors in the proposed upcoming commercial complex project of a builder along with four other investors.
The assessee made payment of 95% of the sale price and was provisionally allotted fourth and fifth floors in a proposed commercial complex. In lieu of such 95% advance payment, the builder was to pay assured return on monthly basis to assessee till the time possession of the commercial space was handed over.
The builder made Such payments for five assessment years after making deduction of tax (TDS) u/s 195 @ 15% under the India-U.K. Double Taxation Avoidance Agreement (DTAA)
The Assessing officer on the basis of information received by him reopened the assessment and asked the assessee to file its return of income. The assessee accordingly filed is return of income and offered to tax the assured return received from builder treating the same as interest income. Since the TDS @ 15% has already been deducted in accordance with article 12 of the DTAA between India and U.K., income was offered to tax @ 15% accordingly.
The Assessing officer, however, was of the view that the assured return received by the assessee from builder was not the interest income, rather he treated the same as return from investment and assessed the same as ‘income from other sources’ and thereby making the addition into the income of the assessee for the year under consideration.
The addition made by the Assessing officer was confirmed by CIT(A).
Before the Tribunal, the assessee challeneged the reopening as bad in law. The AO in the reasons recorded had given two reasons; firstly, that the source of the investment made by the assessee was to be verified. Secondly, the AO had information that the assessee had received the assured returns but he had not filed his return of income.
It was further submitted that as per the provisions of section 115A, sub section (5), it is not necessary for an assessee who is a non-resident to furnish return u/s 139 of the Act, if his income consisted only of income referred to in clause (a) of sub section (1) of section 115A, which include interest income and further that the tax deductible at source under the relevant provisions has been deducted from such income.
It was submitted that the reopening cannot be done just to verify the source of investment in the absence of any information or reasons to believe of escapement of income. That the assessment cannot be reopened for making fishing and roving inquiries. Further, that the second reason recorded that the assessee had not filed the return, was not tenable as the assessee as per the provisions of the Income Tax Act was not necessarily require to file the return of income
The Tribunal opined that it could not be said that the Assessing officer was supposed to assume that the assessee was not required to file the return of income as per the provisions of section 115A sub-section (5) or that the Assessing officer was of the view that the assessee had been receiving interest income only. Therefore, the reopening of the assessment was held valid.
The Tribunal observed that the Assessing officer while making the addition had relied upon the definition of ‘interest’ as provided under article 12 of the India U.K. DTAA. The Assessing officer had also referred to the clause 23 of the allotment letter issued by the Builder to the assessee, which provided that unless and until the Conveyance deed is executed and registered, the builder will continue to have full authority over the proposed Unit and all the amounts paid by the allottee shall merely be a token payment and shall not give any lien or interest in the said unit to the allottee.
The Tribunal further observed that the property for which the assessee had paid the money was not in existence at the time of making payment and even subsequently was not capable of yielding any income in the shape of rent, lease money and even otherwise was not capable to be commercially exploited.
The Tribunal opined that the assured return was not a return from the property in respect of which the assessee had paid the amount. Even as per the allotment letter, even for making the investment, the payment of the advance money at the rate of 95% of the agreed price, the assessee did not get right of lien in the proposed property.
In view of the above facts, the Tribunal opined that the assessee had a claim of debt against the Builder, which means the assessee had advanced money to the Builder which was nothing but a debt claim till the proposed property is constructed, possession handed over to the assessee and the conveyance deed executed and registered. Therefore, it was a financial transaction and the assured money return received by the assessee was nothing else than the interest received by the assessee on the finances made by the assessee to the Builder to be used for the construction of the property.
The Tribunal held that there was no justification on the part of the lower authorities in treating the receipts of the assessee as ‘income from other sources’. Accordingly, the Tribunal set aside the impugned order and directed that the assessee had rightly paid the taxes as per India U.K. DTAA. The claim of the assessee as to capital receipt was rejected.