TMI Blog2018 (11) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... or has it been transferred so as to give rise to the income under dispute, as such, it does not fall within the definition of capital gain. As is held in the case of Dhruv N. Shah [2003 (5) TMI 478 - ITAT MUMBAI] 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 and clearly in this matter, the impugned receipt is not a capital gain and, therefore, it is outside the definition of income u/s 2(24) of the Act. The assessee entered into the memorandum of settlement does not seem to be an act of unwiseness. The memorandum of settlement is 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 do not suggest anything suspicious surrounding the settlement. We, therefore, hold that the assessee not earning a particular income is not without any reason and it is not for the AO to say that the assessee should have earned such income also or that eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interested in buying one residential flat at Bangalore, entered into the construction agreement dated 7.10.1994 with M/s Cordell Estate (P) Ltd. and made an advance payment of ₹ 50 lacs. The said agreement provides for deduction of a penalty 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 never honoured the obligation under the contract, hence, the assessee had to file a suit for recovery of the advance amount of ₹ 50 lacs with ante latem interest at ₹ 86,65,773/- . the said suit was decreed for such amount with pendent latum and post latum interest @ 24% on the principal amount of ₹ 50 lacs which the assessee calculated at ₹ 1,37,25,869/-. The seller approached the Hon ble High Court against the decree of the Bangalore Civil Court and such appeal was dismissed. Subsequently, the assessee entered into a memorandum of settlement dated 10.9.2010 and received ₹ 1.20 crores towards the full and final settlement of the entire claim and claimed the difference between ₹ 1,37,25,869/- and ₹ 1,20,00,000/- as long term capital l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such, such amount assumes the character of capital receipt and in the absence of any capital gain, such capital receipt is not liable to tax; whereas challenging the relief granted by the learned CIT(A) to the assessee in restricting the addition to ₹ 70 lacs, Revenue preferred ITA No.5884/Del/2015 stating that the voluntary waiver of the income amounts to diversion of income, as such, the learned AO was justified in bringing it to tax. Learned CIT(A) committed an error in deleting the same. Since the issues involved in both the appeals is in respect of the nature of receipt in the hands of the assessee, we deem it just and proper to answer this issue by way of this common order. 8. On a careful consideration of the record and the arguments on either side, we are convinced that in so far as the facts are concerned, absolutely there is no dispute. The entire dispute in this matter revolves around the question whether the amount received by the assessee over and above the advance amount is interest or a capital receipt and if so, whether eventually received part of the amount under the decree in view of the memorandum of settlement is also liable to be brought under tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in SLP(Civil) No.17158 of 1985 (CIT vs J. Dalmia, 189 ITR (St.) 122). 12. In the case in hand also Clause 3 of the agreement which entitles the purchaser to deduct penalty by way of interest at 24% p.a. for the period of delay if any in handing over the possession of the apartment to the assessee if such apartment is not handed over to the assessee as per the time schedule agreed upon by the parties. This clause clearly shows that the benefit that shall ensure to the assessee, though calculated by way of interest at 24% p.a. but in fact was intended to be by way of reduction of the price of the capital asset. No doubt, in this matter the apartment intended to be purchased by the assessee is a capital asset in any case, the assessee does not deal in real estate nor could such apartment be stock in as trade. When there is a clear intention on the part of the parties that the performance or non performance shall affect the value of the capital assets, mentioning of the wording interest @24% is only a measure or method of calculation to quantify the receipt but is not decisive of the character of the payment. It does not partake the character of interest within the mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be no tax even though it is possible to reach a hypothetical income which was never materialized. Further in CIT vs Govind Agencies (P) Ltd. (2007) 295 ITR 290 (All), it was 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 real income theory stated in the case of State Bank of Travancore vs. CIT, 158 ITR 102, 154 (SC), is 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. 17. Learned CIT(A) in the impugned order recorded that after having lost the case before the Civil Court and the High Court of Karnataka, the seller had the option to approach the Hon ble Apex Court for remedy and, at the same time, the assessee also had seen a prolonged legal battle for a while over 15 years and still there was the possibi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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