Capital gains on surrender of rights

Your Q is not clear. has the investor invested in the project ( as capital )or purchased one or more modules (properties) in the complex,

from your query it looks like the first one. Then what was the profit sharing arrangement or agreed returns for your client??

In this case then you chould have claimed the interest on borrowed capital as a loss in the respective years and now claimed setoff.

I

My client has invested for an X amount of area in an upcoming residential project. Actual number of apartments wasnt finalised at that time and later the Developer dodged and had not allotted or earmarked the apartments or modules. After lots of fighting, Developer has agreed to totally pay 50 lakhs as compensation over n above the principal of 100 lakhs. Out of this total 150 lakhs, developer has already paid 110 lakhs upto Mar 13 in piece meal starting ftom 2009.

My client has invested for an X amount of area in an upcoming residential project. Actual number of apartments wasnt finalised at that time and later the Developer dodged and had not allotted or earmarked the apartments or modules. After lots of fighting, Developer has agreed to totally pay 50 lakhs as compensation over n above the principal of 100 lakhs. Out of this total 150 lakhs, developer has already paid 110 lakhs in piece meal from 2009 to Mar 2014. My client has further capitalised interest of 25 lakhs over the last 6 years on this investment and the Investment cost in his books as on Mar 14 is 125 lakhs (100 principal + 50 capitalised interest) So the profit of 25 lakhs will be business income or capital gain..?

Dear Sunil

Here I am unable to give a final answer but can only contribute a few points reg the issue.

1. Capital Gains Vs. Business Income - The general rule is that an isolated one off transaction cannot be considered as a "business". However, this is definitely a rebuttable assumption that can be proved otherwise using the actual facts. Business demands continuity and a series of transaction made with profit motive.
2. Though the mode of accounting in the books doesn't matter for income tax purposes, it could be indicative as to the right treatment. Here, your clinet has accounted the transaction an "investment". Maybe, this could be considered as an "Investment Propoerty". This in turn, would mean that the property in which your client has invested is not a "Stock-in-Trade" atleast going by the way of accounting. Also, I assume even by the actual facts of the case, your client did not intended to "engage" in a business of dealing in real estate like continous buying and selling of properties.
3. So, assuming it be an investement propoerty of your client, it is a "Capital Asset", transfer of which will result in Capital Gain chargeable to Tax.
4. Again, "transfer" for the purpose of tax includes "relinuisment of rights". Now, assuming that your client has formally "relinquished" his right in March 2014, it could be said that the Capital Gains has arisen in the Previous Year 2013-14.
5. Interest on Borrowings could be added to the Cost of Acquisition or as Cost of Improvement.
6.  I wonder whether Sec.50C is applicable in this case?

Hope the experts will contribute more.

Regards

Ajay