Business Income vis-à-vis Short term capital gains — Cancellation of agreemen

Ramesh Gelli Hyderabad v Income Tax Officer

Business Income vis-à-vis Short term capital gains — Cancellation of agreement — Compensation received — Assessee filed return declaring income — Case selected for scrutiny — Notice was issued u/s 143(2) and assessment was completed u/s 143(3) — Assessee extended business funds of ₨ 2.57 crores as business advance to company GGPL towards participation in doing business together to set up SEZ and other project — During progress of project an event changed conditions of project and assessee decided to exit from business venture — Assessee was paid business compensation of ₨ 2.90 crores by GGPL that was mutually agreed — AO treated business compensation as short term capital gain — CIT(A) partly allowed appeal of assessee — Held, assessee produced agreement with GGPL recording that assessee was interested in development of properties and company had agreed to join with assessee — Amount of ₨ 257 lakhs given by assessee was reflected in books of assessee and shown as trade advance in balance sheet and not as investments — Hence, cancellation of agreement and payment of business compensation was shown as business income — Since assessee was following consistently method of accounting, amount shown as trade advance cannot be changed — Hence, compensation was business income which arose due to cancellation of business deal as per option available in agreement as there was no capital asset acquired — Set off of earlier year business losses was correct and was as per provisions of s 72.