2003 (5) TMI 478 - AT - Income Tax

Summary

Issues Involved:

1. Whether the provisions of section 263 of the Income-tax Act, 1961 were rightly invoked by the Commissioner of Income-tax.
2. Whether the amount received by the assessee from M/s. Mahendra Builders Pvt. Ltd. and claimed as liquidated damages is assessable to tax as capital gains.

Summary:

Issue 1: Invocation of Section 263

The Commissioner of Income-tax invoked section 263, claiming the Assessing Officer's order was erroneous and prejudicial to the interests of the Revenue. The Commissioner argued that the Assessing Officer failed to properly assess the Rs. 21 lakhs received by the assessee from M/s. Mahendra Builders Pvt. Ltd. (MBPL) as capital gains. The assessee contended that the Assessing Officer had made detailed inquiries and accepted the explanation that the amount was liquidated damages, not taxable as capital gains. The Tribunal, referencing the Bombay High Court's decision in Gabriel India Ltd. [1993] 203 ITR 108, held that the Commissioner cannot substitute his judgment for that of the Assessing Officer if the latter had applied his mind and made inquiries. The Tribunal concluded that the Commissioner wrongly invoked section 263, as the Assessing Officer's decision was not erroneous.

Issue 2: Taxability of Liquidated Damages

The Tribunal examined whether the Rs. 21 lakhs received by the assessee from MBPL as liquidated damages was taxable as capital gains. The facts revealed that MBPL had no right, title, or interest in the flat sold to the assessee, as it was already sold to another party. The Tribunal held that the agreement between the assessee and MBPL was fraudulent and invalid. Consequently, the assessee had no capital asset or right in the flat to transfer or relinquish. The Tribunal referenced the Bombay High Court's decisions in Abbasbhoy A. Dehgamwalla [1992] 195 ITR 28 and Bharat Forge Co. Ltd. [1994] 205 ITR 339, concluding that the right to sue for damages is not a capital asset and cannot be taxed as capital gains. The Tribunal determined that the liquidated damages were not taxable as capital gains or revenue receipts, as they were compensation for mental and physical agony, loss of good bargain, and steep rise in real estate prices.

Conclusion:

The Tribunal annulled the Commissioner of Income-tax's order under section 263 and held that the Rs. 21 lakhs received by the assessee from MBPL as liquidated damages was not taxable as capital gains. The appeal of the assessee was allowed.