2013 (6) TMI 722 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received for waiving rights under a Joint Venture Agreement.
2. Classification of the compensation as capital receipt or short-term capital gain.

Summary:

Issue 1: Taxability of Compensation Received for Waiving Rights under a Joint Venture Agreement

The assessee, a company engaged in trading and servicing electronic equipment, filed an appeal against the order of the CIT(A) confirming the addition of Rs. 2,10,75,000/- made by the A.O. The A.O. treated the compensation received by the assessee for waiving and giving up rights under Article 8.6 and 8.7 of the Joint Venture Agreement as income chargeable to tax under the head "short term capital gain." The assessee argued that the compensation was a capital receipt, relying on judicial pronouncements such as Kettlewell Bulen and Co. Ltd. vs. CIT and Oberoi Hotels Pvt. Ltd. vs. CIT, and claimed it should not be taxable under the Income Tax Act.

Issue 2: Classification of the Compensation as Capital Receipt or Short-Term Capital Gain

The A.O. contended that the amount was received against the sale of 50% shares in the Joint Venture Company and thus chargeable to tax as "short term capital gain." The CIT(A) upheld this view, stating that the right of first refusal (ROFR) was akin to a call option, and the compensation for giving up this right was taxable as short-term capital gain. The CIT(A) reasoned that the cost of acquisition of such a right was nil as per sec. 55(2)(a) of the Income Tax Act.

The Tribunal found that the A.O.'s finding was factually incorrect as the assessee continued to hold the shares even after receiving the compensation. The CIT(A) did not address the assessee's plea that the compensation was a capital receipt not chargeable to tax. Instead, the CIT(A) confirmed the addition on a different basis without giving the assessee an opportunity to be heard on this new basis.

Conclusion:

The Tribunal set aside the order of the CIT(A) and remitted the matter back for fresh consideration. The CIT(A) was directed to provide the assessee with a proper and adequate opportunity of being heard and to pass a well-considered and well-discussed order after dealing with the submissions made by the assessee.

Order Pronounced:

The appeal of the assessee was treated as allowed for statistical purposes, and the order was pronounced in the open court on 21-6-2013.