2010 (12) TMI 233 - AT - Income Tax

Income from other business or under the head capital gains - CIT(A) viewed the compensation received by the assessee as income from business as a receipt received for termination of a trading contract which is a normal incident of the business and accordingly directed the Assessing Officer to tax the income under the head business - The assessee had obtained a right to have a conveyance executed by the Nigams in respect of the plot admeasuring 1267 sq. mts - Held that - The CIT(A) with respect appears to have thought that the additional FSI is to belong to the assessee and Small Success which they are going to develop for their own profit. It is from the factually erroneous finding that he has drawn the conclusion that there is a business motive and hence the receipt for surrendering the rights over the property should be assessed as business profits treating it to be a case of a normal cancellation of a contract entered into in the course of the business of constructing and selling properties. The entire case-law referred to by him has been held applicable on the basis of the erroneous conclusion. - The assessee s contention that it should be assessed under the head capital gains with all the allowable deductions is upheld Appeal is partly allowed

Issues Involved:
1. Classification of the Income: Whether the compensation received by the assessee should be classified as "capital gains" or "income from other sources" or "business income".

Detailed Analysis:

Issue 1: Classification of the Income

Background and Facts:
The assessee, an individual deriving various forms of income, declared capital gains from the sale of a property referred to as "Nigam property" in his return for the assessment year 2007-08. The capital gains were calculated after adjusting for long-term capital loss. The assessee had entered into an agreement with the owner of the Nigam property on 3rd February 1998, which later led to the receipt of Rs. 3,00,00,000 as compensation upon cancellation of the agreement on 31-1-2007.

Assessing Officer's Findings:
The Assessing Officer (AO) observed that the assessee was not a party to the original agreement dated 3-2-1998 and thus had no right in the Nigam property. Consequently, the AO classified the compensation received as "income from other sources" rather than "capital gains".

CIT(A)'s Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] examined the documents and concluded that the compensation should be taxed as "business income". The CIT(A) reasoned that the transaction was essentially a business activity involving the construction and sale of residential apartments, and the compensation received was for the termination of a trading contract.

Tribunal's Analysis:
The Tribunal examined the sequence of events and the nature of the agreements involved. The key points are:
1. The agreement dated 15-1-1998 between the assessee and Small Success Finance & Trading Pvt. Ltd. indicated the intention to construct a residential bungalow and utilize the plot's FSI.
2. The MoU dated 3-2-1998 outlined the development of the property and the construction of residential units.
3. The "Declaration Cum Confirmation" dated 16-2-1998 made the assessee a party to the transaction, giving him the right to enforce the MoU.
4. The "agreement of cancellation" dated 31-1-2007 and the subsequent "agreement to assign" dated 2-4-2007 confirmed the relinquishment of the assessee's rights for a consideration of Rs. 3,00,00,000.

Tribunal's Conclusion:
The Tribunal held that the compensation received by the assessee should be classified as "capital gains". The reasoning included:
1. The assessee had a right to enforce the MoU and obtain specific performance, which qualifies as a "capital asset" under section 2(14) of the Income Tax Act.
2. The compensation received was for the relinquishment of this right, making it a capital receipt.
3. The CIT(A) misinterpreted the MoU, leading to an erroneous conclusion that the transaction was a business activity.

Precedents Cited:
The Tribunal referred to the judgments of the Hon'ble Bombay High Court in CIT v. Tata Services Ltd. (1980) 122 ITR 594 and CIT v Vijay Flexible Containers (1990) 186 ITR 693, which supported the view that a right to obtain conveyance of property is a capital asset.

Final Order:
The Tribunal directed the AO to assess the compensation received under the head "capital gains" and allow all permissible deductions. The appeal was partly allowed in favor of the assessee.

Conclusion:
The compensation received by the assessee for relinquishing his rights in the Nigam property is taxable under the head "capital gains" and not as "income from other sources" or "business income". The AO is instructed to reassess the income accordingly, allowing for appropriate deductions.

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