2014 (9) TMI 388 - AT - Income Tax

Treatment of compensation received Opportunity to examine evidences not given - Whether the compensation received by assessee can be treated as capital receipt not liable to tax without giving opportunity to AO to examine the new evidence/claim of the assessee Held that - Assessee received ₹ 3.5 crores from Amba High Rise P Ltd as compensation and out of this, an amount of ₹ 75 Lakhs was claimed as receipt for releasing rights to premises and balance amount of ₹ 2.75 crores was claimed as loss of its right to develop the said premises as per agreement with the said Amba High Rise P Ltd. - assessee has no right or title or interest in the property as on the date of agreement, by virtue of which, the compensation was received - The assessee could not have acquired the property because there was no order of court for transfer of property in the name of the assessee - Even the MOU/agreement cannot be used for specific performance of contract to purchase the property - the Tribunal was right in arriving at a conclusion that it was a capital receipt - The amount was received because the assessee had given up its right to purchase and/or to operate the property - it is loss of source of income to the assessee and that right is determined for consideration. Following the decision in Kettlewell Bullen And Company Limited Versus Commissioner Of Income-Tax, Calcutta 1964 (5) TMI 4 - SUPREME Court - The amount was received because the assessee had given up its right to purchase and/or to operate the property and the amount was held to be capital receipt and not revenue receipt by giving up its right to purchase and/or to operate the property, injury was inflicted on the capital asset of the company thereby resulting in loss of source of income - the assessee has released/discharged qualcomm from the project agreement thereby giving up its right to purchase/acquire the equipment from the party and this act has certainly inflicted an injury to the capital structure of the assessee company resulting in loss of source of income - the entire sum was capital receipt not liable to tax Decided against revenue.

Summary

Issues Involved:
1. Treatment of compensation received as capital receipt or business receipt.
2. Opportunity for the Assessing Officer (AO) to examine new evidence/claim of the assessee.

Detailed Analysis:

1. Treatment of Compensation Received as Capital Receipt or Business Receipt:

The primary issue in this appeal is whether the compensation of Rs. 3.5 crores received by the assessee should be treated as a capital receipt not liable to tax or as a business receipt. The AO initially considered the compensation as an undisclosed business receipt, assessing Rs. 3.28 crores after deducting a business advance of Rs. 22 lakhs. The AO's rationale was that the compensation was related to a 'would be' business asset, and thus should be treated as a business receipt.

However, the CIT(A) held that the assessee had not acquired any right over the land since there was no agreement for sale but only a Memorandum of Understanding (MOU) for property development. The CIT(A) concluded that the assessee only had a right to sue Eastern Paper Mills Ltd. for not acting according to the MOU, which is not a capital asset. Therefore, the CIT(A) treated the entire compensation of Rs. 3.5 crores as a capital receipt not liable to tax.

The Tribunal reviewed the facts and circumstances, noting that the assessee received Rs. 3.5 crores as compensation for releasing rights to premises and for the loss of the right to develop the premises. The Tribunal observed that the assessee had no legal right or title to the property as there was no court order for the transfer of property to the assessee, and the MOU could not be enforced for specific performance. The Tribunal referred to Section 6 of the Transfer of Property Act, 1882, which states that a right to sue is not an asset.

The Tribunal also cited the Supreme Court's decision in Oberoi Hotels Pvt. Ltd. vs. CIT, which held that compensation for giving up a right to purchase or operate property is a capital receipt, not a revenue receipt. The Tribunal concluded that the compensation received by the assessee was for giving up its right to purchase and/or operate the property, resulting in a loss of source of income, thus making it a capital receipt not liable to tax.

2. Opportunity for the Assessing Officer (AO) to Examine New Evidence/Claim of the Assessee:

The revenue's appeal included the contention that the CIT(A) treated the compensation as a capital receipt without giving the AO an opportunity to examine the new evidence or claim of the assessee. However, the Tribunal did not find merit in this contention, as the CIT(A)'s decision was based on the legal interpretation of the nature of the compensation and the rights involved, rather than on new evidence.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, confirming that the entire compensation of Rs. 3.5 crores received by the assessee was a capital receipt not liable to tax. The appeal by the revenue was dismissed, and the order was pronounced in the open court on 05.09.2014.