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2014 (12) TMI 433 - AT - Income TaxPrior paid expenses deleted Expenses set off by prior paid income - Mercantile system of accounting followed Held that - CIT(A) rightly was of the view that as per the details furnished by the assessee, the assessee has claimed deduction on account of prior period expenses of ₹ 15.38 lakhs and at the same time, the assessee has offered previous year income to the extent of ₹ 18.78 lakhs - income offered on account of previous years is more than the claim of the assessee relating to previous year expenses - Since the AO has already assessed previous year income in the present year, there is no reason to disallow the claim of the assessee regarding previous year expenses since there expenses are lesser than such incomes, but at the same time, this has to be seen as to whether such previous year expenses are otherwise allowable or not because we have noted that some of the expenses are on account of penalty and some of the expenses are infrastructure expenses which may not to be found otherwise allowable - normally prior period expenses cannot be allowed but if there is some income in the prior period then definitely the expenses can be set off against such income Decided against revenue. Deletion of STCG Held that - The assessee has originally purchased an industrial plot bearing NO. B-77, Ph VII, IA, Mohali through auction - The auction was conducted by sale committee appointed by Court on winding upon of Punwire - The sale was challenged before the Company judge by Sun Group - what has happened is that by setting aside the same the Hon'ble Supreme Court has cancelled the original sale made to the assessee-company - sale in favour of WINSOME in respect of item No. 17, 19 & 20 shall stand set aside and sale of said items No. 17 (plot no. B-77 and structure thereon has been confirmed in favour of SUNGROUP) also in Smt. C. Kamala Versus Commissioner Of Income-Tax, Bangalore 1978 (4) TMI 80 - KARNATAKA High Court the similar matter has been decided - if sale itself is set aside by a Court then it can be said that the assessee never acquired any interest in such property - sale has been set aside by the Hon'ble Supreme Court and therefore it cannot be said that the assessee ever acquired any interest in the property - No doubt extinguishment is also covered in the definition of transfer u/s 2(47)(II) - extinguishment would normally connote a situation where an asset goes out of existence thus, surplus arising on account of compensation received by the assessee cannot be assessed under the head capital gain because no asset came into existence with the assessee. Taxability of the amount as compensation Held that - In Kettlewell Bullen And Company Limited Versus Commissioner Of Income-Tax, Calcutta 1964 (5) TMI 4 - SUPREME Court it has been held that if amount is received as compensation in relation to surrender of profit making structure then such compensation is to be treated as capital receipt - the assessee has acquired an industrial shed for running a manufacturing business and sale was set aside by the Hon'ble Supreme Court and therefore the assessee is clearly deprived of making future profits by surrendering this profit making structure or capital asset and therefore compensation received against such surrender is to be treated as capital receipt - the compensation cannot be brought to tax as revenue receipt the order of the CIT(A) is upheld Decided against revenue.
Issues Involved:
1. Disallowance of prior period expenses. 2. Taxability of compensation received as short-term capital gain. Issue-Wise Detailed Analysis: 1. Disallowance of Prior Period Expenses: During the assessment proceedings, the Assessing Officer (AO) observed that the assessee debited prior period expenses of Rs. 6,03,1289/- to the profit and loss account, which were adjusted against prior period income of Rs. 10,70,480/-. The AO disallowed the net prior period expenses of Rs. 10,70,480/- on the grounds that the assessee, following the mercantile system of accounting, should have claimed these expenses in the relevant assessment year. On appeal, the CIT(A) found that the AO failed to provide reasons why prior period income could not be set off against prior period expenses. The CIT(A) relied on various judicial decisions, including the Delhi Bench Tribunal's decision in Modi Industries Ltd. v. Dy. CIT, which allowed prior period income to be set off against prior period expenses. The CIT(A) concluded that if there is prior period income, the expenses can be set off against such income, thus deleting the addition. The ITAT upheld the CIT(A)'s decision, agreeing that the AO did not provide adequate reasons to disallow the set-off and that prior period expenses can be set off against prior period income. 2. Taxability of Compensation Received as Short-Term Capital Gain: During assessment, the AO noticed that the assessee credited Rs. 2,69,83,000/- in the profit and loss account from the sale of fixed assets. The AO treated this amount as short-term capital gain, arguing that the receipt was compensation for the extinguishment of rights in a capital asset (Plot No. B-77, Ph VII, IA, Mohali) as per Section 2(47)(ii) of the Income Tax Act. The CIT(A) found that the compensation was received based on a negotiated settlement endorsed by the Supreme Court, which set aside the initial sale of the property to the assessee. The CIT(A) referred to the Supreme Court's decision in CIT v. Saurashtra Cement Ltd., concluding that the compensation had a direct connection with the capital asset and should be treated as a capital receipt, not taxable as short-term capital gain. The ITAT agreed with the CIT(A), noting that the sale was set aside by the Supreme Court, meaning the assessee never acquired any interest in the property. The ITAT referenced the Karnataka High Court's decision in Smt. C. Kamala v. CIT, where it was held that if a sale is set aside by a court, the assessee never acquires any interest in the property. The ITAT also distinguished the case from other cases cited by the revenue, noting that those cases did not involve a court setting aside the sale. Furthermore, the ITAT considered the alternative argument by the AO that the compensation could be treated as interest income. The ITAT rejected this, citing the Supreme Court's rulings in Kettlewell Bullen & Co. Ltd. and Oberoi Hotel (P.) Ltd. v. CIT, which established that compensation received for the surrender of a profit-making structure or capital asset should be treated as a capital receipt. In conclusion, the ITAT upheld the CIT(A)'s order, treating the compensation as a capital receipt and not taxable as short-term capital gain or interest income. Final Judgment: The appeal of the revenue was dismissed, upholding the CIT(A)'s decisions on both issues.
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