2015 (12) TMI 962 - AT - Income Tax

Nature of interest received - revenue receipt or capital receipt - compensation for breach of contract relating to capital assets - CIT (A) treated the interest received and tax deducted at source from the same u/s 194A as capital in nature - Held that - We find merit in the submissions of the learned Counsel for the assessee. Merely because the tax has been deducted by the builder and recorded it in his books of account as revenue expenditure, the same cannot be treated as revenue receipt. The compensation received for breach of contract which relates to capital assets and, therefore, the learned CIT(A) has rightly held it to be capital in nature. Thus, we do not find any cogent reason to disturb the reasoned order passed by the learned CIT(A) and decline to interfere in the matter as such. - Decided against revenue

Summary

Issues:
1. Whether interest income received by the assessee should be treated as capital in nature?
2. Whether interest received and tax deducted at source should be considered as capital in nature?
3. Whether compensation received for breach of contract is taxable as income?

Analysis:

Issue 1:
The Revenue challenged the deletion of interest income received by the assessee as capital in nature from the vendee per consent decree. The Assessing Officer added the amount to the assessee's income based on Form no.26AS where the builder treated the payment as interest and deducted TDS under section 194A. The assessee argued that the amount was compensation for damages due to the builder's breach of contract, relying on legal precedent. The CIT(A) agreed with the assessee, citing that the compensation was not taxable at the time of receipt but would reduce the cost of acquisition for capital gains tax purposes. The Tribunal upheld the CIT(A)'s decision, emphasizing that the compensation for breach of contract related to capital assets and was thus capital in nature, dismissing the Revenue's appeal.

Issue 2:
The Revenue also contended that interest received and tax deducted at source should not be considered capital in nature. The assessee maintained that the amount received was compensation for breach of contract regarding capital assets, regardless of the builder's treatment in their books. The Tribunal agreed with the assessee, affirming that the compensation for breach of contract was capital in nature, and declined to interfere with the CIT(A)'s decision. The Tribunal dismissed the Revenue's appeal, emphasizing that the tax treatment by the builder did not alter the nature of the payment as capital in the hands of the assessee.

Issue 3:
The core issue revolved around whether the compensation received for breach of contract should be taxed as income. The CIT(A) ruled that such compensation was not taxable at the time of receipt but would impact the cost of acquisition for future capital gains tax calculations. Legal precedents were cited to support this position. The Tribunal concurred with the CIT(A) and upheld the decision, emphasizing that the compensation for breach of contract was related to capital assets and therefore not taxable as income. The Revenue's appeal was dismissed, affirming the capital nature of the compensation received by the assessee.

In conclusion, the Tribunal's decision in this case clarified the treatment of compensation for breach of contract as capital in nature, impacting future capital gains tax calculations and not taxable as income at the time of receipt. The legal precedents cited supported this interpretation, leading to the dismissal of the Revenue's appeal.