2021 (11) TMI 1072 - AT - Income Tax

Capital gain - taxability of compensation receipts under normal provisions of the Act - sale of land which is a capital asset u/s 2(14) - As submitted that the amount in question was received by the assessee against its right to receive damages which arose from the arbitration ward and not formed the right to sue as erroneously contended by the assessee - as contended that the amount received was in the nature of compensation and would squarely fall within the definition of capital asset under s.2(14) of the Act which is defined in widest possible terms and seeks to an encompass property of any kind and includes any right whatsoever arising from such transactions - whether damages received by the assessee for relinquishment of right to sue in the context of the facts of the case are capital receipt excludible from the definition of Section 2(14) of the Act or not and consequently, such receipts arising from release of right to sue is taxable under the scheme of the Act or not? - HELD THAT - In the instant case, the rights of the assessee arising under the sale agreement with the original land owners were frustrated in view of another sale agreement of the same land parcels in favour of other party. The assessee received certain consideration by way of damages as a culmination of ongoing vexatious dispute towards rightful ownership of land parcels in question. The amount arose to the assessee by virtue of arbitral award adhered to by the parties to the dispute. The assessee has received consideration for its release of right to sue. Despite the definition of expression capital asset in the widest possible term of Section 2(14) of the Act, a right to a capital asset must fall within the expression property of any kind and must not fall within the exceptions. Section 6 of Transfer of property Act which uses the same expression property of any kind in the context of transferability makes an exception in the case of a mere right to sue. The issue is no longer res integra. There are long line of judicial precedents which echoes the view that the right to receive the compensation for release of right to sue on account of breach of contract for sale of land is not a capital asset and thus not chargeable to tax as capital gains. Support is drawn from CIT vs. J. Dalmiya 1984 (5) TMI 32 - DELHI HIGH COURT ; Baroda Cements Chemicals Ltd. vs. CIT 1985 (12) TMI 55 - GUJARAT HIGH COURT ; CIT vs. A. A. Dehgamwalla Ors. 1991 (4) TMI 38 - BOMBAY HIGH COURT - As decided in BHOJISON INFRASTRUCTURE PVT. LTD. VERSUS THE INCOME TAX OFFICER, AHMEDABAD 2018 (9) TMI 1239 - ITAT AHMEDABAD mere right to sue , while a capital receipt, is not a capital asset under s.2(14) of the Act and thus compensation received on release of right to sue is not a taxable receipt. Thus such capital receipts towards compensation do not fall within the sweep of expression property of any kind notwithstanding its very wide connotations and consequently such capital receipts (not being capital asset) are not susceptible to capital gain tax having regard to provisions of charging section 45 of the Act. Merely because such right towards compensation surfaced as a result of sale of disputed land would not per se govern its taxability unless such right can be termed as a capital asset which it is not. Thus, in totality, we see no error in the conclusion drawn by the CIT(A) in favour of the assessee under the normal provisions of the Act for excluding impugned capital receipts from ambit of taxation. Hence, We decline to interfere with the first appellate order on this score. Taxability of compensation on the contours of MAT provisions embodied under section 115JB - HELD THAT - The compensation received for release of right to sue being a capital receipt is not deemed to be income and hence not chargeable to tax. Significantly, the Constitution itself uses the term tax on income and the term income must be construed in the same manner as the one defined under Income Tax Act. As a corollary, it is impermissible to cover such capital receipts under S. 115JB in an unregulated manner. At this stage, we notice a pertinent plea taken on behalf of the assessee that the receipt being of capital nature does not enter into the computation provision at all and hence, there is no question of including the same in book profits for the purposes of Section 115JB of the Act. Since capital receipts are not ordinarily construed as income under rudimentary understanding of accounting and tax laws, they do not find a specific mention in Section 10 of the Act and consequently Explanation 1 to Section 115JB of the Act is silent on exclusion of capital receipts. In tandem, on facts, the capital receipt has been credited in appropriation of profits account and is not regarded as income per se in the profit loss account prepared under schedule VI of Companies Act, 1956. Hence, when the factual position and law is read conjointly, it appears that such capital receipts are not susceptible to tax under s.115JB of the Act. The AO cannot bring such capital receipts to tax by including it in book profit artificially We concur with the view adopted by the CIT(A) in favour of the assessee towards inapplicability of MAT provisions to the impugned capital receipts. In parity with judicial precedents governing the field, we see no error in the conclusion drawn by the CIT(A) in this regard.

Summary

Issues Involved:
1. Taxability of compensation received for relinquishment of the right to sue under normal provisions of the Income Tax Act.
2. Inclusion of compensation received for relinquishment of the right to sue in book profits under Section 115JB of the Income Tax Act.

Detailed Analysis:

1. Taxability of Compensation Received for Relinquishment of the Right to Sue:
- Background: The assessee entered into agreements to purchase agricultural land, which later was found to have been sold to another party earlier. This led to prolonged litigation, culminating in an arbitration award directing the sale of the disputed land and distribution of proceeds. The assessee received Rs. 70 Crores as compensation for relinquishing its right to sue.
- Assessing Officer's (AO) Stance: The AO treated the compensation as long-term capital gains, taxable under the normal provisions of the Income Tax Act. The AO argued that the right to sue constituted a capital asset under Section 2(14) of the Act.
- Commissioner of Income Tax (Appeals) [CIT(A)]'s Decision: The CIT(A) reversed the AO's decision, holding that the compensation received for relinquishing the right to sue is not a capital asset under Section 2(14) of the Act. The CIT(A) relied on various judicial precedents, including the Gujarat High Court's decision in Baroda Cement & Chemicals Ltd., which held that a mere right to sue is not transferable and thus not taxable as capital gains.
- Tribunal's Findings: The Tribunal upheld the CIT(A)'s decision, emphasizing that the right to sue is not a property or a capital asset under Section 2(14) of the Act. The Tribunal referred to several judicial precedents, including CIT vs. J. Dalmiya and Baroda Cements & Chemicals Ltd., which supported the view that compensation for relinquishing the right to sue is a capital receipt not subject to tax.

2. Inclusion of Compensation Received for Relinquishment of the Right to Sue in Book Profits Under Section 115JB:
- Background: The AO included the compensation in the book profits for the purpose of Minimum Alternate Tax (MAT) under Section 115JB, arguing that the compensation should be part of the book profits.
- CIT(A)'s Decision: The CIT(A) excluded the compensation from book profits, citing judicial precedents that capital receipts not taxable under normal provisions should not be included in book profits under Section 115JB. The CIT(A) referred to the Supreme Court's decision in Apollo Tyres Ltd., which held that the AO cannot go beyond the net profits shown in the profit and loss account except as provided in the explanation to Section 115JB.
- Tribunal's Findings: The Tribunal agreed with the CIT(A), stating that capital receipts, which are not income, cannot be included in book profits under Section 115JB. The Tribunal cited several decisions, including Shree Cement Ltd. and Binani Industries Ltd., which held that capital receipts not chargeable to tax under normal provisions should be excluded from book profits for MAT purposes. The Tribunal emphasized that the compensation for relinquishing the right to sue is a capital receipt and not an income, and thus should not be included in book profits.

Conclusion:
- The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the compensation received for relinquishing the right to sue is not taxable under normal provisions of the Income Tax Act and should not be included in book profits under Section 115JB.
- The cross-objection filed by the assessee, supporting the CIT(A)'s decision, was also dismissed as infructuous.