2016 (9) TMI 948 - AT - Income Tax

Taxing of compensation - revenue or capital receipt - Held that - Huge compensation was awarded by the arbitrator. The basis of award remained the lost profit due to non-supply of the knowhow and not on loss of profit and that newly installed machinery in absence of supply of knowhow have gone completely wasted. Reliance was placed on several decisions. After dealing with the issue in detail, the ITAT has decided the issue in favour of the assessee. When we examine the facts of the present case in view of the above cited decision of Pune Bench of the ITAT, we find that in the present case before us also the injury was caused to the profit making apparatus as the land which was profit making apparatus for the assessee was not supplied by JMA Buildcom (P) Ltd. as per the agreement entered into between the assessee and associates, and JMA Buildcom (P) Ltd. Appreciating the same, compensation was awarded in the arbitration proceedings initiated against JMA Buildcom.(P) Ltd. In other words, the basis of award remained the lost profit due to non-supply of the land i.e. profit making apparatus and not on loss of profit. We thus find that the only inference can be drawn is that the compensation received by way of reward due to non-supply of land by JMA Buildcom (P) Ltd. under the agreement was capital receipt.

Summary

Issues Involved:
1. Taxation of compensation as Revenue receipt vs. Capital receipt.
2. Rejection of additional evidence by CIT(A).
3. Status of the land as agricultural land.
4. Nature of the business and the impact on trading structure.

Detailed Analysis:

1. Taxation of Compensation as Revenue Receipt vs. Capital Receipt:

The primary issue was whether the compensation of ?1 crore received by the assessee should be taxed as a Revenue receipt or a Capital receipt. The assessee argued that the compensation was a capital receipt, as it was received due to the breach of an agreement which prevented the commencement of a new business venture. The consortium formed by the assessee and its associates was a one-time arrangement, and the business never commenced due to the breach. The assessee cited several judicial precedents, including the case of Aquapharm Chemical Co. Ltd. vs. JCIT, where compensation for the non-fulfillment of a contract was treated as a capital receipt. The ITAT agreed with the assessee, stating that the compensation was for the loss of a profit-making apparatus (the land), and thus, it should be treated as a capital receipt.

2. Rejection of Additional Evidence by CIT(A):

The assessee contended that the CIT(A) wrongly rejected additional evidence, including the fard of land and the company's resolution, under Rule 46A. The assessee argued that there was sufficient cause for not presenting these documents earlier. However, this ground was not pressed by the assessee during the hearing and was thus rejected as not pressed.

3. Status of the Land as Agricultural Land:

The assessee argued that the land in question was agricultural land and not intended for immediate sale. The CIT(A) and the Assessing Officer (AO) had impliedly accepted the land's agricultural status but contended that the assessee's intention was to develop the land for a project. The assessee cited various judicial precedents, including the cases of DLF Universal Limited and Hindustan Industrial Resources, to support the claim that the land's character as agricultural land did not change merely because it was not cultivated or because the assessee intended to develop it in the future. The ITAT found merit in the assessee's argument, noting that the land's status as agricultural land was not effectively disputed by the authorities.

4. Nature of the Business and Impact on Trading Structure:

The AO and CIT(A) had observed that the agreement to purchase land was entered into in the normal course of the assessee's business. However, the assessee argued that the consortium was a one-time arrangement and that the business never commenced. The ITAT agreed with the assessee, noting that the consortium's business was demolished before it could start, and thus, the compensation received was not in the normal course of business. The ITAT referenced the case of Aquapharm Chemical Co. Ltd., where compensation for the loss of a new line of business was treated as a capital receipt.

Conclusion:

The ITAT concluded that the compensation received by the assessee was a capital receipt, as it was awarded for the loss of a profit-making apparatus (the land) due to the breach of the agreement. The ITAT allowed the appeal, holding that the compensation should not be taxed as a Revenue receipt. The remaining grounds became academic in light of this finding and were accordingly disposed of. The appeals were allowed, and the order was pronounced in the open court on 12.08.2016.