2017 (6) TMI 125 - AT - Income Tax

Reopening of assessment - Held that - It is possible that with due diligence of the Assessing Officer would have ascertained this fact at the time of assessment, if any also, but in view of the explanation (1) it does not mean that there was no default on the part of the assessee. Hence, reopening u/s.147 is held to be valid. The assessee has tried to take shelter under the exception provided in that section. But as stated above, when the assessee has not disclosed fully and truly the facts necessary for the assessment and there is no assessment u/s.143(3) of the Act, this proviso will not come to its rescue. Consequently, we hold that the entire reassessment proceeding in this case is valid and therefore, the action of the Assessing Officer is upheld. Nature of receipt - Assessment of compensation received - revenue v/s capital receipt - Held that - The compensation is only to compensate the loss of rental income, which would have arisen to the appellant had the agreement dated 24.3.2003 been honoured by the developer. A perusal of the purchase and compensation agreements shows that the land sold as per the earlier sale agreements is entirely different from the land on which the appellant is acquiring the property. In view of the above it is very clear that the compensation received by the appellant is purely for non fulfillment of contractual obligations with regard to purchase of built up area in Mantri Chambers and in no way linked to the sale of the land at Begur Hobli in Bangalore South Taluk as per sale agreement dated 30.10.2000 and supplementary agreement dated 9.1.2003. The assessing officer in his well reasoned order has correctly treated the receipts as revenue receipt and has in no way treated the same as income on account of capital gains. Therefore, the appellants claims with regard to cost of acquisition or the extinguishment of rights are not accepted. The compensation was received by the appellant, for loss of revenue. Further, compensation has been awarded only by way of agreement dated 15/3/2004. The mere provision of a compensation agreement dated 24.3.2003, does not presuppose the default by the developer receipt of compensation on that count. The claim of compensation fructifies only when Developer failed is his obligations and that happened only on 15/3/2004.The compensation is to be taxed in assessment year 2004-2005 only. In view of this, we dismiss the ground taken by the assessee on merit also.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.
2. Taxability of compensation received on cancellation of a contract as revenue receipt or capital receipt.

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147 of the Income Tax Act:
The assessee challenged the reopening of the assessment, arguing that there was no fresh material warranting the reassessment and that the reopening was based on the same material already on record, constituting a mere change of opinion. The original assessment was completed under Section 143(3) of the Act, and the reopening notice under Section 148 was issued after four years from the end of the relevant assessment year.

The tribunal held that the Assessing Officer (AO) had valid reasons to believe that income had escaped assessment, based on objective material evidence. The reasons recorded by the AO indicated under-assessment of tax due to non-disclosure of compensation received and rental income. The tribunal emphasized that the AO's power to reassess is broader post-1st April 1989, but it must be based on tangible material indicating income escapement, not merely a change of opinion. The tribunal concluded that the reopening of the assessment was valid under Section 147, as the assessee had not disclosed fully and truly all material facts necessary for the assessment.

2. Taxability of Compensation Received on Cancellation of a Contract:
The assessee contended that the compensation received should be treated as a capital receipt, arguing that it resulted from the termination of an agreement and not from the transfer of a capital asset. The assessee cited various judicial precedents to support the claim that compensation for sterilization of a source of income is a capital receipt.

The tribunal, however, observed that the compensation was linked to the loss of revenue due to the non-fulfillment of contractual obligations by the developers, specifically related to a separate agreement for the purchase of built-up area and rental income. The tribunal noted that the compensation was for the loss of potential rental income, which is a revenue receipt. The agreements for the sale of land and the purchase of built-up area were distinct, and the compensation was not related to the sale agreements.

The tribunal upheld the AO's treatment of the compensation as a revenue receipt, dismissing the assessee's claims regarding the cost of acquisition and the extinguishment of rights. The tribunal concluded that the compensation received was for the loss of revenue and should be taxed in the assessment year 2004-05, as the default by the developer occurred on 15.03.2004.

Conclusion:
The tribunal dismissed the appeal of the assessee, affirming the validity of the reassessment proceedings and the treatment of the compensation received as a revenue receipt. The order was pronounced on 29th May 2017, at Chennai.