2018 (4) TMI 621 - AT - Income Tax

Relinquishment of right before development - Right to sue surrendered in lieu of getting compensation money - capital gain or business income - Held that - Assessee s development license acquired in its all three agreements does not amount to part performance requiring compulsory registration u/s.17 of the Registration Act. We therefore conclude in this view of all this evidence as well as legal position that the impugned compensation amount is not liable to be treated as income u/s.2(24) of the Act nor the same is taxable as capital gain for business income being in the nature of a capital receipt. Compensation sum as in facts of the instant case is not a business income as well since not covered under specific instances u/s.28(va) of the Act. The Revenue s stands therefore holding both development and cancellation agreements in all cases is not sustainable in view of the same unregistered documents does not carry any merit as Section 17 of the Registration Law could not have been applied in view of bar on transfer of the lands in question. We thus observe that assessee s above development license acquired in its all three agreements does not amount to part performance requiring compulsory registration u/s.17 of the Registration Act. We therefore conclude in this view of all this evidence as well as legal position that the impugned compensation amount is not liable to be treated as income u/s.2(24) of the Act nor the same is taxable as capital gain for business income being in the nature of a capital receipt. - Decided against revenue

Issues Involved:
1. Whether the compensation received by the assessee for relinquishing its right to sue under development agreements is taxable as business income or capital receipt.
2. Validity and implications of unregistered development and cancellation agreements.
3. Applicability of various legal precedents and statutory provisions to the case.

Detailed Analysis:

1. Taxability of Compensation as Business Income or Capital Receipt:

The primary issue is whether the compensation of ?3,87,27,804/- received by the assessee for relinquishing its right to sue under development agreements should be treated as business income or a capital receipt. The assessee argued that the compensation was a capital receipt, not assessable as business income under Section 2(24) of the Income Tax Act, 1961. The Assessing Officer, however, treated it as business income, asserting that the transactions were a modus operandi to avoid tax.

The CIT(A) upheld the addition, reasoning that the compensation was an in-built part of the development agreements, received for the loss of future income, and thus taxable as business income. The CIT(A) also noted that the assessee had entered into similar agreements in the past, benefiting from compensation without undertaking any development activities, indicating a pattern beyond normal business operations.

2. Validity of Unregistered Agreements:

The assessee contended that the development agreements were mere MOUs and not compulsorily registerable under the Indian Registration Act. The CIT(A) and the Assessing Officer, however, held that the unregistered agreements had no enforceable value in a court of law, thus questioning the genuineness of the transactions.

The tribunal, however, noted that the agreements were not covered under Section 53A of the Transfer of Property Act, as they did not involve part performance of a contract. It was further observed that the assessee’s possession under the agreements was in the capacity of a licensee, not creating any easement or interest in the land.

3. Legal Precedents and Statutory Provisions:

The tribunal referred to various legal precedents, including the jurisdictional High Court's decision in Baroda Cement & Chemicals Ltd. vs. CIT, which held that a mere right to sue is not an actionable claim and is not transferable under Section 6(e) of the Transfer of Property Act. The tribunal also cited the Bombay High Court's decision in Manoj B. Joshi vs. ITO, which held that compensation received for relinquishing a right to sue is not taxable as income under Section 2(24) of the Act.

The tribunal further noted that the assessee’s development agreements were not compulsorily registerable, and the compensation received was in the nature of a capital receipt, not taxable as business income or capital gains. The tribunal rejected the Revenue’s argument that the transactions were a colorable device to evade tax, concluding that the assessee’s transactions were genuine and within the four corners of the law.

Conclusion:

The tribunal concluded that the compensation received by the assessee was a capital receipt, not assessable as business income or capital gains. The impugned addition of ?3,87,27,804/- was deleted, and the assessee’s appeal was allowed.

← Previous Next →