2018 (4) TMI 794 - AT - Income Tax

Nature of receipt - payment of damages for breach of contract - compensation from Debt Recovery Tribunal (DRT) on sum paid in auction for purchase of property, which after issue of sale certificate was cancelled - revenue or capital receipt - chargeability to tax - Held that - In the present case, the sum is received by the assessee on cancellation of sale contract as per the auction of Sanmati Rice Mills. Further, the sum received by the assessee had direct nexus to the cancellation of acquisition of the immovable property obtained by him in auction. Further, it is clear that excess of amount then what assessee deposited, received by the assessee for a breach of a contract and hence same is a capital receipt. DR has heavily relied on the provision of section 56(2) (viii) of the act. The above section provides that income shall be chargeable to tax under the head income from other sources if it is income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A - provision of section 145A speaks about the timing of taxability and section 56 (2) (viii) the head under which it is chargeable - the character of income should be interest on compensation or enhanced compensation. As held that it is not interest but compensation. Section 56 (2) (viii) also does not provide for taxation of compensation but only interest on such compensation. In the present case, the assessee has received compensation. Ld DR also could not show that if the amount received is interest on compensation what the amount of compensation itself is. In view of this, we reject the contention of the revenue that provision of section 56 (2) (viii) applies to the impugned amount. - Decided in favour of assessee Rectification of mistake u/s 154 - Held that - Section 154 of the Act was not applicable in this case. Right to rectify mistakes under section 154 could not be invoked in a case of mere change of opinion. A rectifiable mistake was a mistake, which was obvious, and not something, which had to be established by a long drawn process of reasoning or where two opinions were possible. A decision on a debatable point of law could not be treated as a mistake apparent from the record. In the present case, firstly it was held that the impugned sum is chargeable to tax as interest and subsequently it was held that it is capital receipt, therefore there is a change of opinion on a debatable issue. Hence, we hold that ld CIT (A) has erred in rectifying his order u/s 154 of the act. One cannot say that this is a case of a mistake apparent from record. Hence, we cancel the order of the ld CIT (A) passed u/s 154 of the act.

Summary

Issues Involved:
1. Taxability of ?31,907,676 as capital receipt or revenue receipt.
2. Validity of rectification order under Section 154 of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Taxability of ?31,907,676 as Capital Receipt or Revenue Receipt:

The primary issue in this case revolves around whether the amount of ?31,907,676 received by the assessee should be classified as a capital receipt or a revenue receipt. The assessee, engaged in finance and investment, received this sum as compensation from the Debt Recovery Tribunal (DRT) after an auction for a property was canceled. The assessee argued that this amount was a capital receipt, not subject to tax, as it was compensation for breach of contract related to the purchase of a property. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] initially treated the amount as interest, thus taxable as revenue receipt. However, upon rectification, the CIT(A) later held that the amount was a capital receipt, not subject to tax.

The tribunal examined the nature of the receipt, considering the judicial precedents and the specific circumstances of the case. It was noted that the amount was received due to the cancellation of the auction sale, which had a direct nexus to the acquisition of an immovable property. The tribunal referred to the Supreme Court's decision in CIT vs. Saurashtra Cement Ltd., which established that compensation for breach of contract related to a capital asset is a capital receipt. The tribunal concluded that the amount received by the assessee had a direct connection to the cancellation of the property acquisition and thus was a capital receipt, not taxable.

2. Validity of Rectification Order under Section 154 of the Income Tax Act:

The second issue pertains to the validity of the rectification order passed by the CIT(A) under Section 154 of the Income Tax Act. The revenue argued that the rectification was not valid as the issue was debatable and not an apparent mistake. The CIT(A) had initially held the amount as taxable interest and later rectified the order to classify it as a capital receipt. The tribunal noted that Section 154 allows rectification of mistakes that are apparent from the record, which do not require extensive reasoning or where two opinions are possible.

The tribunal found that the change in the CIT(A)'s stance from treating the amount as taxable interest to a non-taxable capital receipt indicated a change of opinion on a debatable issue. Therefore, the tribunal held that the rectification under Section 154 was not justified as it involved a debatable point of law. Consequently, the rectification order was canceled.

Conclusion:

The tribunal allowed the appeal of the assessee, holding that the amount of ?31,907,676 was a capital receipt and not chargeable to tax. The tribunal also allowed the revenue's appeal, canceling the rectification order passed by the CIT(A) under Section 154 of the Income Tax Act. The final judgment resulted in the recognition of the amount as a capital receipt, thus not subject to tax, and the invalidation of the rectification order due to its debatable nature.