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2018 (11) TMI 323 - AT - Income TaxNature of receipt - compensation for permanent loss of business or income generating asset - revenue OR Capital receipt - as per AO payment received by the assessee company is in consideration of the efforts made by the assessee for facilitating the availability of land and for the services rendered by it although in the MOU - Held that - After numerous rounds of deliberations & meetings between LIPL and the assessee company, MOU was executed on 31st January, 2009 leading to determination of compensation in lieu of cancellation/termination of the earlier MOU Dated 19th November, 2001 or in lieu of determination of its rights in the said MOU ultimately leading to loss of source of income. It is the construction of this MOU executed on 31st January, 2009 which ultimately decides the nature of receipt of the impugned amount termed as Compensation . We find the assessee correctly claimed such compensation as capital receipt being loss of source of income We find the assessee during the course of appeal proceedings had filed a certificate issued by LIPL where in they have certified that the compensation had been determined and paid by them for stalling the execution of the agreed work as above in terms of the earlier MOU. The above clarification issued by LIPL clearly shows that the compensation received by the assessee is for sterilization of the profit making apparatus of the assessee company. The various decisions relied on by Ld. Counsel for the assessee also support its case that the impugned receipt is capital in nature. - decided against revenue
Issues Involved:
1. Whether the compensation received by the assessee from Lafarge India Pvt. Ltd. is a capital receipt or a revenue receipt chargeable to tax. Issue-wise Detailed Analysis: 1. Facts and Background: The assessee, a company, filed its return of income declaring a total income of ?23,33,570 for the assessment year 2011-12. The assessee derived income from interest, categorized under "Income from Profit & Gains of Business." During scrutiny, the Assessing Officer (AO) noticed an amount of ?3,01,47,107 credited under "Reserve and Surplus" as a capital receipt. The assessee explained that this amount was received as compensation for the termination of a Memorandum of Understanding (MOU) with Lafarge India Pvt. Ltd. (LIPL), which impaired its profit-making structure, thus treating it as a capital receipt not chargeable to tax. 2. Assessing Officer's Findings: The AO was not satisfied with the explanation and analyzed the MOU dated 31.01.2009. He observed that the term 'compensation' used in the MOU was misleading and concluded that the amount received was a taxable consideration for services rendered by the assessee in facilitating land acquisition for LIPL's proposed railway track. The AO held that the payment was a normal business receipt and not compensation for the permanent loss of business or income-generating assets. Consequently, the AO treated the amount as a revenue receipt and added it to the taxable income of the assessee. 3. CIT(A)'s Decision: The CIT(A) allowed the assessee's claim, treating the receipt as a capital receipt. The CIT(A) observed that the MOU dated 31.01.2009 was executed to compensate the assessee for the termination of the earlier MOU dated 19.11.2001, which resulted in the loss of the source of income. The CIT(A) emphasized that the compensation was for the sterilization of the profit-making apparatus of the assessee, thus constituting a capital receipt not chargeable to tax. 4. Revenue's Appeal: The revenue appealed against the CIT(A)'s order, arguing that the payment was for services rendered by the assessee and should be treated as a revenue receipt. The revenue cited various judicial decisions to support its claim that the order of the CIT(A) should be reversed and the AO's decision restored. 5. Tribunal's Analysis and Judgment: The Tribunal considered the rival arguments, perused the orders of the authorities below, and reviewed the relevant documents and judicial precedents. The Tribunal noted that the assessee was incorporated with the sole objective of undertaking infrastructure development activities for LIPL. The MOU dated 31.01.2009 was executed after numerous deliberations and meetings, leading to the determination of compensation for the termination of the earlier MOU, which resulted in the loss of the source of income for the assessee. The Tribunal found merit in the CIT(A)'s reasoning that the compensation received by the assessee was for the loss of the source of income and the sterilization of its profit-making apparatus. The Tribunal referred to several judicial decisions, including the Supreme Court's rulings in Oberoi Hotel (P) Ltd. vs. CIT and Kettlewell Bullen & Co. Ltd. vs. CIT, which supported the view that compensation for the loss of a source of income constitutes a capital receipt. 6. Conclusion: The Tribunal upheld the CIT(A)'s order, concluding that the compensation received by the assessee was a capital receipt not chargeable to tax. The appeal filed by the revenue was dismissed. The Tribunal emphasized that the compensation was for the sterilization of the profit-making apparatus of the assessee and not for services rendered, thus constituting a capital receipt. The decision was pronounced in the open court on 23.10.2018.
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