2019 (7) TMI 855 - AT - Income Tax

LTCG - sum received on execution of cancellation deed - surrender of right sue under MOU and withdrawal of complaint before criminal court - receipt of compensation is a capital receipt within the meaning of section 2(47) or capital gain and liable to tax as long term capital gain - HELD THAT - The Hon ble Supreme Court in CIT Vs Saurashtra Cement Ltd 2010 (7) TMI 11 - SUPREME COURT has held that the amount received by way of damages was directly linked to acquisition of capital asset and led to delay in coming into existence of the profit-making apparatus. Accordingly, it was held that the amount so received was a capital receipt and could not be taxed as income. In the present case from the contents of clause 5 of the cancellation deed dated 11th September 2011, we have noted that the assessee has not transferred any right in favour of the confirming party (third Party) in respect with regard to the rights, which were sought to be confirmed in MOU dated 24th March and 25Th March 2005. In facts all those right were already stand transferred by the owners in favour of M/s Star Habitat Pvt Ltd. The assessee received compensation of ₹ 20 Crore consisting of refund of the amount paid by assessee to the owners in pursuance of the said Development Agreement dated 24th March, 2005 read with supplementary agreement dated 25th March, 2005 along with interest, towards loss of profit/ liquidated damage for loss of opportunity to develop the property and sale of flats in the open market and towards the cost of litigation only. Therefore, in view of the ratio of decisions of CIT Vs J Dalmia 1984 (5) TMI 32 - DELHI HIGH COURT , Bombay High Court in CIT Vs Abbasbhoy A. Dehgamwalla 1991 (4) TMI 38 - BOMBAY HIGH COURT , Hon ble Supreme Court in Saughtra Cement Ltd 2010 (7) TMI 11 - SUPREME COURT and Jackie Shroff 2018 (9) TMI 1006 - ITAT MUMBAI and Bhojison Infrastructure (P ) Ltd 2018 (9) TMI 1239 - ITAT AHMEDABAD the amount received by the assessee in excess of advance is on account of compensation for extinction of its right to sue the owner, the receipt is a Capital receipt not chargeable to tax. Since the assessee has not received the amount in excess of advance in the course of his business it must be construed as capital receipt and not business receipt. - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of compensation received as capital receipt or long-term capital gain.
2. Validity of the claim of nil income despite advance tax payment.
3. Consideration of the right to sue as a capital asset.

Issue-wise Detailed Analysis:

1. Classification of Compensation Received as Capital Receipt or Long-Term Capital Gain:
The primary issue was whether the ?20 Crore compensation received by the assessee was a capital receipt within the meaning of Section 2(47) of the Income Tax Act or a capital gain liable to tax as long-term capital gain (LTCG). The assessee argued that the compensation was for the criminal breach of contract and fraudulent development agreement, thus not constituting a transfer of a capital asset as per Section 2(14) of the Income Tax Act. The Tribunal examined the nature of the compensation, which included refund of advance, interest, loss of profit, liquidated damages, and cost of litigation. It was concluded that the compensation received was for the extinction of the right to sue, which is a personal right and not a capital asset. Therefore, the receipt was classified as a capital receipt, not chargeable to tax.

2. Validity of the Claim of Nil Income Despite Advance Tax Payment:
The assessee filed a return declaring nil income and sought a refund of ?3 Crore paid as advance tax. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) viewed this as a pretense for evading tax. The Tribunal noted that the advance tax was paid under the belief that the compensation might be taxable. However, upon legal advice, the assessee filed a nil income return, asserting that the compensation was not taxable. The Tribunal found that the assessee's claim was consistent with the legal interpretation of the compensation as a capital receipt, thus validating the claim of nil income.

3. Consideration of the Right to Sue as a Capital Asset:
The Tribunal deliberated on whether the right to sue, relinquished by the assessee, constituted a capital asset. The assessee's right to sue was derived from a breach of contract and fraudulent misrepresentation by the landowner. The Tribunal referred to various case laws, including the Gujarat High Court in Baroda Cement and Chemicals Ltd. and the Supreme Court in Saurashtra Cement Ltd., which established that a right to sue for damages is not an actionable claim and cannot be transferred. Therefore, it does not constitute a capital asset. The compensation received for relinquishing this right was not considered a transfer of a capital asset and hence not liable to LTCG tax.

Conclusion:
The Tribunal concluded that the compensation received by the assessee was a capital receipt not chargeable to tax. The claim of nil income was validated based on the legal interpretation of the compensation. The right to sue was determined not to be a capital asset, and thus the compensation for relinquishing this right was not subject to capital gains tax. The appeal of the assessee was allowed, and the order of the lower authorities was overturned.