2020 (4) TMI 574 - AT - Income Tax

Revision u/s 263 - difference between lack of inquiry and inadequate inquiry - As per CIT AO was the alleged lack of enquiry in respect of the liquidated damages which was claimed to be in the nature of capital receipt and for which he held the assessment order to be erroneous and prejudicial to interest of the Revenue - HELD THAT - From the order of the Ld. Pr. CIT, we note that he found fault with the AO s role of an investigator and that he did not properly investigate into the facts of the case before taking a view that the liquidated damages received by the assessee being capital receipt was not liable to tax. We note that in the given facts of the present case the AO had made specific enquiry regarding the nature of liquidated damages. In compliance with the AO's notice u/s.142(1) the appellant furnished the required details along with an explanation vide its submission dated 30.11.2016. The appellant furnished copies of the FA agreements, arbitration award and the legal opinion received from a Senior Advocate regarding the character of receipt and its taxability. The appellant had also furnished a written note outlining the factual matrix and the reasons for which the receipt of liquidated damages was treated to be in the natureof capital receipt - all the requisite details were furnished by the appellant which enabled the AO to make enquiries into the nature and character of receipt and its taxability. No substance in the impugned order wherein it has been held that AO s order suffered infirmity on account of lack of enquiry. Where the CIT finds that the enquiry conducted by the AO is not in accordance with his subjective standards, then the Ld. Pr. CIT should himself conduct the investigation and thereafter record a clear finding in his order u/s. 263 that the view followed or acted upon by the AO in his order was unsustainable in law. In the given facts of the present case, as noted earlier, the AO had made due enquiries into the nature character of receipt of liquidated damages. - Decided in favour of assessee.

Summary

Issues Involved:
1. Nature of Liquidated Damages: Capital Receipt vs. Revenue Receipt
2. Jurisdiction under Section 263 of the Income-tax Act, 1961
3. Adequacy of Enquiry by the Assessing Officer (AO)

Detailed Analysis:

1. Nature of Liquidated Damages: Capital Receipt vs. Revenue Receipt
The primary issue was whether the liquidated damages amounting to ?16.90 crores received by the appellant should be treated as a capital receipt or a revenue receipt. The appellant argued that the amount was a capital receipt, citing the Supreme Court judgments in Kettlewell Bullen & Co. Ltd. vs. CIT, Oberoi Hotel Pvt Ltd vs. CIT, and Karam Chand Thapar & Bros Pvt Ltd vs. CIT. The appellant claimed that the receipt was for the loss of a source of income and should not be taxed as business income. The Assessing Officer (AO) accepted this view and did not tax the amount. However, the Assistant Audit Officer and the Principal Commissioner of Income Tax (Pr. CIT) later argued that the amount should be treated as business income under Section 28(ii) of the Income-tax Act, 1961, as it was related to the appellant's real estate business.

2. Jurisdiction under Section 263 of the Income-tax Act, 1961
The Pr. CIT invoked Section 263, arguing that the AO's order was "erroneous and prejudicial to the interest of the revenue" due to a lack of proper enquiry into the nature of the liquidated damages. The appellant contested this, arguing that the AO had indeed conducted a thorough enquiry and had taken a plausible view supported by legal precedents. The Tribunal examined whether the twin conditions for invoking Section 263—error and prejudice to the revenue—were met. The Tribunal referred to the Supreme Court's judgment in Malabar Industries Ltd. vs. CIT, which held that the CIT must show that the AO's order was erroneous and caused real and tangible loss to the revenue.

3. Adequacy of Enquiry by the Assessing Officer (AO)
The Tribunal found that the AO had issued a notice under Section 142(1), specifically asking for details about the ?16.90 crores credited to the capital reserve. The appellant had furnished detailed explanations, including copies of the Financial Assistance (FA) agreements, the arbitration award, and a legal opinion. The AO had considered these documents and concluded that the receipt was a capital receipt. The Tribunal emphasized the difference between "lack of enquiry" and "inadequate enquiry," stating that if the AO had conducted an enquiry, even if deemed inadequate by the Pr. CIT, it would not justify invoking Section 263. The Tribunal concluded that the AO had applied his mind and taken a plausible view, and therefore, the Pr. CIT's action was without jurisdiction.

Conclusion:
The Tribunal quashed the order of the Pr. CIT, holding that the AO had conducted a proper enquiry and taken a plausible view supported by legal precedents. The assessment order was neither erroneous nor prejudicial to the interest of the revenue. The appeal of the assessee was allowed, and the order was pronounced in the open court on 9th August 2019.