2022 (1) TMI 481 - AT - Income Tax

Revision u/s 263 by CIT - Nature of receipt - amount received on cancellation of the long-term lease right - compensation received for cancellation of rights under the lease agreement - Revenue or capital receipt - HELD THAT - When the subject matter of the lease constitutes the source of profit-making to the assessee and any compensation received for cancellation of such rights, it would impact the profit-making capacity of the assessee and therefore, falls in the domain of capital receipt and not a Revenue receipt. Going by such rule it is clear that in this case it cannot be said that the assessee was wrong in offering such proceeds to tax under the head capital gains or the learned Assessing Officer accepting the same as something erroneous. It could be seen from the record that in the assessment order the assessing officer had stated that the details filed in respect of various items called for and were examined before accepting the returned income of the assessee. Assessing Officer applied his attention to this particular receipt and having called for the details on this aspect and by perusing them he accepted the same. In the preceding paragraphs it is held that the view taken by the learned Assessing Officer is certainly one of the several plausible views. In this context, it is worth the referring to the decision of the Hon'ble Apex Court in the case of CIT vs. Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT wherein it was held that where two views are possible and the learned Assessing Officer had taken one such view, with which the learned CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the learned Assessing Officer is unsustainable in law. Non-agreement of the Ld. PCIT with the view taken by the learned Assessing Officer, unless such a view of the learned Assessing Officer is unsustainable in law, does not afford any ground to the Ld. PCIT to revise the impugned assessment order. Accordingly, we find it difficult to sustain the order passed by the Ld. PCIT under section 263 - Decided in favour of assessee.

Summary

Issues:
1. Assessment of compensation received on cancellation of a long-term lease as capital receipt or not.
2. Validity of the order passed by the Ld. PCIT under section 263 of the Income-tax Act, 1961.

Issue 1: Assessment of Compensation Received on Cancellation of a Long-Term Lease:

The appeal involved the assessment of compensation received by the assessee on the cancellation of a long-term lease as a capital receipt. The Ld. PCIT questioned the treatment of the compensation amount as capital gains by the assessee, arguing that the assessee did not have full ownership rights over the property, making it a premises for construction purposes only. The Ld. PCIT contended that since the ownership had not been transferred to the assessee, treating the compensation as capital gains was incorrect.

However, the Tribunal analyzed various precedents and held that compensation received for the cancellation of lease rights, which formed the profit-making source for the assessee, constituted a capital receipt. The Tribunal referred to cases such as Butterfly Marketing Private Limited, Bombay Burmah Trading Corporation Limited, and Vardhani & Co, where similar compensation was treated as capital receipts. The Tribunal concluded that the compensation, in this case, was rightly offered as capital gains by the assessee and accepted by the Assessing Officer.

Issue 2: Validity of the Order Passed by the Ld. PCIT under Section 263:

The Tribunal further examined the validity of the order passed by the Ld. PCIT under section 263 of the Income-tax Act, 1961. The assessee contended that the original assessment order was not erroneous and did not prejudice the revenue's interest. The Tribunal noted that the Assessing Officer had thoroughly examined the details provided by the assessee regarding the compensation receipt, and the decision to treat it as capital gains was based on a plausible view.

Citing the decisions of the Hon'ble Apex Court in cases like CIT vs. Max India Ltd. and Malabar Industrial Co. Ltd. vs. CIT, the Tribunal emphasized that if the Assessing Officer's view was sustainable in law and one of the plausible views, it could not be considered erroneous. Therefore, the Tribunal concluded that the Ld. PCIT's disagreement with the Assessing Officer's view did not warrant revising the assessment order under section 263. Consequently, the Tribunal quashed the order passed by the Ld. PCIT.

In conclusion, the Tribunal allowed the appeal of the assessee, upholding the treatment of compensation as capital gains and ruling in favor of the original assessment order. The judgment highlighted the importance of considering the source of profit-making in determining the nature of compensation receipts and the need for assessing officers to take informed decisions based on detailed examination of facts.