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2022 (1) TMI 484 - AT - Income TaxCorrect head of income - compensation/liquidation damages received on account of relinquishment of right in the property - business receipts or Short term capital gain - relinquishment deed between the assessee and M/s JRPL was entered - AO held that the amount of compensation received by the assessee represents the business transaction and therefore the same cannot be treated as capital receipt - income has accrued in the year under consideration as the relinquishment deed was signed dated 16th December 2010 in the year under dispute corresponding to assessment year 2011-12 - difference between the right to sue and right to seek conveyance of property from the taxation point of view - HELD THAT - We note that there is no single test or criteria to decide whether a receipt represents the capital or the business receipt. It depends upon the facts and circumstances of each case. It is the decision of the assessee to acquire the project as asset or stock in trade ignoring the object clause appearing in the memorandum of association. It is for the reason that the object clause appearing in the memorandum of association which authorises the assessee to carry on the activity of real estate cannot be a criteria to hold that the assessee intended to acquire impugned project as stock in trade. It is because the assessee while carrying out the real estate business can also hold certain assets as fixed assets to be used for the purpose of the business. But, we note that there is no direct/indirect evidence available on record indicating that the assessee was intending to acquire such project to be used for the purpose of its business activities of trading in shares and securities - there is no circumstantial evidences suggesting so. On the contrary, there are enough indications available on record as highlighted by the authorities below that the assessee was intending to acquire the impugned project as stock in trade. These indications have been highlighted by the learned CIT (A) which have been reproduced in the preceding paragraph. Thus it appears that, the assessee was intending to acquire the impugned project as stock in trade. It is for the reason that the revenue cannot sit on the armchair of the assessee to decide the decisions of the assessee. Therefore, nothing adverse can be drawn against the assessee on presumption and assumptions based on indications until and unless the documentary evidence or other materials are available on record. The word saleable condition cannot be a deciding factor that the assessee wanted to acquire the project for its business activities. Admittedly, it appears to us that the scale of the business of the assessee was not significant enough to acquire such a huge property for its business activities and similarly there was not sufficient funds available with it which is discernible from the financial statement of the assessee. But, again we are not in agreement with the decision of the authorities below on this aspect. The assessee might have some financier or exploring for some joint-venture. In fact, it was the call of the assessee how to arrange the fund and use the impugned project for its business activities. The revenue cannot enter into the business strategies of the assessee to draw any inference based thereon. The assessee has received the compensation which is not chargeable to tax in the light of the above principles laid down in M/S. SAURASHTRA CEMENT LIMITED 2010 (7) TMI 11 - SUPREME COURT - Accordingly we hold that, the amount of compensation received by the assessee is not chargeable to tax in the hands of the assessee. Whether amount in lieu of cancellation agreement should be taken into consideration while determining the taxable income of the assessee? - Admittedly, the cancellation agreement was made by the assessee for a consideration of E40 crores. It is the undisputed fact. However, at the same time we cannot ignore the fact that what has actually been received by the assessee. As per the record available before us the assessee has received a sum of 4.89 crore only. There was no allegation by the revenue that the assessee has received over and above the amount of rupees 4.89 crores either in the form of cash or in any other form. Thus we are of the view that the only real income should be brought to tax after ignoring the documents available on record. Thus we are of the view that the sum of E4.890 crores should only be subject matter of tax, if any liability is there. Whether the assessee has adopted colourable device by entering into the transaction with M/s JRPL? - Amount receivable only at ₹ 4.83 crores whereas as per deed it was to receive ₹ 40 crores only and loss on sale of share occurred after the finalization of books of account. Thus it is transpired that the assessee along with M/s JRPL arranged all the transaction in dubious manner which is nothing but a colourable devise. Once the amount was finalised at E4.89 crores only, then why the assessee agreed in the cancellation agreement for E40 crores. It is also a fact on records that M/s JRPL has claimed the deduction for E40 crores as expenses in the financial statement. Thus if we see all the facts in the aggregation of aforesaid information, it is transpired that the assessee along with M/s JRPL has adopted the colourable device. The prime purpose of the colourable device is to extend the benefit to M/s JRPL which is the beneficiary of major amount. The assessee in this process derived the benefit of E4.89 crores only as conduit. As far as tax liability is concerned even in case of colourable device, it seems to us that the party who has been benefited from such colourable device should only be brought to tax. Indeed, the assessee was a party in such colourable device but the same cannot be made subject to tax for the reason that the beneficiary of the colourable device is M/s JRPL. The Revenue is at liberty to proceed against M/s JRPL in the manner as provided under the provisions of law. Thus the ground of appeal of the assessee is allowed. Allowance of brought forward losses - HELD THAT - The assessee is very much entitled to claim brought forward losses subject to the conditions specified under the provisions of law. Accordingly in the interest of justice and fair play, we are restoring this issue to the file of the AO for fresh adjudication as per the provisions of law. The assessee is also directed to cooperate and furnish the necessary documents before the AO during the proceedings. The assessee also directed not to seek any adjournment without any justifiable cause. Hence the ground of appeal of the assessee is allowed for the statistical purposes.
Issues Involved:
1. Whether the amount of compensation/liquidation damages received by the assessee for ?40 crores represents capital receipt or business receipts. 2. If such receipt is capital in nature, whether the provisions of capital gain shall attract on account of relinquishment of right in the property. 3. Whether the amount of compensation stands at ?4.89 crores against the allegation of the revenue for ?40 crores. 4. Whether the assessee has adopted a colourable device along with M/s JRPL for diverting the income and enabling M/s JRPL to claim higher deduction by way of an expense. 5. Whether the learned CIT (A) erred in not allowing the brought forward losses claimed by the assessee. Issue-wise Detailed Analysis: 1. Nature of Compensation (Capital Receipt vs. Business Receipts): The assessee, a private limited company, entered into an MOU with M/s JRPL for acquiring part of a project for ?63 crores, paying ?6.30 lakhs as token money. Later, a relinquishment deed was signed, and the assessee received ?40 crores as compensation. The AO treated this as business income, while the assessee claimed it as a capital receipt. The learned CIT (A) upheld the AO's view, citing the object clause of the MOA which authorized the assessee to carry on the business of construction and dealing in immovable property, indicating that the MOU represented business activities. The Tribunal, however, noted the absence of direct evidence that the project was intended as stock in trade and emphasized that the revenue cannot decide the business strategies of the assessee. The Tribunal concluded that the compensation received was for the sterilization of a capital asset and thus, a capital receipt not liable to tax. 2. Applicability of Capital Gains Provisions: The Tribunal referred to precedents where compensation for relinquishment of rights in property was treated as capital gains. It highlighted that the compensation received by the assessee was for avoiding legal consequences and not for any business activity. Thus, the compensation was not subject to capital gains tax as it represented a capital receipt. 3. Amount of Compensation (?4.89 crores vs. ?40 crores): The Tribunal acknowledged that while the relinquishment deed mentioned ?40 crores, the actual amount received by the assessee was ?4.89 crores. There was no evidence suggesting that the assessee received more than ?4.89 crores. Therefore, the Tribunal held that only ?4.89 crores should be considered for taxation purposes. 4. Allegation of Colourable Device: The Tribunal examined the allegation that the assessee and M/s JRPL adopted a colourable device to avoid tax. It noted that the assessee received ?4.89 crores, while M/s JRPL claimed ?40 crores as an expense. The Tribunal concluded that the primary beneficiary of the colourable device was M/s JRPL, not the assessee. Thus, the Tribunal held that the assessee should not be taxed for the colourable device, and the revenue could proceed against M/s JRPL. 5. Brought Forward Losses: The assessee requested the Tribunal to restore the issue of brought forward losses to the AO for fresh adjudication. The learned DR did not object. The Tribunal restored the issue to the AO, directing the assessee to cooperate and furnish necessary documents, and not to seek adjournments without justifiable cause. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal held that the compensation received was a capital receipt not liable to tax, considered only ?4.89 crores for taxation, and restored the issue of brought forward losses to the AO for fresh adjudication.
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