2022 (3) TMI 1309 - AT - Income Tax

Capital gain computation - Disallowing the deduction claimed as expenses while determined the capital gain - computation of income filed by the assessee that assessee has shown to have earned the compensation on acquisition of land for construction of NH-76 - assessee is a sick company under Sick Industrial Companies (Special Provisions) Act, 1985 - payment made directly to banks and financial institutions in pursuance of judicial order is still towards discharge of principle amount of loan and interest thereon - HELD THAT - Assessee is a sick company under Sick Industrial Companies (Special Provisions) Act, 1985. We observe from the record that no doubt the land belongs to the company was transferred and assessee has received sale proceeds out of the above said sale proceeds and assessee has transferred being principal loan amount towards repayment to financial institutions from the compensation received from the NHAI based on the direction of Hon'ble High Court of Rajasthan. Observation of the Hon'ble Rajasthan High Court it is clear that there is a pre-existing overriding title and interest in the property of the company in favour of its secured creditors comprising of Financial Institutions and Banks on paripassu basis by virtue of joint equitable mortgage credit on 1st June 1994. Since assessee has defaulted and not able to service any of the loan to the financial institutions, by virtue of failure, the assets belong to the assessee with the overriding title and interest in the property is already passed to the secured creditors. Based on the direction of the Hon'ble Rajasthan High Court the financial institutions are directly secured the property and collected the sale proceeds. The sale proceeds were distributed among the financial institutions without there being any involvement of the assessee. Since the property transferred was with pre-existing lien with the overriding title and technically assessee is not the owner of the property which was duly transferred. Therefore, the assessee cannot be asked to pay the tax on the same. Accordingly, we are not in agreement with the finding of the Ld.CIT(A). See SITALDAS TIRATHDAS 1960 (11) TMI 17 - SUPREME COURT - Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Disallowance of ?1,26,96,360 as a deduction while determining capital gains.
3. Treatment of compensation received for land acquisition under the National Highways Act.
4. Application of judicial precedents and legal provisions.

Detailed Analysis:

1. Validity of the Order Passed by the AO and Upheld by CIT(A):
The assessee contended that the CIT(A) erred in upholding the AO's order, which was claimed to be "bad in law and against justice." The Tribunal noted that the assessee is a sick industrial unit and had not appeared for a long time. The Tribunal decided to proceed with the case based on the submissions of the Departmental Representative (DR) and the material available on record, including the written submissions of the assessee.

2. Disallowance of ?1,26,96,360 as a Deduction While Determining Capital Gains:
The AO observed that the assessee reduced ?1,26,96,360 from the compensation received for land acquisition, claiming it as payment made directly to financial institutions and banks towards the principal amount of loans as per the Rajasthan High Court's order. The AO rejected this deduction, stating that the payment was towards the discharge of the principal loan amount and interest, which cannot be allowed as a deduction under "Capital Gains."

The CIT(A) upheld the AO's decision, citing the Supreme Court's decision in CIT vs. Attili N. Rao (2001) and other judicial precedents. The CIT(A) concluded that the payment to banks was not a diversion by overriding title but an application of income, and thus, not deductible while calculating capital gains.

3. Treatment of Compensation Received for Land Acquisition:
The assessee argued that the compensation received from the National Highways Authority of India (NHAI) was diverted at source due to the pre-existing pari passu charge of banks and financial institutions. The Tribunal noted that the Rajasthan High Court had directed the compensation amount to be deposited with Canara Bank for distribution among secured creditors. The Tribunal observed that the land had a pre-existing overriding title and interest in favor of secured creditors due to a joint equitable mortgage created on June 1, 1994. The Tribunal concluded that the sale proceeds were distributed among the financial institutions without the involvement of the assessee, and thus, the assessee should not be taxed on this amount.

4. Application of Judicial Precedents and Legal Provisions:
The Tribunal referred to the Supreme Court's decision in Sitaladas Tirathdas (41 ITR 367), which established the principle of income diversion by overriding title. The Tribunal concluded that the compensation amount never reached the assessee as income, as it was directly paid to the secured creditors based on the Rajasthan High Court's order. Therefore, the Tribunal allowed the assessee's claim for deduction of ?1,26,96,360.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, holding that the compensation amount was diverted by overriding title and thus not taxable in the hands of the assessee. The Tribunal also applied the same decision to the appeal for A.Y. 2011-12, allowing it as well. The order was pronounced on February 24, 2022.

← Previous Next →