2023 (2) TMI 848 - AT - Income Tax

Capital gain - compromise settlement for breach of contract - Transfer u/s 2(47) - assessee has entered into an agreement for purchase of a property by paying an amount partially but subsequently the seller expired in 2007 by executing a Will in favour of his son and same property was sold to another five vendees - assessee has relinquished her right on the specific performance of the contract by agreeing to the compromise settlement for receiving a compensation - whether extinguishment of a right of specific performance of a contract shall be covered under the definition of capital asset as defined U/s. 2(14)(a)? - HELD THAT - Extinguishment of a right of specific performance of a contract shall be covered under the definition of capital asset as defined U/s. 2(14)(a) of the Act. In the instant case, the assessee has relinquished her right on the specific performance of the contract by agreeing to the compromise settlement for receiving a compensation of Rs. 3 Crs. The argument of the Ld. AR that there is no transfer of any capital asset for receiving the compensation and it is merely a right to sue for damages cannot be considered as a capital asset could not be accepted. As decided in H. Anil Kumar 2011 (1) TMI 1159 - KARNATAKA HIGH COURT since the word transfer in relation to capital asset is defined under the IT Act, 1961 it is not necessary to import the meaning assigned to them under the provisions of the Transfer of Property Act. The word Capital Asset as defined in the IT Act, 1961 means any kind of property held by the assessee which is not necessarily be confined to the immovable property. Similarly, the definition of word transfer in relation to capital asset includes sale, exchange or relinquishment of the asset . The said asset need not necessarily be an immovable property. In the instant case, the assessee has paid an amount during 2001 while entering into an agreement with the seller. We are therefore of the considered view that the compensation received by the assessee arises out of the transfer of capital asset in the nature of relinquishment of the specific performance of the contract shall be treated as transfer of capital asset within the meaning of section 2(47) of the Act, and hence it is a capital gains under the Income Tax Act, 1961 and exigible to tax. Accordingly, this ground raised by the Revenue is allowed. Deduction u/s. 54F - We direct the Ld. AO to look into the facts of the owning of the residential properties by the assessee afresh and accordingly the deduction U/s. 54F shall be decided after providing a reasonable opportunity to the assessee. Accordingly, this ground raised by the Revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Treatment of compensation received as capital receipt or taxable income.
2. Deduction claimed under Section 54F of the Income Tax Act, 1961.
3. Remanding of the matter to the Assessing Officer (AO) for additional grounds.

Issue-wise Detailed Analysis:

1. Treatment of Compensation Received as Capital Receipt or Taxable Income:
The primary issue in this case was whether the compensation of Rs. 3 Crores received by the assessee should be treated as a capital receipt or as taxable income under capital gains. The assessee had initially claimed the compensation received for breach of contract as long-term capital gains and sought deduction under Section 54F of the Income Tax Act, 1961. However, before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the compensation was a capital receipt not exigible to tax, as it arose from a right to sue for damages, which is not a transferable asset under Section 6(e) of the Transfer of Property Act.

The Tribunal, after considering the arguments and relevant case laws, concluded that the compensation received by the assessee for relinquishing the right to specific performance of a contract constitutes a transfer of a capital asset as defined under Section 2(14) and Section 2(47) of the Income Tax Act. The Tribunal relied on the Karnataka High Court's decision in CIT vs. H. Anil Kumar, which held that relinquishment of the right to specific performance amounts to a transfer of a capital asset, and any compensation received for such relinquishment is taxable as capital gains. Therefore, the Tribunal held that the compensation received by the assessee is exigible to tax under capital gains.

2. Deduction Claimed under Section 54F of the Income Tax Act, 1961:
The second issue was regarding the deduction claimed by the assessee under Section 54F of the Act for Rs. 2,90,30,172/-. The Assessing Officer (AO) had disallowed the deduction on the grounds that the assessee owned more than one residential property, which disqualifies her from claiming the deduction under Section 54F. The Tribunal directed the AO to re-examine the facts concerning the ownership of residential properties by the assessee and to decide the deduction under Section 54F afresh after providing a reasonable opportunity to the assessee.

3. Remanding of the Matter to the Assessing Officer (AO) for Additional Grounds:
The Revenue contended that the CIT(A) erred in not remanding the matter to the AO when an additional ground was admitted in the appellate proceedings. However, the Tribunal did not find it necessary to adjudicate on this ground separately, as the primary issues were already addressed in the judgment.

Conclusion:
The Tribunal concluded that the compensation received by the assessee for relinquishing the right to specific performance of a contract is taxable as capital gains. The matter concerning the deduction under Section 54F was remanded back to the AO for fresh examination. The appeal of the Revenue was partly allowed for statistical purposes. The judgment was pronounced in open court on 16th February 2023.