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2017 (2) TMI 1567 - AT - Income TaxCharacterization of income - treating the receipts of compensation from developer to compensate for a nuisance / inconvenience due to extension of work untaken by the builder for building - income from other sources u/s 56 or capital receipt - HELD THAT - Assessee stated that this issue is squarely covered in favour of assessee by the decision of Kushal K Bangla 2012 (2) TMI 29 - ITAT MUMBAI wherein exactly on identical facts Tribunal has held receipt by the assessee cannot be said to be of revenue nature and accordingly the same is outside the ambit of income under section 2(24) of the Act. However in our considered opinion and as learned counsel for the assessee fairly agrees the impugned receipt ends up reducing the cost of acquisition of the asset i.e. flat and therefore the same will be taken into account as such as and when occasion arises for computing capital gains in respect of the said asset - Appeal of assessee is allowed.
ISSUES PRESENTED and CONSIDERED
The primary legal issue considered in this judgment was whether the compensation received by the assessee from the developer, due to nuisance and inconvenience caused by the extension work on the building "Kailas Jyot No. 2," should be treated as a capital receipt or as income from other sources under Section 56 of the Income Tax Act, 1961. The assessee claimed it as a capital receipt, while the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as income from other sources. ISSUE-WISE DETAILED ANALYSIS Relevant legal framework and precedents The legal framework revolves around the interpretation of what constitutes a capital receipt versus income from other sources under the Income Tax Act, 1961. Section 2(24) of the Act defines income, which includes capital gains chargeable under Section 45. However, a capital receipt is not considered income unless specifically brought under the ambit of income by a provision in the Act. The case of Kushal K Bangla v. Income Tax Officer was cited, where a similar receipt was treated as a capital receipt. Court's interpretation and reasoning The Tribunal referred to the decision in Kushal K Bangla v. Income Tax Officer, emphasizing that the nature of the receipt should be determined in the hands of the receiver, not the payer. It was noted that the compensation received by the assessee was related to the capital asset (the residential flat) and thus should be considered a capital receipt. The Tribunal highlighted that the burden of proving that a receipt is of revenue nature lies with the revenue authorities, as per the Supreme Court's ruling in Dr. George Thomas K vs CIT. Key evidence and findings The key evidence was the nature of the compensation received by the assessee for the inconvenience caused by construction work. The Tribunal found that the compensation was linked to a capital asset and not a revenue transaction. The Tribunal also considered the precedent set by the coordinate Bench in similar cases, which supported the assessee's position. Application of law to facts The Tribunal applied the principles from the cited precedent to the facts of the case, concluding that the compensation received was not of a revenue nature. The Tribunal determined that the receipt should reduce the cost of acquisition of the asset (the flat) and would be considered when computing capital gains in the future. Treatment of competing arguments The Tribunal addressed the Departmental Representative's argument that the compensation was a share in profits earned by the developer, which would be a revenue item. The Tribunal rejected this argument, stating that the nature of the payment in the hands of the payer does not determine its nature in the hands of the receiver. The Tribunal emphasized that the compensation was related to the capital asset owned by the assessee. Conclusions The Tribunal concluded that the compensation received by the assessee was a capital receipt and not income from other sources. It allowed the appeal of the assessee, reversing the decisions of the AO and CIT(A). SIGNIFICANT HOLDINGS The Tribunal's significant holding was that the compensation received by the assessee for nuisance and inconvenience caused by construction work was a capital receipt, not income from other sources. The Tribunal preserved the distinction between capital and revenue receipts, following the precedent that the nature of the receipt is determined in the hands of the receiver. Preserve verbatim quotes of crucial legal reasoning The Tribunal quoted from the Kushal K Bangla case: "it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer." Core principles established The core principle established is that a capital receipt is outside the scope of income chargeable to tax unless specifically included by a provision in the Income Tax Act. The Tribunal reinforced the notion that the determination of whether a receipt is capital or revenue depends on its nature in the hands of the recipient. Final determinations on each issue The Tribunal determined that the compensation received was a capital receipt, allowing the appeal of the assessee. The Tribunal's decision was based on the consistent application of legal principles and precedents, leading to the conclusion that the receipt was not taxable as income from other sources.
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