1987 (1) TMI 137 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received by the assessee.
2. Classification of the compensation as capital gains or business income.
3. Applicability of Section 176(3A) of the Income-tax Act, 1961.
4. Eligibility for exemption under Section 54E of the Income-tax Act, 1961.

Detailed Analysis:

1. Taxability of Compensation Received by the Assessee:
The primary issue was whether the compensation amount of Rs. 4,67,000 received by the assessee, a former partner of a dissolved firm, was subject to tax. The Income-tax Officer (ITO) contended that the amount was taxable as business income under Section 28(iv) read with Section 176(3A) of the Income-tax Act, 1961. The assessee initially argued that the amount was a capital receipt not subject to tax, but later conceded that it was taxable and should be classified as capital gains.

2. Classification of the Compensation as Capital Gains or Business Income:
The ITO classified the compensation as business income, arguing that the benefit arising from business was chargeable to tax under Section 28(iv), and since the business was discontinued, it was taxable under Section 176(3A). The Commissioner of Income-tax (Appeals) upheld this view, stating that the firm was engaged in the business of builders and contractors, and the compensation was a trading receipt. However, the Tribunal disagreed, noting that the firm never obtained possession or legal title to the land and had only paid earnest money. The Tribunal referred to the Gujarat High Court decision in CIT v. Shah Doshi & Co. (1982) 133 ITR 23, which supported the view that the land did not become the firm's stock-in-trade merely by entering into an agreement to purchase it. The Tribunal concluded that the compensation represented a capital asset, not stock-in-trade, and thus should be classified as capital gains.

3. Applicability of Section 176(3A) of the Income-tax Act, 1961:
The Tribunal examined whether Section 176(3A) applied to the case. The section states that any sum received after the discontinuance of a business is deemed to be the income of the recipient and charged to tax accordingly. The Tribunal noted that while Section 176(3A) ensured the amount was taxable, it did not specify that it should be taxed as business income. The Tribunal cited the Madras High Court decision in CIT v. Estate of Late A. V. Viswanatha Sastri [1980] 121 ITR 270, which held that the head under which income is chargeable depends on the circumstances. Consequently, the Tribunal concluded that the compensation received by the assessee should be assessed as capital gains, not business income.

4. Eligibility for Exemption under Section 54E of the Income-tax Act, 1961:
The assessee claimed exemption under Section 54E for placing Rs. 4,00,000 in a fixed deposit. The Tribunal directed the ITO to compute the capital gains and grant the exemption under Section 54E, if the assessee was entitled to it. The Tribunal set aside the orders of the lower authorities and restored the matter to the ITO for re-computation of capital gains in accordance with the law.

Conclusion:
The Tribunal allowed the appeal, determining that the compensation received by the assessee was a capital receipt resulting in capital gains, not business income. The Tribunal directed the ITO to compute the capital gains and grant the exemption under Section 54E if applicable.