2017 (4) TMI 353 - AT - Income Tax

Nature of receipt - damages received from DDA - loss of sources of income - Arbitration awards from DDA in respect of construction of houses at Rohini, Motia Khan and Vasant Kunj for earlier years - Held that - The only receipt on which assessment was completed was receipt of award during the year and there was no other income. Assessee was out of the contract business due to the dispute with DDA, therefore, damages so received were for loss of business and not merely loss of profit, same was capital in nature. The business of assessee was totally paralyzed. The nature of dispute under consideration is similar to dispute in AY 2003-04. We further find that Ld. CIT(A) by following the decision of Delhi ITAT in the assessee s own case for the asstt.year 2003-04, rightly deleted the addition made by the Assessing Officer who treated the-same as revenue receipt, which does not need any interference on our part, hence, we uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the ground no. 1 raised by the Revenue. Damages and interest being still subjudice cannot be brought to tax in the year under consideration. The finding of the Assessing Officer in this respect that if the assessee fails in appeal by the judgement of Hon ble High Court then the same will be deducted from its income is not justified. After considering the relevant facts of case and in view of the legal proposition cited in cases relied upon by the assessee, the ld. CIT(A) has rightly deleted the addition which does not need any interference on my part, hence, uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the ground no. 2 raised by the Revenue.

Summary

Issues Involved:

1. Deletion of addition of ?46,37,887/- on account of arbitration award received from DDA as escalation damage and interest.
2. Deletion of addition of ?77,73,520/- on account of arbitration award received from DDA for construction of 416 houses at Alaknanda.

Issue-wise Detailed Analysis:

Issue 1: Deletion of addition of ?46,37,887/- on account of arbitration award received from DDA as escalation damage and interest

The Revenue appealed against the deletion of the addition made by the Assessing Officer (AO) of ?46,37,887/-, which was received by the assessee as an arbitration award from the Delhi Development Authority (DDA). The AO considered this amount as revenue receipt, while the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] held it as a capital receipt. The CIT(A) reasoned that the damages were received due to a complete paralysis of the business caused by disputes with DDA, thus categorizing the damages as capital in nature. The CIT(A) referred to the assessee’s own case for the assessment year 2003-04, where the Tribunal had held that damages received for the loss of income-earning apparatus are capital receipts, not taxable as revenue receipts. This view was supported by several judicial precedents, including the Supreme Court's decisions in Oberoi Hotels and P.H. Divecha & Anr. vs. CIT, which established that compensation for the loss of a source of income is a capital receipt. The Tribunal upheld the CIT(A)'s decision, agreeing that the damages were for the loss of business and not merely for loss of profit, and thus were capital in nature.

Issue 2: Deletion of addition of ?77,73,520/- on account of arbitration award received from DDA for construction of 416 houses at Alaknanda

The Revenue also contested the deletion of the addition of ?77,73,520/- received as an arbitration award from DDA for the construction of 416 houses. The CIT(A) had directed that the interest component of this award should be apportioned over the respective years to which it pertains, rather than being taxed in the year of receipt. This decision was based on the CIT(A)'s earlier ruling for the assessment year 2003-04, which had attained finality as it was not challenged by the Revenue. Additionally, the CIT(A) noted that the award was still under challenge before the Double Bench of the Delhi High Court. The Tribunal agreed with the CIT(A) that the amount should not be taxed until the matter reached finality, citing multiple judicial precedents which held that compensation or interest amounts cannot be taxed until the legal disputes regarding them are resolved. These precedents included cases like CIT vs. Sarvartra Road Runners Pvt. Ltd. and CIT v. Bhoop Ram Dagar HUF, which established that amounts under legal challenge should not be treated as income until the dispute is conclusively settled.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of both additions. It was determined that the ?46,37,887/- received as damages was a capital receipt due to the complete paralysis of the business, and the ?77,73,520/- was not taxable in the year of receipt as the legal dispute regarding the award was still pending. The Tribunal's decision was pronounced in the open court on 29/03/2017.