2018 (5) TMI 492 - AT - Income Tax

Revision u/s 263 - liquidated damages are taxable as capital gain or revenue receipt - Held that - We find that AO has not examined regarding liquidated damages and AO failed to make enquiry. Secondly, the Ld. DIT(IT) has also not made enquiry whether liquidated damages are taxable as capital gain or revenue receipt. DIT(IT) has come to a conclusion that it is liable for tax under the provisions of section 56(2)(vi). DIT(IT) has also not applied his mind properly. Therefore, we are of the opinion that whether the liquidated damages received by the assessee are as per the document filed by the assessee is liable for taxation or not. AO and the Ld. DIT(IT) has not applied their mind at all. Therefore, in the interest of justice and fairplay, we are of the opinion that it requires verification at the end of the AO. Therefore, relying upon the decision in the case of Malabar Industrial Co. Ltd. vs. CIT (2000 (2) TMI 10 - SUPREME Court), we find that AO failed to apply his mind in perspective order passed by him and hence erroneous. AO has not applied his mind. AO has also not verified any supporting material and without making any enquiry. Therefore, we are of the opinion that Ld. DIT(IT) has rightly exercised the jurisdiction under section 263(1). DIT(IT) has without making enquiry has come to a conclusion that this amount is taxable under section 56(2)(vi) of the Act. Therefore, we modify the order of Ld. DIT(IT) and restore this issue back to the file of AO to verify the claim of the assessee that the sum of ₹ 34,57,318/- is liable to tax being a capital income or revenue receipt or whether not taxable as capital gain - Appeal of the assessee is partly allowed

Summary

Issues:
1. Taxability of liquidated damages received by the assessee under section 56(2)(vi) of the Income Tax Act.
2. Validity of invoking section 263 by the Director of Income Tax (International Taxation) (DIT(IT)).

Analysis:

Issue 1: Taxability of liquidated damages
The assessee, holding shares of a company, entered into an agreement for the sale of shares with a provision for liquidated damages if the purchaser failed to pay. The assessee received liquidated damages of ?34,57,318 from the purchaser. The Assessing Officer (AO) did not discuss this issue in the assessment order and accepted the assessee's view that the amount is not taxable. However, the DIT(IT) issued a notice under section 263(1) stating that the amount should be taxed under section 56(2)(vi). The assessee contended that the liquidated damages were not taxable as capital gains or revenue income, citing various cases and the full disclosure of details. The Tribunal found that both the AO and DIT(IT) did not properly apply their minds and ordered a denovo assessment to verify the taxability of the amount, emphasizing the need for proper examination before taxation.

Issue 2: Validity of invoking section 263
The assessee argued that section 263 was invoked improperly as the AO did not propose the revision, which should have been done by the Commissioner. The Tribunal, however, referred to a decision allowing the AO to propose revision if other conditions are met. It was noted that the AO did not inquire about the liquidated damages beyond the assessment proceedings, and the DIT(IT) passed the order without discussing the submissions. The Tribunal found that proper examination was lacking, leading to the decision to send the issue back to the AO for a fresh assessment, highlighting the importance of thorough examination before invoking tax provisions.

In conclusion, the Tribunal partly allowed the assessee's appeal, emphasizing the necessity of a detailed examination and proper application of mind by tax authorities before determining the taxability of amounts such as liquidated damages.