2019 (11) TMI 797 - AT - Income Tax

Compensation received for loss on account of non-exercise of commercial exploitation/ development rights on account of 99 years lease to run the company - revenue or capital receipt - HELD THAT - Admittedly, in the present case property was sold to the same party who was enjoying the property as lessee on long term lease of 99 years and the property was sold for a consideration not below the guideline value prescribed for stamp duty purpose. Provisions of Section 50C of the Act have no application. It is settled proposition of law that there cannot be any presumption of receipt of consideration over and above apparent consideration stated in registered sale deed. What is apparent should be believed to be real in the absence of any material to contrary on record. Apparently, the compensation was paid towards termination of long term lessee, in terms of MOU entered between parties on 29.03.2012. The Assessing Officer doubted the genuineness of the term of MOU. He should have examined the other parties to find out the purpose of the impugned payment, which the Assessing Officer had chosen not to do so. Therefore the MOU has to be believed and the amount received should be held to be compensation towards termination of long term lease. Then the question boils down to whatever compensation received on account of termination of long term lease of 99 years can be treated as revenue receipts and liable to tax. Any compensation received towards loss of source of income cannot be treated as Revenue receipts but capital receipts which is not liable to be taxed. - Decided in favour of assessee.

Summary

Issues:
1. Taxability of compensation received for loss on account of non-exercise of commercial exploitation/development rights.
2. Classification of compensation as capital receipt or revenue receipt.
3. Interpretation of Memorandum of Understanding and Lease Agreement.
4. Application of Section 50C of the Income Tax Act.
5. Assessment of compensation received towards termination of long term lease.

Issue 1: Taxability of Compensation:
The appeal challenged the order confirming the addition of compensation received for loss on account of non-exercise of commercial exploitation/development rights. The Appellant argued that the compensation was a capital receipt and not liable to tax, emphasizing the Memorandum of Understanding provisions. The Assessing Officer treated the compensation as revenue receipt based on precedents. The Tribunal considered the nature of the compensation and its purpose, ultimately allowing the appeal based on the distinction between capital and revenue receipts.

Issue 2: Classification of Compensation:
The primary contention revolved around whether the compensation should be classified as a capital or revenue receipt. The Appellant asserted that the compensation was for mitigating capital loss on the property sale, while the Assessing Officer viewed it as loss of profit. The Tribunal referred to legal precedents and the specific circumstances of the case to determine that compensation for termination of a long-term lease should be treated as a capital receipt not subject to taxation.

Issue 3: Interpretation of Agreements:
The case involved analyzing the Memorandum of Understanding and Lease Agreement to ascertain the purpose and nature of the compensation received. The Appellant highlighted specific clauses to support their argument that the compensation was related to the loss of income source, not rent. The Tribunal emphasized the need to interpret these agreements accurately to determine the taxability of the compensation.

Issue 4: Application of Section 50C:
The Tribunal clarified that Section 50C of the Income Tax Act did not apply in this case as the property sale consideration was not below the guideline value. This ruling was crucial in establishing the basis for assessing the compensation received and differentiating it from the sale consideration.

Issue 5: Assessment of Lease Termination Compensation:
The core issue was whether the compensation received for the termination of a long-term lease should be treated as revenue or capital receipt. The Appellant argued that it was a capital receipt, citing legal precedents. The Tribunal agreed, emphasizing that compensation for the loss of a source of income should be classified as a capital receipt, aligning with established legal principles.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the Appellant and determining that the compensation received for the termination of the long-term lease was a capital receipt not subject to taxation. The decision was based on a thorough analysis of the legal provisions, agreements, and precedents relevant to the case.