2020 (1) TMI 647 - AT - Income Tax

Unexplained cash credit u/s.68 on account of relinquishment of right - CIT (A) concluded that the amount of compensation received by the assessee does not represent as a result of breach of contract. As such the assessee by using dubious method tried to avoid the payment of tax thus confirmed addition - HELD THAT - Character of the transaction for receiving the compensation will not change merely on the ground that the development agreement, termination of agreement and the sale of the property happen in different financial years. It is because there are different parties involved in the transactions and the assessee has no control of whatsoever on these parties. As such, when the societies terminated the agreement with the assessee, it acquired the right to sue and for relinquishment of such right it received the compensation. On perusal of the ITAT order for the assessment year 2009-10, we find that the assessee received the compensation from the 3 parties. And the assessee at the time of entering into agreement with these parties paid or agreed to pay certain amount as per the understanding. Therefore it is clear that the assessee has made or agreed to make the payment of certain amount to these parties from whom it has received the compensation in the assessment year 2009-10. Similarly, the assessee for the year under consideration has also made or agreed to make the payment of certain amount to the societies which has been detailed somewhere in the preceding paragraph. Therefore, we are of the view that the finding of the learned CIT (A) that there was no payment made to the parties by the assessee in the assessment year 2009-10 is factually incorrect. Transaction between the assessee and the society was not representing the related party transaction as alleged by the learned CIT (A). As such we note that the learned CIT (A) has given contrary findings about the fact whether the assessee and the societies were related to each other either directly or indirectly. The parties involved in the entire flow of transactions namely, the assessee, societies and the buyers of the land who are separate taxable and independent persons/ entities viz a viz complying the provisions of the Act. Thus the amount of the compensation received by the assessee for relinquishment of its right to sue from societies to avoid the litigation cannot be treated as a colorable device. Hence, the amount received as compensation in view of said right is not chargeable to tax. - Decided in favour of assessee.

Issues Involved:

1. Whether the compensation received by the assessee for relinquishment of right to sue is a capital receipt not chargeable to tax.
2. Whether the case of the assessee is covered by the order of the tribunal in its own case for the assessment year 2009-10.
3. Whether the amount of compensation received by the assessee represents the income of the assessee.

Detailed Analysis:

1. Compensation Received as Capital Receipt:

The core issue revolves around the nature of the compensation amounting to ?18,02,53,000/- received by the assessee for relinquishing its right to sue. The assessee argued that this compensation should be treated as a capital receipt, not chargeable to tax, based on precedents from various High Courts and the ITAT's own decision in the assessee's case for AY 2009-10. The assessee contended that the right acquired under the development agreements was a "Right to Sue," which, according to Section 6(e) of the Transfer of Property Act, is not a property and thus not a "Capital Asset." Consequently, the compensation received for relinquishing this right should not be taxable as either capital gains or business income.

2. Tribunal's Previous Decision for AY 2009-10:

The assessee cited the ITAT Ahmedabad's decision for AY 2009-10, where a similar compensation was treated as a capital receipt, not subject to tax. The CIT(A) distinguished the facts of the current year from AY 2009-10, noting differences such as the timing of agreements and payments. However, the tribunal found that these differences did not alter the nature of the transaction. The tribunal emphasized that the character of the transaction does not change merely because the agreements and payments occurred in different financial years. The tribunal also noted that the assessee had made or agreed to make payments to the societies in both years, thus invalidating the CIT(A)'s distinction.

3. Nature of Compensation as Income:

The CIT(A) and AO argued that the compensation should be treated as business income, suggesting that the transactions were part of a scheme to avoid tax. The CIT(A) highlighted several points, such as the unregistered agreements, common notary, and the close relationship between the parties involved. The CIT(A) also noted that the compensation received constituted a significant portion of the sale consideration and was immediately transferred to related parties, indicating a circular transaction within the Popular Group. However, the tribunal found that these points did not change the nature of the compensation. The tribunal held that the compensation for relinquishing the right to sue is not taxable as business income or capital gains, reaffirming its decision from AY 2009-10.

Conclusion:

The tribunal concluded that the compensation received by the assessee for relinquishing its right to sue is a capital receipt, not chargeable to tax. The tribunal's decision was guided by its previous ruling for AY 2009-10 and various judicial precedents. The tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal.

Final Order:

The appeal of the assessee was allowed, and the addition of ?18,02,53,000/- was deleted.

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