2020 (7) TMI 714 - AT - Income Tax

Capital gain - tenancy right available with the assessee or not? - the amount received for not interfering possessions - the parties of the family settlement that the assessee and her relatives were in possession of flat. - relinquishment of rights - capital receipt v/s capital gain - HELD THAT - In the instant case, Smt. Saraswati Vithaldas Sahita occupied the said flat at 2nd floor of the building known as Gangasagar on license basis. This is crystal clear from the Consent Term before the Hon ble Court of Small Causes at Mumbai, quoted at length earlier. After demise of Mrs. Saraswati Vithaldas Sahita, her son Shri Vidyut Sahita occupied the said flat with his family. The said building Gangasagar was purchased by M/s H.M. Enterprises. For vacating the premises, M/s H.M. Enterprises filed suit against the occupier of Gangasagar building. An out of Court settlement was made so that occupier could not interfere with possession of M/s H.M. Enterprises. The appellant being daughter-in-law of Smt. Saraswati Vithaldas Sahita received ₹ 25,00,000/- for not interfering possessions of M/s H.M. Enterprises. The distillation of precedents must now be applied to the facts of the present case. CIT(A) erred in confirming addition on account of relinquishment of right. CIT(A) erred in treating capital receipt as capital gain - Decided in favour of assessee.

Issues Involved:
1. Addition of ?25,00,000 on account of relinquishment of right.
2. Treatment of capital receipt as capital gain.
3. Applicability of section 56(2) of the Income Tax Act to capital receipts.
4. Computation of capital gain in the absence of cost.
5. Determination of capital gain when receipt is for passing over the same.

Detailed Analysis:

1. Addition of ?25,00,000 on account of relinquishment of right:
The assessee filed an appeal against the addition of ?25,00,000 made by the Assessing Officer (AO) on account of relinquishment of rights in a property. The AO observed that the amount was received as consideration for vacating the premises and relinquishing any claims, which he treated as capital gains. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the receipt of money could not be considered capital in nature and should be taxed under section 56 as income without consideration.

2. Treatment of capital receipt as capital gain:
The AO treated the amount of ?25,00,000 as capital gains, which accrued to the assessee in lieu of relinquishment of rights in the property. The CIT(A) confirmed this treatment, explaining that the appellant did not have any right to relinquish but received the money as a result of an out-of-court settlement for vacating the premises.

3. Applicability of section 56(2) of the Income Tax Act to capital receipts:
The CIT(A) reasoned that since the appellant did not have any right to relinquish, the receipt of money should be considered as income without consideration and taxed under section 56(2). The assessee argued that the receipt was capital in nature and did not fall under the definition of income as per section 56(2).

4. Computation of capital gain in the absence of cost:
The assessee contended that capital gain could not be computed as there was no cost of acquisition for the relinquished right. The CIT(A) referred to section 49(1) of the Act, which states that the cost of acquisition in cases of succession, inheritance, or devolution would be the cost incurred by the previous owner.

5. Determination of capital gain when receipt is for passing over the same:
The assessee argued that no gain arises under capital gain when the receipt was for passing over the same. The CIT(A) dismissed this argument, stating that the appellant received the money as a result of an out-of-court settlement and had a right in the flat by virtue of family settlement.

Judgment:
The Tribunal reviewed the case laws and facts, noting that the appellant did not have any legal right in the property as it was occupied on a license basis by the appellant's mother-in-law. The Tribunal referred to the distinction between lease and license, emphasizing that a license does not create any interest in the property. The Tribunal concluded that the appellant received the amount for not interfering with the possession of the property by M/s H.M. Enterprises, and the receipt could not be treated as capital gains due to the absence of cost of acquisition.

The Tribunal set aside the order of the CIT(A), allowing the appeal filed by the assessee. The procedural issue regarding the delay in pronouncement of the order due to the COVID-19 pandemic was also addressed, with the Tribunal citing extensions granted by the Hon'ble Supreme Court and Bombay High Court.

Conclusion:
The Tribunal ruled in favor of the assessee, determining that the ?25,00,000 received could not be taxed as capital gains due to the absence of cost of acquisition and the nature of the receipt as consideration for not interfering with the possession of the property. The appeal was allowed, and the addition made by the AO was set aside.

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