2021 (1) TMI 1069 - AT - Income Tax

Long term capital loss/gain - loss on cancellation of flat booked - extinguishment of assessee s right in flat - treating the compensation received as income from other sources as against the same having been treated as part of the sales consideration by the assessee - HELD THAT - Provisions of MOFA can not regulate the taxability of any income in the form of long term capital gain/loss which may raise from the cancellation of any letter of intent/agreement which is not registered. Therefore, we are inclined to hold that the assessee has rightly calculated the long term capital loss upon the cancellation of letter of intent dated 09.02.2010. We have also perused the provisions of section 2(47) clause (vi) and observed that transfer of capital asset includes transferring or enabling the enjoyment of any immovable property by way of becoming a member of or acquiring a share in a company or by way of any agreement or arrangement or in any other manner whatsoever. The case of the assessee is also squarely covered by the decision of Tribunal in the case of ACIT vs. Ashwin S. Bhalekar 2018 (5) TMI 1887 - ITAT MUMBAI wherein has held that the extinguishment of assessee s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation receipt upon extinguishment of right which was held for more than 3 years falls under the head Capital gain under section 45 - direct the AO to allow the claim of the assessee on account of long term capital loss. - Decided in favour of assessee.

Issues Involved:
1. Rejection of long-term capital loss claim by the assessee.
2. Treatment of compensation received as income from other sources.
3. Determination of whether the right to specific performance constitutes a capital asset under Section 2(14) of the IT Act, 1961.
4. Applicability of The Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (MOFA) to the transaction.
5. Initiation of penalty under Section 271(1)(c) of the IT Act, 1961.

Detailed Analysis:

1. Rejection of Long-Term Capital Loss Claim by the Assessee:
The assessee filed a return of income declaring a total income of ?23,55,91,710/-. The case was selected for scrutiny, and during the assessment, it was found that the assessee had canceled an agreement for the purchase of a flat and received ?2,50,00,000/- as compensation along with a refund of ?10,75,99,999/-. The assessee claimed a long-term capital loss of ?3,37,09,505/- by treating the compensation received as part of the sales consideration. The AO rejected this claim, treating the compensation as income from other sources, and this rejection was upheld by the CIT(A).

2. Treatment of Compensation Received as Income from Other Sources:
The AO held that the compensation received was not from the transfer of a capital asset, as the asset did not exist at the time of the letter of intent. The CIT(A) supported this view, stating that the letter of intent was a deposit-raising arrangement and did not confer any ownership rights, thus treating the compensation as income from other sources.

3. Determination of Whether the Right to Specific Performance Constitutes a Capital Asset:
The CIT(A) argued that the letter of intent did not create a capital asset as defined under Section 2(14) of the IT Act, 1961, since the flats and shares were not in existence at the time of the agreement. The assessee contended that the letter of intent created rights in the immovable property, and the compensation received upon cancellation should be treated as consideration for the transfer of these rights, thus falling under capital gains. The assessee relied on various judicial decisions, including CIT vs. Vijay Flexible Containers (Bombay High Court) and ACIT vs. Ashwin S. Bhalekar (ITAT Mumbai), which supported the view that rights created under an agreement to sell constitute a capital asset.

4. Applicability of The Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (MOFA) to the Transaction:
The CIT(A) and the AO argued that the provisions of MOFA were not followed, as the agreement was neither registered nor in the prescribed form, and thus, the letter of intent did not create any enforceable rights. The assessee countered that the provisions of MOFA do not regulate the taxability of income arising from the cancellation of such agreements.

5. Initiation of Penalty under Section 271(1)(c) of the IT Act, 1961:
The CIT(A) dismissed the ground related to the initiation of penalty under Section 271(1)(c) as infructuous since no penalty order had been passed by the AO.

Conclusion:
The Tribunal held that the letter of intent dated 09.02.2010 created a right in favor of the assessee, which constituted a capital asset under Section 2(14) of the IT Act, 1961. The compensation received upon cancellation of this right should be treated as part of the sales consideration, and the resultant long-term capital loss claimed by the assessee was valid. The Tribunal set aside the order of the CIT(A) and directed the AO to allow the claim of the assessee on account of long-term capital loss. The appeal of the assessee was allowed.

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