2022 (12) TMI 1076 - AT - Income Tax

Nature of receipt - amount received by the assessee firm as a compensation for pre-closure of its BOT projects - Revenue or capital receipt - whether taxable as a revenue receipt in the hands of the assessee firm since it represented the net present value of the future cash flows to be received by the assessee? - HELD THAT - Revenue s vehement arguments supporting the learned lower authorities action treating the impugned compensation as a revenue receipt fail to evoke our acceptance. This is for the reason that the Government of Maharashtra herein had acquired the assessee s BOT project(s); lock, stock and barrel by way of gazette notification(s) dated 27.06.2014 thereby rescinding it s earlier notification dated 08.04.2000 introducing the toll scheme in issue. We conclude in the light of these clinching facts and settled legal proposition that the hon ble Calcutta high court s view 1989 (12) TMI 362 - CALCUTTA HIGH COURT would squarely apply since not only the assessee s business stood closed but also it s intangible asset(s) by way of right to collect the toll u/s.32(i)(ii) and building, plant and machinery, as the case may be, vested with the government. Legislature has also inserted clause (e) in section 28(ii) of the Act by the Finance Act 2018 w.e.f. 01.04.2019 wherein any compensation or such payment received at or in connection with termination or the modification of the terms and conditions, if any, contract relating to his business is assessed has seem held taxable as profits and gains of business or profession. This latter amendment is applicable w.e.f. 01.04.2019 whereas we are in AY 2015-16 only. We also take note of the explanatory memo thereof that this latter amendment proposes to invoke section 28 of the Act qua any compensation; including both revenue as well as capital u/s.28 of the Act. We thus conclude that both the learned authorities have erred in law and on facts in invoking section 28(ii)(d) qua assessee s impugned compensation thereby holding it as a revenue receipt. The assessee succeeds.

Issues Involved
1. Taxability of compensation received for pre-closure of BOT projects.
2. Applicability of Section 28(ii)(d) of the Income Tax Act, 1961.
3. Nature of compensation as capital receipt or revenue receipt.

Issue-wise Detailed Analysis

1. Taxability of Compensation Received for Pre-closure of BOT Projects
The core issue revolves around whether the compensation amounting to Rs. 18,51,61,000/- received by the assessee firm for the pre-closure of its BOT projects is taxable as income under Section 28(ii)(d) of the Income Tax Act, 1961. The assessee argued that the compensation was a capital receipt as it was received for the pre-closure of its BOT projects, thereby extinguishing its income source. The CIT(A) held that the compensation was taxable as a revenue receipt since it represented the net present value of future cash flows the assessee would have received had the toll booths been operational.

2. Applicability of Section 28(ii)(d) of the Income Tax Act, 1961
The CIT(A) and AO both invoked Section 28(ii)(d) to treat the compensation as a revenue receipt. Section 28(ii)(d) states that any compensation received for or in connection with the vesting in the Government of the management of any property or business is taxable as a revenue receipt. The AO argued that the compensation received was the net present value of future cash flows, not a capital amount to compensate for the loss of an income source.

3. Nature of Compensation as Capital Receipt or Revenue Receipt
The assessee's contention was that the compensation received was for the loss of its income source and should be treated as a capital receipt. The assessee relied on several judgments, including CIT vs. Bombay Burmah Trading Corporation and Oberoi Hotels Pvt Ltd vs. CIT, to support its claim that compensation for the loss of a source of income is a capital receipt. The CIT(A) rejected this argument, stating that the compensation was for the net present value of future toll collections, thus making it a revenue receipt.

Judgment Analysis

Analysis of Assessee's Appeal
The Tribunal noted that the assessee received the compensation from the Government of Maharashtra for the closure of its BOT projects. The Tribunal referred to the explanation in the Finance Act 1973 and the judgment of the Calcutta High Court in Ram Saran Das & Brothers V/s. CIT, which clarified that Section 28(ii)(d) does not apply when the government takes over both the management and assets of a business. The Tribunal concluded that the compensation received by the assessee was for the complete takeover of its BOT projects, including intangible assets like the right to collect tolls, thereby making it a capital receipt. The Tribunal allowed the assessee's appeal, holding that the compensation was not taxable as a revenue receipt under Section 28(ii)(d).

Analysis of Revenue's Cross Appeal
The Revenue's cross appeal challenged the CIT(A)'s partial acceptance of the assessee's Section 80-IA deduction claim. The Tribunal observed that since the assessee's appeal was allowed, the Revenue's cross appeal automatically fails. The Tribunal dismissed the Revenue's cross appeal.

Conclusion
The Tribunal allowed the assessee's appeal, holding that the compensation received for the pre-closure of its BOT projects was a capital receipt and not taxable as a revenue receipt under Section 28(ii)(d). Consequently, the Revenue's cross appeal was dismissed. The judgment emphasized the distinction between compensation for the loss of a source of income and compensation for future income streams, aligning with the legal precedent that compensation for the loss of a source of income is a capital receipt.

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