2024 (3) TMI 573 - AT - Income Tax

Correct head of income - compensation received for vacating the flat - income from other sources or capital gain - denying the assessee s claim for deduction u/s. 54F - AO held that the amount is taxable in the hands of the assessee as income from other sources as reason being that assessee has received this amount not on account of surrender of transfer of tenancy rights as assessee was never the sub-tenant of the said flat by virtue of any legal agreement or by payment of any rent to the tenant HELD THAT - It is not in dispute that the company OIPL was a tenant in the residential flat pursuance of leave and license agreement dated 01/05/1965 and thereafter, the company continued to have the possession of the flat. For vacating the flat, a suit filed by the landlord against OIPL. The Court ruled against the Landlord and it was held that OIPL is a deemed tenant of the residential flat. Thereafter, various suits were filed by the landlord for eviction. Finally, consent terms were agreed into and out of Court settlement was made between landlord and OIPL for vacating the flat an in lieu thereof, a sum of Rs. 2,01,00,000/- was paid to OIPL by the Landlord for vacating the flat. Assessee is contending that, since assessee and his family members (directors in the OIPL) and were staying in the said flat rented by OIPL for more than 40 years and they had to vacate flat to find an alternative accommodation, therefore, the company had paid an amount of Rs. 75,00,000/- to each of the Director. Thus, the compensation received from the company for vacating the flat is for the occupancy rights, that is, they will not evoke any possessory or occupancy rights in respect of the said flat and therefore, surrender of said rights amounts to capital asset - We are unable to agree with the contention raised by the assessee, because, as rightly held by the ld. AO, assessee was neither a sub-tenant nor there was any kind of sub-licensing of the property by the company to the assessee from his family members. Though assessee might have resided in the property taken on rent by the company but it does not translate into any right in the property in the name of the assessee. Assessee was occupying the property on behalf of the company which company had allowed them to stay. There is also nothing on record that a separate consent between assessee and the landlord had also been agreed upon or assessee was part of the legal suit filed by the landlord. It is also not on record the directors had paid any rent to the company nor did the company had shown any such perquisite given to its director. Thus, we agree, with the observation of the ld. AO to the extent that it is not chargeable to tax under the head capital gain in the hands of the assessee, because only company had a sole right in the tenancy in the property and company alone can show the entire compensation amount as its income from Capital Gain from surrender of tenancy right. There is nothing on record to suggest that assessee had any kind of right in the said property for which they were to be compensated separately by the Landlord. However, the amount of Rs. 75,00,000/- received by the assessee cannot be taxed in the hands of the assessee for the reason that firstly, the amount has been received from the company out of its own income which was received in the form of compensation chargeable to tax under the head capital gains entirely in the hand of the company and any amount given to the assessee out of such taxable income amounts to application of income by the company. Secondly, the capital gains for the entire compensation received is taxable in the hands of the company OIPL and if any such amount paid to the assessee by the company is out of its income, which cannot be taxed as income from other sources in the hands of the assessee. The reason being, the amount has been received by the assessee from the company so that company can honour the consent term with the landlord for peaceful vacation of the flat and assessee had no role in the consent term. Thirdly, the amount to be taxed in the hands of the assessee has to be in the nature of income which assessee had earned from company carrying out any activity or surrendering any right or asset in favour of the company which can be assessable under any head. Here the money has been received by the assessee from the company so that company can discharge its obligations; it has nothing to with the assessee. In the hands of the assessee it is purely a capital receipt which he has received from the company so that company can give undertaking to vacate the premises in the favour of the landlord for which company was paid compensation. Lastly, If at all, the amount of entire compensation was taxable in the hands of the company which we find that it has offered as a capital gain in the return of income. However, it has claimed deduction for such payment made to the assessee. Such a claim is allowable or not the issue before us, because it is not a cost incurred on tenancy right albeit its application of income. Since, it is not the subject matter of issue before us therefore, we are refraining to go on this issue. Whether it is taxable in the hands of the assessee? - We hold that, the amount received from the company is neither chargeable under the head capital gains nor as income from other sources, albeit, it is a capital receipt in the hands of the assessee because the amount received from the company out of its own income, is an application of income by the company. The entire amount of compensation is capital gains in the hands of the company, which has been declared, albeit its computation and deduction is subject matter of examination there and since this not the issue before us so we refrain from any such adjudication. Thus on this ground, the addition made by the ld. AO is deleted.

Summary

Issues Involved:
1. Taxability of compensation received for vacating the flat.
2. Classification of the compensation as 'income from other sources' versus 'capital gains'.
3. Eligibility for deduction under Section 54F of the Income Tax Act.

Summary of Judgment:

1. Taxability of Compensation Received for Vacating the Flat:
The assessee received Rs. 75,00,000/- from Overseas Impex Pvt. Ltd. (OIPL) for vacating a flat occupied for over 40 years. The primary issue was whether this compensation should be taxed as 'income from other sources' or 'capital gains'. The assessee argued that the compensation was for the surrender of occupancy rights, thus qualifying as a capital receipt.

2. Classification of Compensation as 'Income from Other Sources' Versus 'Capital Gains':
The Assessing Officer (AO) held that the compensation should be taxed as 'income from other sources' because the assessee was not a sub-tenant and had no legal agreement or rent payment to establish tenancy rights. The AO emphasized that OIPL, being the tenant, received the compensation for surrendering its tenancy rights. The assessee, merely a director residing in the flat, had no separate legal right to the property.

The Tribunal, however, found that the amount received by the assessee was not for any capital asset transfer but was an application of income by the company. The Tribunal noted that the company paid the compensation to the directors to fulfill its obligation under the consent terms with the landlord.

3. Eligibility for Deduction Under Section 54F:
The assessee claimed exemption under Section 54F for the capital gains arising from the transfer of occupancy rights. However, since the AO classified the compensation as 'income from other sources', the exemption under Section 54F was denied.

The Tribunal concluded that the compensation received by the assessee was a capital receipt and not taxable as 'income from other sources'. The company, OIPL, had already declared the entire compensation as capital gains in its return of income. Therefore, the amount received by the assessee was not taxable under any head of income in the assessee's hands.

Final Decision:
The Tribunal allowed the appeal, holding that the compensation received by the assessee was a capital receipt and not taxable as 'income from other sources'. The addition made by the AO was deleted, and the appeal was allowed in favor of the assessee.