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TMI Blog2022 (1) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the reason that the object clause appearing in the memorandum of association which authorises the assessee to carry on the activity of real estate cannot be a criteria to hold that the assessee intended to acquire impugned project as stock in trade. It is because the assessee while carrying out the real estate business can also hold certain assets as fixed assets to be used for the purpose of the business. But, we note that there is no direct/indirect evidence available on record indicating that the assessee was intending to acquire such project to be used for the purpose of its business activities of trading in shares and securities - there is no circumstantial evidences suggesting so. On the contrary, there are enough indications available on record as highlighted by the authorities below that the assessee was intending to acquire the impugned project as stock in trade. These indications have been highlighted by the learned CIT (A) which have been reproduced in the preceding paragraph. Thus it appears that, the assessee was intending to acquire the impugned project as stock in trade. It is for the reason that the revenue cannot sit on the armchair of the assessee to deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 4.83 crores whereas as per deed it was to receive ₹ 40 crores only and loss on sale of share occurred after the finalization of books of account. Thus it is transpired that the assessee along with M/s JRPL arranged all the transaction in dubious manner which is nothing but a colourable devise. Once the amount was finalised at E4.89 crores only, then why the assessee agreed in the cancellation agreement for E40 crores. It is also a fact on records that M/s JRPL has claimed the deduction for E40 crores as expenses in the financial statement. Thus if we see all the facts in the aggregation of aforesaid information, it is transpired that the assessee along with M/s JRPL has adopted the colourable device. The prime purpose of the colourable device is to extend the benefit to M/s JRPL which is the beneficiary of major amount. The assessee in this process derived the benefit of E4.89 crores only as conduit. As far as tax liability is concerned even in case of colourable device, it seems to us that the party who has been benefited from such colourable device should only be brought to tax. Indeed, the assessee was a party in such colourable device but the same cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired part of the impugned project held by M/s JRPL to the extent of 50% against the consideration fixed at E 63 crores. The assessee also made the payment of E 6.30 lakhs as token money to M/s JRPL for the acquisition of the part project at the time of agreement dated 23-8-2010. 3.3 However, on a later date i.e. 16th December 2010, a relinquishment deed between the assessee and M/s JRPL was entered. As per the relinquishment deed, the latter shall pay to the former liquidated damages of E40 crores and former will relinquish all its rights in the said property. As per relinquishment deed, the JRPL had to pay all the amount up-to 15th January 2011. 3.4 The assessee got ₹ 2.5 crores only during the year through cheque. In the subsequent year the assessee got another cheque of ₹ 2 crores. For the balance amount of ₹ 35.50 crores, the assessee was allotted 3.55 lakh shares of JRPL @ ₹ 1000 for each share vide allotment dated 09th September 2011. 3.5 However, the assessee in the year under consideration has shown total receipt of ₹ 4,83,05,000/- against such relinquishment deed which was treated as capital receipt by crediting reserve and sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id that the share of the project to be acquired by the assessee was representing the capital assets. In other words the compensation received by the assessee for E 40 crores represents the business activity for the purpose of making the profit. Therefore, the transactions on hand characterizes the revenue receipts. iv. The right for receiving the compensation of E 40 crores accrued to the assessee after entering into the relinquishment agreement dated 16th December 2010 which was entered in the year under consideration. Though, the part of the consideration in the form of cheque and shares was received in the subsequent year but as per the mercantile system of accounting, the income in the form of compensation pertains to the year under consideration. Similarly, the amount of consideration as agreed between the parties is of E 40 crores as reflecting in the relinquishment deed. Accordingly, the loss incurred against the sale of shares that too in the subsequent year, cannot be considered and allowed to be reduced from the compensation accrued to the assessee in the year under consideration. v. On verification under section 133(6) of the Act from M/s JRPL, it was revealed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt (FY 2011-12) 2.0 crores iii. Amount realized from the sale of shares (FY 2011-12 dated 26-9-2011) 39,05,000/- 4.5 However, the learned CIT (A) disagreed with the contention of the assessee by observing as under: i. As per the clause 17 of the other objects, appearing in the memorandum of association, the assessee is authorized to carrying on the business of construction or dealing in immovable properties . Therefore the MOU entered with JRPL represents the business activities of the assessee. It is because it does not make any difference whether the activity of the assessee was listed in the main object or incidental /ancillary objects. Likewise, as per the MOU with JRPL the assessee was to acquire part of the residential and commercial buildings in saleable condition which represents the stock in trade. ii. The contention of the assessee that it was acquiring the impugned property for the extension of his business activities is grossly misplaced. It is because, on perusal of the audited balance sheet, it was found that the assessee has not carried out any major busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital receipt only for E4.89 crores whereas JRPL has claimed the deduction for E40 crores in its profit and loss account. vi. Without prejudice to the above, CIT (A) held that if the impugned amount is held as capital receipt. It has to be taxed as short-term capital gain in the hands of the assessee. It is for the reason that the assessee failed to bring anything on record that the amount was received on account of breach of contract. Rather the amount represents the consideration received by the assessee for relinquishment of his rights in the impugned property. It was also pointed out that MOU was entered dated 23rd August 2010 and was subsisting on the date of cancellation. Thus the impugned amount has been paid without any breach of contract and therefore the same represents the amount received for the relinquishment of right in the property. Further, the learned CIT (A) referred clause 5 of the deed of relinquishment which clearly says that the assessee has released/relinquished/surrender all its rights and claims against the 50% entitlements of JRPL. Accordingly the learned CIT (A) held that the assessee has relinquished its right in favour of JRPL. 4.6 In vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... + 39.05 lakh) only but mistakenly shown 4,83,05,000/- 8.1 From the preceding discussion, certain issues arise for our consideration as detailed below: i. Whether the amount of compensation/liquidation damages received by the assessee for E40 crores represents the capital receipt or the business receipts. ii. If such receipt is capital in nature, then whether the provisions of capital gain shall attract on account of relinquishment of right in the property. iii. Whether the amount of compensation stands at E4.89 crores against the allegation of the revenue for E 40 crores. iv. Whether the assessee has adopted colourable device along with M/s JRPL for diverting the income as well as enabling M/s JRPL to claim higher amount of deduction by way of an expense. Likewise, whether the shares were sold by the assessee to a company controlled and managed by M/s JRPL. 8.2 The assessee in the present case has entered into an agreement for acquiring the part of the project vide agreement dated 23-8-2010. The assessee has also given the part payment of E6.30 lakhs only at the time of agreement. This agreement has nowhere been doubted by the authorities below as far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax as the right to sue is not a capital asset. Right to sue is not an actionable claim and it cannot be assigned. 8.7 We also note that Recently, in Bhojison Infrastructure (P) Ltd v. ITO [2018] 99 taxmann.com 26/173 ITD 436 (Ahd. - Trib) the assessee being a builder and developer entered into a development agreement with a land owner by which he had a right in the said land for development. Subsequently, the landlord sold the land to third parties. The assessee acquired right to sue for specific performance of its pre-emptive right to purchase the land. The assessee received ₹ 247 lakhs as compensation/damages for relinquishment of 'right to sue' in the court of law and claimed the same as capital receipt not liable to income tax. The assessee made reference to section 6 of the Transfer of Property Act where the 'right to sue' is not a property and it cannot be transferred to another person. The assessee contended that after the breach of development agreement by the landowner, the only right which survives for the assessee was the 'right to sue' the vendor. It is a personal right and is not susceptible to transfer for being exigible to ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s intent. Every businessman generally avoids the litigation which are indeed time-consuming and expensive affair besides the damage of the goodwill. The assessee has also explained the reason why the other party did nothonour the agreement. The other party got the approval for the construction and FSI of one floor which was more remunerative than the cost of damage paid to the assessee. This submission of the assessee was nowhere disputed by the ld. CIT-A. 8.10 A question also arises whether the compensation received by the assessee represents the business income or capital gain. As regards the issue whether the impugned compensation represents the business income of the assessee, we note that there is no single test or criteria to decide whether a receipt represents the capital or the business receipt. It depends upon the facts and circumstances of each case. It was contended by the assessee that it was acquiring the impugned project for expansion of business and intended use the same as office and staff quarter whereas the revenue was of the view that the assessee was acquiring the project as stock in trade. The opinion of the revenue was based on the following facts: a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade. But to our understanding, based on the indications as discussed above, we find difficult to hold that the assessee was acquiring the impugned project for its business activities. It is for the reason that the revenue cannot sit on the armchair of the assessee to decide the decisions of the assessee. Therefore, nothing adverse can be drawn against the assessee on presumption and assumptions based on indications until and unless the documentary evidence or other materials are available on record. 8.12 Furthermore, the assessee on records engaged in the activity of share trading. There is no activity of the assessee for the real estate activity carried out by it in the earlier years. Thus, the activity which has not commenced cannot be decided as in the nature of business. Likewise, the agreement says that the assessee will get the share in the property in saleable condition. To our understanding, saleable condition cannot be criteria to hold that the assessee was acquiring the project as stock in trade. Saleable condition may refers to the different stages of work of the project to be acquired by the assessee. As such the word saleable condition was used in the agreement t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... days of MOU. (iv) The supplier having failed to deliver the machinery within the stipulated time, the company received ₹ 8,50,000/- as liquidated damages. (iv) The vendor failed to handover documents/possession of the subject property, the appellant received ₹ 4,89,05,000/- as liquidated damages. (v) The company claimed it as capital receipts, however, the A,O, sought to treat it as income in its hands. (v) The company claimed it as capital receipts, however, the A.O. sought to treat it as income in its hands. (vi) As held by the Hon'ble Court that the compensation paid amounted to sterilization of the capital asset of the assessee, as the supplier failed to supply plant as stipulated in the agreement and clause 6 thereof came into play. The aforesaid amount received by . the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, was a capital receipt not liable to tax in the hands of the company. (vi) The appellant has been consistently claiming that the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e compensation of ₹ 2.5 crores was received in the year under consideration through cheque dated 30th March 2011. The balances amount was received in the subsequent year in the form of cheque of ₹ 2 crores dated 9th September 2011 and allotment of 3.55 lakh shares for ₹ 35.5 crore dated 9th September 2011. The allotted share were finally sold for ₹ 39,05,000/- only as on 26th September 2011. However in the books of account prepared for year ending 31st March 2011 on the basis of mercantile system which was approved and singed on 25th August 2011, the assessee recorded an amount of ₹ 4.83 crores as capital receipt on account of compensation receivable as per relinquishment deed. Thus the question arise how assessee determined the amount receivable only at ₹ 4.83 crores whereas as per deed it was to receive ₹ 40 crores only and loss on sale of share occurred after the finalization of books of account. Thus it is transpired that the assessee along with M/s JRPL arranged all the transaction in dubious manner which is nothing but a colourable devise. 8.17 Besides the above, we also note that the assessee before the authorities below has sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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