Rohan and Rajdeep Infrastructure Vs DCIT (ITAT Pune)
ITAT Pune held that the amount received as compensation for pre-closure of BOT (Build, Operate, Transfer) project is capital receipt. Hence, treating the same as revenue receipt by invoking provisions of section 28(ii)(d) of the Income Tax Act is unsustainable in law.
Facts-
The assessee had received the impugned compensation amount i.e Rs. 18,51,61,000/- from the Government of Maharashtra in lieu of closure of its Build, Operate, Transfer “BOT” projects at three location. Both the lower authorities have invoked section 28(ii)(d) of the Act that such a compensation received partakes character of a revenue receipt as taxable income only.
It is alleged that the CIT(A) failed to appreciate that the amount received by the assessee was on account of pre-closure of its BOT projects and therefore, the same was a capital receipt and the provisions of section 28(ii)(d) of the Income Tax Act, 1961 were not applicable to the facts of the present case.
Conclusion-
Section 28(ii)(d) stood inserted in the Act by the Finance Act 1973 with retrospective effect. Relevant memo of explanation thereto clarified that “Several laws have been enacted in recent years for taking over the management of industrial undertakings, mines, insurance companies etc. pending their final takeover by the Government. These laws provided for the payment of compensation in respect of the vesting in the Government of the management of the business of industrial undertakings etc. taken over by the government.
The 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 proposes to invoke section 28 of the Act qua any compensation; including both revenue as well as capital u/s.28 of the Act.
Held that both the learned authorities have erred in law and on facts in invoking section 28(ii)(d) qua assessee’s impugned compensation of Rs. 18,51,61,000/- thereby holding it as a revenue receipt.
FULL TEXT OF THE ORDER OF ITAT PUNE
1. These assessee’s and Revenue’s cross appeals ITA Nos.575 and 692/PUN/2019 for A.Y. 2015-16, arise against the CIT(A)-3, Pune’s order dated 04/02/2019 passed in case no.PN/CIT(A)-3/Cir-3, Pn/255/2017-18/691, in proceedings u/s.143(3) of the Income Tax Act, 1961; in short “the Act”.
Heard both the parties. Case files perused.
2. The assessee’s appeal ITA No.572/PUN/2019 raises the following substantive grounds :-
“1. The learned CIT(A) erred in holding that the amount received by the assessee firm of Rs. 18,51,61,000/- was taxable as an income u/s. 28(ii)(d) of the Act without appreciating that the said amount was received by the assessee firm as a compensation for pre-closure of its BOT projects and therefore, the said amount was a capital receipt not chargeable to tax.
2. The learned CIT(A) further erred in holding that the amount of Rs. 18,51,61,000/- was 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.
3. The learned CIT(A) failed to appreciate that the amount received by the assessee was on account of pre-closure of its BOT projects and therefore, the same was a capital receipt and the provisions of section 28(ii)(d) were not applicable to the facts of the present case.
4. The learned CIT(A) ought to have appreciated that even thought the amount of compensation was quantified by considering the net present value of the future income, the income earning source of the assessee was extinguished and accordingly, the compensation received was a capital receipt in the hands of the assessee.
5. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
3. We next note that the Revenue’s cross appeal ITA No.692/PUN/2019 challenges correctness of CIT(A)’s action partly accepting the assessee’s section 80-IA deduction claim qua the forgoing sum of Rs.18,51,61,000/-thereby treating it as a revenue receipt. It thus emerges that in case the assessee’s forgoing sole substantive grievance regarding nature of its impugned compensation the natural corollary thereof would be rejection of Revenue’s cross appeal only. We thus proceed to decide the assessee’s appeal ITA No.572/PUN/2019 first.
4. Both the learned representative invited our attention to the CIT(A)’s detailed deduction upholding assessment findings treating the foregoing compensation sum of Rs.18,51,61,000/- as a revenue receipt as follows :-
“5. GROUND No.1:- in this ground the appellant has contended that the A.O. erred in holding that the amount received by the assessee firm of Rs. 18,51,61,000/- was taxable as in income u/s 28(ii)(d) without appreciating that the said amount was received by the assessee firm as compensation or pre-closure of its BOT projects and therefore, the said amount was a capital receipt not chargeable to tax.
5.1. OBSERVATION OF THE A.O.:– On this issue, the AO has made the following observations in the assessment order:
“7. Compensation Rs. 18,51,61.000/- credited to capital account of partners: During the course of assessment proceedings, abiding by the directions received u/s. 144A, the AR of the assessee vide proceeding sheet entry dated 11.12.2017 was asked as to why the amount of Rs. 18,51,61,000/- credited to partners ‘ capital account should not be treated as revenue receipt and added back to the total income of the assessee u/s. 28(ii)(d) of the Income Tax Act, 1961 and also considering the fact that the amount has not been received on account of compensation for closure of business, but has been received as the present value of future cash flows which would accrue to the assessee had the toll booths been operational.
7.1 The AR of the assessee vide letter dated 12.12.2017 submitted his reply, the same has been taken on record vide proceeding sheet entry dated 15.12.2017. The reply submitted by the AR.”
7.2 The Submission made by the AR of the assessee has been perused and due consideration has been given to the contentions put forward therein. However, it is not acceptable for following reasons:
7.2.1. The contention of the assessee that Loss of source of income being the basis for treating the amount of Rs.18,51,61,000/- received as a capital receipt is not acceptable as the accounting treatment adopted by the assessee by crediting the amount of Rs.18,51,61,000/-to the capital accounts of the partners is a violation of provisions of Sec. 28(ii)(d) of the Income Tax Act, 1961. The relevant portion of Sec 28 Profits & Sains of Business or Profession is reproduced below:
“28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—
(i) ..
(ii) any compensation or other payment due to or received by,— (a).,(b)..(c)….
(d) any person, for or in, connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;”
On perusal of the provisions of Sec, 28(ii)(d) if is evident that any amount received by way of compensation or other payment due to or received by any person for or in connection with the management of any property or business of the government or any corporation owned or controlled by the government is taxable as a revenue receipt,
Further, what the assessee has received is the Net Present Value of the future cash flows that the assessee would have received if the toll plaza’s had been operational. Hence, what the Government of Maharashtra has given the assessee is the present value of future cash flows and not a capital amount to compensate the loss of a income source. Rather, the entire income stream has been paid at its present value and as such there isn’t any loss of source of income the assessee as the entire income stream has been paid at its present value.
Hence the amount of Rs. 18,51,61,000/- is added back to the total income of the assessee u/s. 28(ii)(d),
7.2.2 Further, Case laws relied upon by the assessee in support of its claim of treating the amount of Rs, 18,51,61,000/- as a capital receipt have been given due consideration and not found relevant to this case as the case laws relied upon by assessee in support of its claim are totally out of context as the facts of the said case laws are totally different and relate to license revocation where the tax payer did not have a legal right to continue with the same business or for default of a contractual obligation. ”
5.2. SUBMISSION OF THE A.R.:- During appellate proceedings the Ld AR of the appellant has given following written submission vide letter dated 21-02-2019:
“Ground No. 1
1.1] “The assessed firm is engaged in development of infrastructure facilities. The assesses firm was allotted following projects on BOT basis –
