Case Law Details
Case Name : Aerens Developers and Engineers Ltd. vs. ACIT (ITAT Delhi)
Appeal Number : ITA No. 5054/Del/2011
Date of Judgement/Order : 12.08.2016
Related Assessment Year : 2007-08
CA Saurabh Chokra
Brief of the case:
The ITAT Delhi in the above cited case held that Compensation received for loss of business activity is a Capital Receipt as it is injury to the profit making apparatus and not the loss of profits. Therefore, in the present case , non-supply of land by supplier which was to be used by the consortium was injury to profit making apparatus and hence capital receipt.
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Facts of the case:
- The assessee company engaged in the business of real estate had entered into a consortium agreement dated 02.03.2005 amounts its associates defining their rolls, rights and responsibilities along with their respective shares in the consortium. Thereafter, the consortium companies, namely, Aerens R Infra-structure Pvt Ltd, Samurai Entertainment P. Ltd., Shivgiri Suppliers (P) Ltd., the assessee and Aerens Goldsok International Ltd. through their lead company, namely, A.R. Developers Pvt. Ltd. entered into an agreement to sell dated 02.03.2005 with GMA Buildcom (P) Ltd. to purchase 10 acres of land for a consideration of Rs.15 crores in village Bhattian, Tehsil and District Ludhiana (Punjab).
- Since GMA Buildcom (P) Ltd. failed to transfer minimum land of 10 acres within the prescribed and extended time limits as per the terms of the agreement. The matter was settled through arbitration award dated 11.8.2006 wherein compensations were awarded to all the consortium members, M/s. Aerens Developers & Engg. Pvt. Ltd (assessee) received a compensation of Rs. 1 crores.
- The assessee company credited the compensation so received to Profit & Loss A/c . However, in the computation of income the assessee claimed this income as exempt and reduced this income while computing its taxable profit.
- The AO, however, added the same to taxable income considering that compensation was received in the normal course of business hence taxable as business income. CIT (A) also concurred with the view taken by AO. Aggrieved assessee is in appeal before ITAT Delhi.
Contention of the Assessee:
- It was contended that the agreement with JMA Buildcom (P) Ltd. to arrange land was entered into normal course of business observed by the Assessing Officer has no relevance as the consortium between some entities as one part and JMA Buildcom (P) Ltd. as other part of the agreement had for the first time joined hands together to carry on business in the state of Punjab
- However, before the business of the consortium would have commenced the deal got spoiled and the business was demolished completely even before the setting up of the business. Therefore, the compensation cannot be considered as revenue receipt as it has no connection with the business activity of consortium which cannot even commence the business due to spoil of land deal.
Held by ITAT Delhi:
- It is well settled position of law that there cannot be a standard test to determine the nature of receipt as to whether it is capital or Revenue in nature which depends on the facts of case. In the present case the injury was caused to the profit making apparatus as the land which was profit making apparatus for the assessee was not supplied by JMA Buildcom (P) Ltd. as per the agreement entered into between the assessee and associates, and JMA Buildcom (P) Ltd.
- Appreciating the same, compensation was awarded in the arbitration proceedings initiated against JMA Buildcom Pvt. Ltd. Here, the basis of reward of compensation remained the lost profit due to non-supply of the land and not on loss of profit.
- Further, before the business of the consortium would have commenced the deal got spoiled and the business was demolished completely even before the setting up of the business. It is the loss of business to consortium as a whole not a sole loss to assessee. Therefore, compensation was capital receipt for consortium and as such assessee’s share is also a capital receipt.
- Thus, compensation was in nature of capital receipt not taxable to business income.
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