Popular Estate Management Ltd. Vs. DCIT (ITAT Ahmedabad)
Compensation for Relinquishment of Right to Sue for Breach of Contract is Capital Receipt & hence Not Chargeable to Tax
The issue under consideration is whether the CIT(A) is correct in confirming the addition while treating the compensation received for relinquishment of right to sue as taxable business income & accordingly considered it as revenue receipt as against the capital receipt?
In the present case the assessee has received the compensation for relinquishment of right to sue from certain societies as there was the breach of contract by the societies. As such the assessee has entered into the development agreement along with preemptive purchase right with the societies for the lands owned by them. But, subsequently the societies terminated the agreement with the assessee after making the payment of the compensation. The amount of compensation received by the assessee was recorded as capital receipt not chargeable to tax u/s 2(45) r.w.s 45 of the, Act. However, the learned AO held that the entire transaction/activities for the development of the land, termination of the development agreement and the subsequent sale of the lands to the parties and the amount of the compensation received by the assessee is nothing but a device used to escape from the tax liability. Accordingly the amount of compensation received by the assessee was treated as business income of the assessee. The ld. CIT-A subsequently confirmed the order of the AO.
ITAT states that, it is also pertinent to note that the parties involved in the entire flow of transactions namely, the assessee, societies and the buyers of the land who are separate taxable and independent persons/ entities viz a viz complying the provisions of the Act. Thus the amount of the compensation received by the assessee for relinquishment of its right to sue from societies to avoid the litigation cannot be treated as a colorable device. Hence, the amount received as compensation in view of said right is not chargeable to tax. In this regards ITAT find support and guidance from the order of this tribunal in the case of Bhojison Infrastructure Pvt. Ltd. Vs. ITO. The essence of long list of judicial pronouncements cited on behalf of assessee is that Section 6 of the Transfer of Property Act which uses the same expression ‘property of any kind’ in the context of transferability makes an exception in the case of a mere right to sue. The decisions thereunder make it abundantly clear that the ‘right to sue’ for damages is not an actionable claim. It cannot be assigned. Hence, such a ‘right to sue’ does not constitute a ‘capital asset’ which in turn has to be ‘an interest in property of any kind’. Despite the definition of expression ‘capital asset’ in the widest possible terms in Section 2(14) of the Act, a right to a capital asset must fall with the expression ‘property of any kind’ subject to certain exclusions. Notwithstanding widest import assigned to the term ‘property’ which signifies every possible interest which a person can hold and enjoy, the ‘right to sue’ is a right in personam and such right cannot certainly be transferred. In order to attract the charge of tax on capital gains, the sine qua non is that the receipt must have originated in a ‘transfer’ within the meaning of Section 45 r.w.s. 2(47) of the Act. In the absence of its transferability, the compensation/damages received by assessee is not assessable as capital gains. In view of the above and after considering the facts in totality as discussed above, we set aside the order of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–9, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-9/121/DCIT.Cir-3(1)(1)/15-16 dated 25/10/2017 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”) dated 27/03/2015 relevant to Assessment Year (AY) 2012-13. The assessee has raised the following grounds of appeal:-
1. The Ld.CIT(A) has grossly erred in law and on facts in dismissing the appeal. He ought to have allowed the appeal fully in accordance with the grounds of appeal raised by the appellant before him.
I. The Ld.CIT(A) has grossly erred in law and on facts in dismissing the appeal. He ought to have allowed the appeal fully in accordance with the grounds of appeal raised by the appellant before him.i. Addition on account of alleged unexplained cash credit u/s.68 of the I.T.Act, 1961 on account of relinquishment of right – Rs.18,02,53,000/-.
1. The Ld.CIT(A) has erred in law and on facts in confirming the addition of Rs.18,02,53,000/- as made by the Ld.A.O. while treating the compensation received for relinquishment of right to sue as taxable business income and accordingly revenue receipt as against the4 capital receipt not assessable either as capital gains or business income.
2. That the Ld.CIT(A) has failed to consider the fact that the rights acquired by the appellant company under different development agreements was a “Right to Sue” and as per the provisions of section 6(e) of the Transfer of Property Act, “Right to Sue” is not a property and thereby it is not a “Capital Asset” and as a consequence, impugned receipt of Rs.18,02,53,000/- received as compensation/damages for relinquishment of right to sue in the Courts of law is a “capital receipt” in the hands of the appellant company not assessable either as capital gains or business income in view of the Hon’ble Jurisdictional Gujarat High Jurisdictional High Court in the case of (i) Baroda Cement & Chemicals Ltd vs. CIT 158 ITR 636 (Guj.), (ii) CIT vs. Hiralal Manilal Mody 131 ITR 421 (Guj.), (iii) Hon’ble Calcutta High Court in the case of CIT vs. Ashoka Marketing Ltd. 164 ITR 664 (Cal.), (iv) CIT vs. J. Dalmia 149 ITR 215 (Del.) & (v) Satyam Food Specialties (P) Ltd. vs. DCIT, Central Circle-2, Jaipur [2015] 57 com 194.
3. The Ld.CIT(A) has grossly erred in law and on facts in failing to consider the fact that Hon’ble ITAT, Ahmedabad “A” Bench in the case of appellant company’s own case rendered the appellate order vide ITA No.212/Ahd/2014 dated 29/08/2017 for AY 2009-10, wherein, the compensation for relinquishment of right to sue was the grounds of appeal being the said compensation whether subject to tax or not was the issue and the Hon’ble ITAT, Ahmedabad, “A” Bench has allowed the appeal of the appellant company in favour of the appellant company by holding that the amount received as a capital receipt not assessable either as a capital gain or business income in view of the Hon’ble Jurisdictional High Court in the case of (i) Baroda Cement & Chemicals Ltd. vs. CIT 158 ITR 636 (Guj.), (ii) CIT vs. Hiralal Manila I Mody 131 ITR 421 (Guj.), (ii) Hon’ble Calcutta High Court in the case of CIT vs. Ashoka Marketing Ltd. 164 ITR 664 (Cal.), (iv) CIT vs. J. Dalmia 149 ITR 215 (Del.) & (v) Satyam Food Specialties (P) Ltd. vs. DCIT, Central Circle-2, Jaipur [2015] 57 com 194 and thereby deleted the addition as made by the Ld. A.O. in the assessment order and copy of the Hon’ble ITAT order dated 29/08/2017 for AY 200910 has already been provided to the Ld.CIT(A) in the appellate proceedings.
The appellant company reserves its right to add, amend, alter or modify any of the grounds stated hereinabove either before or at the time of hearing.
Prayer
The appellant therefore respectfully prays that :-
1. The addition of Rs.18,02,53,000/- on account of alleged unexplained cash credit u/s.68 of the I.T.Act, 1961 confirmed by the Ld.CIT(A) may kindly be deleted.
2. Such and further relief as the nature and circumstances of the case may justify.
The effective ground of appeal raised by the assessee is that the ld. CIT(A) erred in confirming the order of the AO by treating the capital receipt of Rs. 18,02,53,000/- as income of the assessee.
2. The facts in brief are that the assessee in the present case is a limited company and engaged in the business of construction and engineering activities. The AO during the assessment proceedings observed that the assessee has received certain amount for relinquishment of its right which was treated as capital receipt, not chargeable to tax. However, the AO was of the view that such receipt in the hands of the assessee is revenue receipt and chargeable to tax. Accordingly he show caused the assessee vide notice dated 20th March 2015 proposing to treat such amount as revenue receipts.
2.1. However, the assessee in response to such notice did not make any submission on merit. Therefore the AO in the absence of any documentary evidence, and further observing that similar receipt was treated as income of the assessee in the earlier assessment year, treated the same as unexplained cash credit under section 68 of the Act and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT(A).
3. The assessee before the learned CIT (A) submitted that it has entered into the agreements with different societies which were holding the agriculture lands. As per the agreement, the assessee was appointed by the societies as project consultant and organizer to develop such agricultural lands. There was also a clause in the agreement that in case the society terminates the development agreement or wishs to sale the land, then the assessee shall have the pre-emptive right for the purchase of such land. Similarly, there was also a clause in the agreement that in case the society terminates the agreement and does not wish to sell the land to the assessee, then the societies will pay compensation to the assessee.
3.1 As such, the societies terminated the agreement and decided to sell the land to different persons after making the payment of the compensation to the assessee. Accordingly the assessee claimed to have received a sum of Rs.18,02,53,000/- as compensation by relinquishing its right in such properties/lands of the societies. Thus the assessee further claimed that such compensation represents the capital receipt not chargeable to tax.
3.2. The assessee in support of its contention also filed the following documentary evidence:
“1) Copies of Development Agreements entered into with aforesaid societies/Mandli are attached herewith as per Exhibit –I (Page No.1 to 181).
i) Copies of Termination Agreements entered into with aforesaid societies/Mandli are attached herewith as per Exhibit –II (Page No.182 to 229).
ii) Copies of Sale Deeds entered into by the aforesaid societies/Mandli are attached herewith as per Exhibit –II-A (Page No.230 to 689).
iii) Copy of said Ledger Account of Compensation Damages Received from aforesaid societies/Mandli are attached herewith as per Exhibit –III (Page No.690).
iv) Copies of said Ledger Accounts aforesaid societies/Mandli are attached herewith as per Exhibit – IV (Page No.691 to 699).”
3.3. The assessee further submitted that the compensation received by it on account of the relinquishment of right cannot be treated as a capital asset within the meaning of the provisions of section 2(14) read with section 45 of the Act. Once, the agreement was terminated by the society the only right available to the assessee was to file sue in the court of law for the breach of the contract. Such right cannot be termed as capital assets. Therefore, the compensation received by the assessee in lieu of filing sue in the court of law against the society for termination of the agreement, represents the capital receipt not chargeable to tax.
4. The learned CIT (A) on the details filed by the assessee called for the remand report from the AO vide letter dated 7th February 2017. The AO accordingly filed the remand report vide letter dated 24th April 2017. The AO in the remand report submitted that the case of the assessee does not fall within the circumstances specified under Rule 46A for admitting the additional evidences, therefore the AO objected on the admission of the additional evidences filed by the assessee before the learned CIT-A.
4.1. The AO without prejudice to the above also doubted on the termination of the agreement with the societies and observed certain defects as detailed under:
i. All the development agreements were made at the fag end of March 2007.
ii. All the development agreements were unregistered.
iii. All the development agreements were made in the same fonts which were notarized by the common notary public.
iv. Similarly all the termination agreements were made at the fag end of March 2011.
v. All the termination agreements were unregistered.
vi. All the termination agreements were made in the same fonts which were notarized by the common notary public.
4.2. The AO in the remand report further observed that the termination of the development agreement with all the parties/societies does not appear to be true. It is because the story of terminating the agreement with 8 parties cannot be considered reasonable/possible in the common business parlance. Furthermore, the character of the compensation amount received on account of the termination agreement is of the business receipt. Therefore the same should be taxable as the business income of the assessee.
4.3. The AO also observed that the assessee has made certain payment to the societies before and after entering into development agreement as evident from remand report reproduced at page 19 & 20 of the learned CIT (A) order.
4.4. The assessee in the rebuttal submitted that the observations made by the AO during the remand proceedings are general and no adverse inference can be drawn against the assessee. As such all the transactions between the assessee and the societies are supported based on the agreement which were duly complied by both the parties.
4.5. The assessee further submitted that the right acquired by it in pursuance to the agreement with the society was to file sue for the specific performance of the agreement which cannot be treated at par with the capital assets.
4.6. The assessee also claimed that there was no compensation received by it in the assessment year 2007-08 as alleged by the AO therefore the question of offering such compensation to the income does not arise. As such the receipt in the assessment year 2007-08 was representing the interest income which was offered to tax but the same cannot be compared with the compensation received by the assessee in the year under consideration.
4.7. The assessee also submitted that the Hon’ble ITAT Ahmedabad “A” Bench in the own case of the assessee involving identical facts and circumstances has decided the issue in favour of the assessee vide ITA No. 212/AHD/2014 order dated 29 August 2017 pertaining to the assessment year 2009-10.
4.8. However, the learned CIT(A) observed that the facts of the case for the assessment year 2009-10 are different with the facts of the case for the year under consideration. Accordingly the learned CIT (A) pointed out such differences in the facts as detailed under:
i. During the A.Y. 2009-10 all the activities/ transactions such as signing of the development agreement, termination of the agreement and sale of the land to the others persons happened in same financial year i.e. 2008-09 corresponding to A.Y. 200910 whereas in the year under consideration the signing of the development agreement was done in the assessment year 2007-08, termination of the agreement was done in the assessment year 2011-12 and the compensation received by the assessee was in the assessment year 2012-13 i.e. the year under consideration.
ii. During the assessment year 2009-10, there was no payment made by assessee to the societies whereas for the year under consideration the assessee has made the payment to the societies as detailed under:
