Compensation for sterilization of profit earning source cannot be taxed

Khevana Securities and Finstock Ltd. Vs ITO (ITAT Ahmedabad)

Learned AR at the time of hearing has strongly emphasized that the impugned amount represents the capital receipt on account of breach of the contract and therefore the same cannot be brought to tax. In support of his argument, the learned AR vehemently relied on the order of Hon’ble Supreme Court in the case of CIT vs. Saurastra Cement Ltd reported in 325 ITR 422. As per the learned AR the facts of the case of the assessee are similar/identical to the facts of the case of CIT vs. Saurastra Cement Ltd (supra) before the Hon’ble Supreme Court. The learned AR in this connection has also made a comparison chart which is reproduced as under:

From the above, it appears that the assessee has received the compensation which is not chargeable to tax in the light of the above principles laid down by the Hon’ble Supreme Court in the above stated case. Accordingly we hold that, the amount of compensation received by the assessee is not chargeable to tax in the hands of the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The captioned appeal hasbeen filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax(Appeals)-1, Vadodara, dated 29/02/2016arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2011-12.

2. The 1^st interconnected issue raised by the assessee in ground Nos. 1 to 3 is that the learned CIT (A) erred in confirming the order of the AO by sustaining the addition of Rs. 40 crores as short term capital gain.

3. The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of trading of shares/ securities.

3.1 M/s Jesani Realty Pvt Ltd (JRPL) and M/s Emgeen Holding Pvt Ltd entered into an agreement dated 28-10-2005 for development of the residential and commercial project jointly in Goregaon Mumbai, Maharashtra. The share/entitlement of JRPL in this development project was 36.5% in commercial premises and 34.5% in residential premises.

3.2 The assessee in the year under consideration has entered into MOU with JRPL dated 23^rd August 2010. As per the MOU, the assessee acquired 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.

3.3However, on a later date i.e. 16^th 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 RS. 40 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 15^th January 2011.

3.4 The assessee got Rs. 2.5 crores only during the year through cheque. In the subsequent year the assessee got another cheque of Rs. 2 crores. For the balance amount of Rs. 35.50 crores, the assessee was allotted 3.55 lakh shares of JRPL @ Rs. 1000 for each share vide allotment dated 09^th September 2011.

3.5 However, the assessee in the year under consideration has shown total receipt of Rs. 4,83,05,000/- against such relinquishment deed which was treated as capital receipt by crediting reserve and surplus in the balance sheet.

3.6 It was submitted by the assessee that the shares acquired by it of M/s JRPL were sold dated 26^th September 2011 @ Rs. 11 each share. Thus, the amount was realized for E 39,05,000/- only against the sale of shares. Accordingly, the assessee claimed that it received an amount of RS. 4.89 crores only being 4.5 crores through banking channel and on the sale of share of Rs. E 39,05,000/- only. However due to some error it discloses the amount of Rs. 4,83,05,000/- in its books of account.Nevertheless, the assessee treated such liquidated damages in its books of accounts as capital receipt not chargeable to tax. It was submitted by the assessee that its main business as recorded in the MOA is dealing in shares and securities and therefore such liquidated damages does not represent business receipts.

3.7 In addition to the above, the assessee further submitted that the property where the commercial/residential project was under construction, was in the possession of M/s EHPL and the same was not party to the MOU. As such, the assessee in pursuance to the MOU with JRPL neither got the possession of the property nor incurred any cost.

3.8 However the AO being dissatisfied with the submission of the assessee observed certain facts as detailed under:

i. As per clause No. 17 of the other object of the MOA, the assessee was clearly authorized to carry on the business of construction and/or dealing in immovable property. Likewise, in Para 7 of the object clause of MOA, the assessee was authorized to undertake any business of sharing or pooling of profit. Thus the AO was of the view that the agreement entered by the assessee with JRPL was within the purview of its object clause.

ii. The assessee in pursuance to the MOU with M/s JRPL was to get its share in the commercial/residential project in saleable condition. Likewise, the assessee was authorized to dispose of such area of saleable condition in the manner as desired by it without the consent of other parties involved in the project.

iii. The assessee neither had substantial business activities from its share and securities trading nor sufficient number of employees who could acquire the residential area as the staff quarters. Likewise, there was no possibility of opening new business line or factory, show room in the commercial area. Thus, it cannot be said 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 16^th 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 that M/s JRPL has claimed an expense of Rs. 40 crores in its audited financial statements.

3.9 In view of the above, the AO held that the amount of compensation received for E 40 crores by the assessee represents the business transaction and therefore the same cannot be treated as capital receipt. Likewise, the income has accrued in the year under consideration as the relinquishment deed was signed dated 16^th December 2010 in the year under dispute corresponding to assessment year 2011-12. Thus, the AO made the addition of RS. 40 crores to the total income of the assessee.

4. Aggrieved assessee preferred an appeal to the learned CIT (A).

4.1 The assessee before the learned CIT (A) submitted that its main object as appearing in the memorandum of association since inception i.e. 31-3-1995 is dealing in shares and securities. The MOU dated 23^rd August 2010 with JRPL was entered for the purchase of the property with a view to expand its business activities in the state of Maharashtra. Thus, the impugned MOU was entered with the intention for acquiring the capital assets for its business. However, the deal on the subsequent date did not get strike, therefore JRPL agreed to pay compensation which is in the nature of liquidated damages. As per the assessee, the liquidated damages received by it represents from its non-recurring activity.

4.2 Furthermore, the assessee also submitted that the property in question was under the possession of 3^rd party namely EHPL with whom there was no tripartite agreement entered by it. Therefore, there was no valuable right accrued to the assessee in the impugned property by way of the MOU entered with JRPL.

4.3 Accordingly, the assessee treated the impugned receipt being capital in nature and not chargeable to tax.

4.4 The assessee further submitted that it is following mercantile system of accounting with respect to its main activities being dealing in shares and securities. However, it is maintaining cash system of accounting with respect to its non-recurring/ exceptional and extra ordinary items. Therefore, the capital reserve was credited by the amount of RS. 4.83 crores based on actual receipt. The breakup of such receipt stands as under:

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 business activity in the last 3 assessment years. The expenses claimed by it in the last 3 assessment years were of negligible value. Therefore, it cannot be believed that the assessee was acquiring the property in question for the purpose of extension of its business/residence for executives. Furthermore, the director’s report and auditors report do not speak for any business expansion of the assessee. Likewise, the assessee did not have sufficient fund for making the investment in the impugned property. As such, it was possible for the assessee to make such a huge investment only after borrowing the fund from the financial institution. Thus in the backdrop of all these facts, it can only be concluded that the impugned MOU for the purchase of the property represents the stock in trade. Accordingly, the liquidation damages on account of cancellation of the agreement represents the business receipt.

iii. The party namely JRPL has shown the impugned amount in the profit and loss account by claiming the deduction thereof. Thus the MOU is not an agreement for assigning the profit in the project rather it was towards acquiring the stock in trade.

iv. The assessee being body corporate has to follow mercantile system of accounting. Furthermore, the version of the assessee is also not correct that it is following cash system of accounting. It is because the assessee has received only Rs. 2.50 crores in the under consideration for alleged liquidated damages whereas it has accounted for the sum of RS. 4.8305 crores on mercantile system of accounting. Accordingly, contention of the assessee is not of any significance.

v. The assessee has sold the shares in the month of September 2011 at E11 per share aggregating to E 39,05,000/- only. The value of these shares were acquired by the assessee at E35.50 lakhs value at E10 per share +990 premium per share. However, the audited balance sheet was signed by the directors dated 25^th August 2011. Thus a question arises how the assessee was able to value shares in the month of August 2011 by incorporating the sale value of the shares at E 39,05,000/- which was not yet allotted to it. i.e. allotted and sold in the month of September 2011. Accordingly, the ld. CIT-A concluded that the assessee has adopted the colourable device to avoid the payment of tax. The assessee on one hand is treating the alleged liquidated damages as capital receipt only for RS. 4.89 crores whereas JRPL has claimed the deduction for RS. 40 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 23^rd 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 view of the above, the learned CIT (A) rejected the contention of the assessee and confirmed the order of the AO.

5. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

6. The ld. AR before us filed a paper book running from pages 1 to 525 and contended that the impugned amount received by the assessee represents the capital receipt. Therefore, the same cannot be subject to tax in the hands of the assessee. As per the ld. AR the amount of compensation was received for waving off the right to sue upon the vendor.

7. On the other hand, the learned DR before us vehemently supported the stand of the authorities below by reiterating the findings contained in the respective orders which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity.

8. We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case in dispute are as under:

1. M/s Jasani Reality Pvt. Ltd and M/s Emgeen Holding Pvt. Ltd entered into agreement dated 28-10-2005 to develop a property located in Goregaon, Mumbai

2. In the year 2010 M/s Jasani Reality Pvt. Ltd decided to sold its part of share of property to the assessee. Accordingly there was entered an agreement dated 23-08-2010 with assessee company for Rs. 63 crore and assessee company made down payment of Rs. 6,30,000/-

3. Subsequently the assessee and M/s Jasani Reality entered into relinquishment agreement dated 16-12-2010. It was decided that the M/s Jasani Reality will pay Rs. 40 crore to assessee and also return the down payment to assessee in lieu of relinquishment of right in property.

4. As per relinquishment agreement all payment dues were to be paid before 15-01-2011

5. The assessee got payment in following manner

(a) Cheque of Rs, 2.5 crdurung the year i.e. F.Y. 2010-11

(b) Cheque of Rs. 2 crore in F.Y. 2011-12

(c) 3,55,000 share of M/s Jasani Reality @ 1000 having Face value of Rs. 10 and premium of Rs. 990 on 09-09-2011

6. Subsequently the assessee sold share of M/s Jasani to M/s Corora Investment Pvt. Ltd. @ Rs. 11 i.e for Rs. 39,05,000/-.

7. Accordingly the assessee claimed that actual benefit derived by it in the transaction is of Rs. 4,89,05,000 (2.5 cr + 2 cr + 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 RS. 40 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 RS. 4.89 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 Rs. 6.30 lakhs only at the time of agreement. This agreement has nowhere been doubted by the authorities below as far as genuineness is concerned. However the agreement on a later date got cancelled vide agreement dated 16-12-2010 and consequently, the assessee received compensation.

8.3 When agreements are entered into for purchase of property, rights are created in favour of the parties to the agreement. Failure to honour the agreement can lead to breach of contract and claims for damages or specific performance.

8.4 Quite often, such breach of contract ultimately results in a compromise settlement of the dispute and monies are paid as quits. Now the question arises whether the receipt of such compensation for breach result in tax consequences? The courts are divided on the question of bringing in the compensation money to tax.

8.5 In the latest case on the subject, the Madhya Pradesh High Court considered a contract entered into by Lakshmi Devi Ratani and Indian Pharmaceuticals. The lady agreed to sell immovable property to the firm for Rs 1,05,000 as per agreement dated September 25, 1970. The agreement was not honoured. The firm filed a suit for specific performance of the contract. The matter was compromised in 1986. The owner of the property agreed to pay to the prospective buyer a sum of Rs 14,85,000 as damages. For taxing the sum of Rs. 14,85,000.00, the matter travelled up to the Hon’ble Madhya Pradesh High Court. The court held that the receipt of Rs 14,85,000 was eligible to capital gains tax as it involved transfer of property within the meaning of Section 2(47) of the Act. It pointed out that the expression “property of any kind” in Section 2(14) is of wide import. Giving up of the right to claim specific performances to get conveyance of immovable property in lieu of monetary compensation results in extinguishment of rights in property thereby attracting the rigor of Section 2(14) read with Section 2(47). This is a clear case of relinquishment of a right in the property resulting in transfer.

8.6 On the contrary, In CIT v. AbbasbhoyA.Dehgamwalla [1992] 195 ITR 28/59 Taxman 498 (Bom) it was held that the definition of capital asset in section 2(14) includes ‘property of any kind’. Similarly section 6 of the Transfer of Property Act, 1882 uses the same expression “property of any kind” but excludes “a mere right to sue” from its coverage. Thus the right to sue when foregone for a consideration, it is not chargeable 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 Rs. 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 capital gains tax. The tribunal held that the amount received for giving up the ‘right to sue’ is a capital receipt and it is not chargeable to tax under section 45. Further it observed that the consideration received would not also fall under the provisions of section 28(va) of the Act.

8.8 Thus, the difference has been noted between the “right to sue” and “right to seek conveyance of property” from the taxation point of view. Thus, the question arises whether the compensation received by the assessee was on account of giving up the right to sue against the party. On this aspect, the order of the authorities below silent. However, we find that the assessee before the learned CIT (A) has made the contention which was not disputed by the learned CIT (A), the same contention is reproduced as under:

After the signing the memorandum of understanding JRPL was trying to avoid to complete the formalities for registration of documents with registrar office, handing over the originaldeeds etc. The Company was in constant touch with JRPL to complete the formalities so we can release balance-payment of Rs 62.937 cr. Since party was not co operating at all and the documentation was also not up to the mark for the above reasons. The JRPL refused to sign any further document and correspondence with us. our Company informed to the JRPL that we will file the case against the Company for not honouring the terms of the Memorandum of Understanding. After numbers of meetings &persuasion by assesse for 4 months finally JRPL came around and assured the payment of Rs 4.89 cr fay way of liquidated Damages for not filing any case against them in any court of law. JRPL after signing of MOU has not fulfilled any terms of MOU as per out information the land on which including Nala Land got approval for construction & FSI of one floor has also increased & one gid builders has agreed to purchase entire right of JRPL at a very good price.

8.9 It is a fact on records that there was no case filed by the assessee against the other party in any court of law. However, from the contention of the assessee, it seems that the compensation was paid by the other party to avoid the legal consequences in the event of any sue to be filed by the assessee. To our understanding, to prove the contention that the assessee is not supposed to file sue in reality to justify its 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. The other object clause of the MOA of the assessee company allow carry out the business in the real estate. Thus it was the object of the assessee to carry the business of real estate by entering into agreement where assessee was to receive commercial as well residential building in saleable condition.

b. Clause 7 of the main clause of the MOA allow the assessee to be engaged in the business activity of entering into an arrangement for sharing or pooling profit. Thus the by virtue of the agreement the assessee was able to pool the profit from the project which is one of its main object.

c. Assessee was not having significant business from the activity of trading of share and securities and also not having staff. Thus the claim of the assessee to expand the business of trading of share and securities and by opening new office in Mumbai is not tenable.

8.11 Thus the 1^st question arises whether the assessee was acquiring the impugned project as fixed asset be used for business activities or as the stock in trade. To resolve this controversy, there is no direct evidence available on record. Indeed it is the decision of the assessee to acquire the project as asset or stock in trade ignoring the object clause appearing in the memorandum of association. It is 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. Likewise, 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. 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 to bring out the clarity between the parties to the agreement in order to avoid any ambiguity on a later date. Thus, the word saleable condition cannot be a deciding factor that the assessee wanted to acquire the project for its business activities. Admittedly, it appears to us that the scale of the business of the assessee was not significant enough to acquire such a huge property for its business activities and similarly there was not sufficient funds available with it which is discernible from the financial statement of the assessee. But, again we are not in agreement with the decision of the authorities below on this aspect. The assessee might have some financier or exploring for some joint-venture. In fact, it was the call of the assessee how to arrange the fund and use the impugned project for its business activities. The revenue cannot enter into the business strategies of the assessee to draw any inference based thereon.

8.13 Before parting, we also note that the learned AR at the time of hearing has strongly emphasized that the impugned amount represents the capital receipt on account of breach of the contract and therefore the same cannot be brought to tax. In support of his argument, the learned AR vehemently relied on the order of Hon’ble Supreme Court in the case of CIT vs. Saurastra Cement Ltd reported in 325 ITR 422. As per the learned AR the facts of the case of the assessee are similar/identical to the facts of the case of CIT vs. Saurastra Cement Ltd (supra) before the Hon’ble Supreme Court. The learned AR in this connection has also made a comparison chart which is reproduced as under:

8.14 From the above, it appears that the assessee has received the compensation which is not chargeable to tax in the light of the above principles laid down by the Hon’ble Supreme Court in the above stated case. Accordingly we hold that, the amount of compensation received by the assessee is not chargeable to tax in the hands of the assessee.

8.15 The 2^nd question arises whether the amount of Rs. 40 crores or 4.89 crores should be taken into consideration while determining the taxable income of the assessee. Admittedly, the cancellation agreement was made by the assessee for a consideration of Rs. 40 crores. It is the undisputed fact. However, at the same time we cannot ignore the fact that what has actually been received by the assessee. As per the record available before us the assessee has received a sum of 4.89 crore only. There was no allegation by the revenue that the assessee has received over and above the amount of rupees 4.89 crores either in the form of cash or in any other form. Thus we are of the view that the only real income should be brought to tax after ignoring the documents available on record. Thus we are of the view that the sum of Rs. 4.890 crores should only be subject matter of tax, if any liability is there.

8.16 The next controversy arises whether the assessee has adopted colourable device by entering into the transaction with M/s JRPL as discussed above. In this connection we note certain facts which are necessary for deciding the allegation purported by the revenue. The assessee entered into agreement to purchase of commercial as well residential building dated 23^rd August 2010 against the consideration of Rs. 63 crores only. Within 4 months of purchased agreement, a cancellation deed vide deed of relinquishment dated 16^th December 2010 was entered. By virtue of the relinquishment deed, the assessee was to receive compensation of Rs. 40 crores but only part of the compensation of Rs. 2.5 crores was received in the year under consideration through cheque dated 30^th March 2011. The balances amount was received in the subsequent year in the form of cheque of Rs. 2 crores dated 9^th September 2011 and allotment of 3.55 lakh shares for Rs. 35.5 crore dated 9^th September 2011. The allotted share were finally sold for Rs. 39,05,000/- only as on 26^th September 2011. However in the books of account prepared for year ending 31^st March 2011 on the basis of mercantile system which was approved and singed on 25^th August 2011, the assessee recorded an amount of Rs. 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 Rs. 4.83 crores whereas as per deed it was to receive Rs. 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 submitted time and again to have received a sum of Rs. 4.89 crores as mutually agreed between it and M/s JRPL. Thus the question arises that once the amount was finalised at RS. 4.89 crores only, then why the assessee agreed in the cancellation agreement for RS. 40 crores. It is also a fact on records that M/s JRPL has claimed the deduction for RS. 40 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 RS. 4.89 crores only as conduit.

8.18 However, 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 made subject to tax for the reason that the beneficiary of the colourable device is M/s JRPL. The Revenue is at liberty to proceed against M/s JRPL in the manner as provided under the provisions of law. Thus the ground of appeal of the assessee is allowed.

9. The 2^nd issue raised by the assessee is that is that the learned CIT (A) erred in not allowing the brought forward losses claimed by the assessee.

10. At the outset the learned AR before us requested to restore the issue to the file of the AO with the direction to allow the brought forward losses claimed by the assessee as per the provisions of law. The learned AR also assured to file the necessary documents in support of his contentions.

11. On the other hand, the learned DR has not raised any objection if the matter is set aside to the file of the AO for fresh adjudication as per the provisions of law.

12. Heard the rival contentions of both the parties and perused the materials available on record. The assessee is very much entitled to claim brought forward losses subject to the conditions specified under the provisions of law. Accordingly in the interest of justice and fair play, we are restoring this issue to the file of the AO for fresh adjudication as per the provisions of law.

12.1 The assessee is also directed to cooperate and furnish the necessary documents before the AO during the proceedings. The assessee also directed not to seek any adjournment without any justifiable cause. Hence the ground of appeal of the assessee is allowed for the statistical purposes.

13. In the result, the appeal filed by the assessee is partly allowed for the statistical purposes.

Order pronounced in the Court on 10/01/2022 at Ahmedabad.