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:
| Facts of the case being relied (supra) | Facts of the case of the appellant |
|---|---|
| (i) The assessee company dealing in manufacture of cement. |
(i) The appellant is trading in shares & : securities. |
| (ii) It entered into an agreement with one M/s. WI For supplying machinery its business. | (ii) It entered into an agreement with “M/s. JRPL for acquiring land being developed by the latter, for its office premises. |
| (iii) The principle agreement contained of time limit for delivery. |
(iii) The principle agreement contained specific clause that. JRPL shall execute all requisite deeds within 7 days of MOU. |
| (iv) The supplier having failed to deliver the machinery within the stipulated time, the company received Rs.8,50,000/- as liquidated damages. | (iv) (iv) The vendor failed to handover documents/possession of the subject property, the appellant received Rs. 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 capita l 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 compensation paid amounted to sterilization of the capital asset of the assessee, as the vendor failed to complete registration formalities as stipulated in the agreement and clause (iv) of MOU thereof came into play. The aforesaid amount received by the appellate towards compensation for sterilization of the profit earning source, not in the ordinary course of its business, has been a capital receipt not liable to tax in the hands of the company. |
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 1st 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 23rd 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. 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 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 15th 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 09th 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 26th 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 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 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 16th 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 23rd 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 3rd 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:
