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Case Law Details

Case Name : Raghav Maheshchandra Trivedi Vs CIT (ITAT Ahmedabad)
Appeal Number : ITA No. 119/Ahd/2021
Date of Judgement/Order : 24/02/2023
Related Assessment Year : 2015-16
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Raghav Maheshchandra Trivedi Vs CIT (ITAT Ahmedabad)

ITAT Ahmedabad held that compensation received from proposed building by way of allotment is extinguishment of right in relation to capital asset and hence provisions of section 45 of the Income Tax Act gets applicable.

Facts- On verification of the assessment order, PCIT found that the assesse received a compensation of Rs. 1,92,18,157/- from M/s. Adarsh Developers and Others on purchase of a villa at Bangalore. Since the developer failed to execute the contract and defaulted in completing the project thereby the assessee got this compensation through litigation at National Consumer Disputes Redressal Commission (NCDRC), New Delhi.

PCIT issued a show cause notice that the compensation received by the assessee is required to be assessed as “Income from Other Sources” rather than “Income from Capital Gains” as per Section 2(14) of the Act. The same was confirmed by PCIT. Being aggrieved, the present appeal is filed.

Conclusion- It is been held by the Co- ordinate Benches of the Tribunal that compensation received by the assessee from the proposed building by way of allotment is actually extinguishment of a right in relation to capital asset, in view of the provisions of section 2(47)(vi) of the Act. This clearly falls within the definition of transfer and hence provisions of section 45 is applicable. Therefore the Revision proceedings initiated by the Ld. CIT (IT &TP) is liable to be quashed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee as against the Revision order dated 30.03.2021 passed by the CIT (IT & TP), Ahmedabad under section 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2015-16.

2. The brief facts of the case is that the assessee is an individual and Non Resident. For the Assessment Year 2015-16, the assessee filed his Return of Income admitting total income of Rs. 37,66,640/- under “Income from House Property”, “Income from Capital Gain” and “Income from other sources”. The assessment was completed passing an assessment order dated 07.08.2017 admitting the returned income which resulting in a refund of Rs.32,95,970/- which is inclusive of interest of Rs. 4,29,915/- u/s. 244A of the Act.

2.1 On verification of the above assessment order, the Ld. PCIT found that the assesse received a compensation of Rs. 1,92,18,157/- from M/s. Adarsh Developers and Others on purchase of a villa at Bangalore. Since the developer failed to execute the contract and defaulted in completing the project thereby the assessee got this compensation through litigation at National Consumer Disputes Redressal Commission (NCDRC), New Delhi.

2.2 The Ld. PCIT issued a show cause notice that the compensation received by the assessee is required to be assessed as “Income from Other Sources” rather than “Income from Capital Gains” as per Section 2(14) of the Act. Since the assessee was not in a possession of capital asset, against the booking amount of a villa, the assessee got the compensation as there is no capital asset involved no question of invoking capital gains as per the provisions of section 45 of the Act. Therefore the assessment order passed by the Assessing Officer without making any enquiry is an erroneous order and prejudicial to the interest of Revenue and why the assessment order not be set aside and to do afresh.

2.3 The assessee replied as follows:

2.1 It has been submitted by the assessee that there is an Underlying asset allotted by “Adarsh Developers”. Adarsh Developers issued letter, letter of allotment on 05.08.2005 which was attached as Annexure-2 of the submission. This allotment letter indicates the allotment of Villa 208 at Palm Retreat, having plot area of 4250 sq.ft with built up area of 2230 sq.ft. at a total consideration of Rs.1,38,01,000/- subject to the approval of plans by the concerned authorities As per the arrangement the assessee has remitted Rs.76,13,444/-comprising as under:

A. Aug 02.2005 INR Rs. 2,00,000
B. Aug 22,2005 $70,000 Rs.30,38,084
C. Sep 06,2005 $22,000 Rs. 9,59,860
D. Nov 09,2005 $75,000 Rs.34,15,500

The qualification provision of Section 2(14) as capital asset is very much in existence in the current case of purchase of the intended asset.

2.2 The assessee having waited for the delivery and due possession of the said allotted property, by Adarsh Developers, who did not honor their commitment, took to legal redressal for the due possession/compensation of the underlying asset the property the subject matter of the discussion. The Assessee after taking necessary steps with other in similar problem in this scheme took to approaching the legal redressal. All the aggrieved parties approached the “National Consumer Disputes Redressal Commission, New Delhi” in redressing the Failed Contract by Adarsh Developers.

2.3 National Consumer Disputes Redressal Commission, New Delhi pronounced its judgment on 28.11.2014 awarding the Assessee a compensation of Rs.1,92,18,157 (TDS Rs 35,85,856) including the 2.1 above the principal Rs. 76,13,444/-

2.4 The whole compensation is the resultant of failure of the underlying contract the Property under dispute which was handed over to the Assessee, failure of the contract by Adarsh Developers. Further the Assessee has also incurred huge loss due to the Dollar to Rupee depreciation and meeting the Legal expenses of about Rs.1,53,000/- not claimed as a set off from the said compensation.

2.5 Based on the above facts the Assessee is entitled for full Exemption of the Compensation Rs.1,16,04,713 as this is in the Nature of Capital Receipt and not liable for Tax. However taking cognizance of the underlying asset the Villa, the Assessee took all precautions in declaring the Income under Capital gains an per the provisions of the Income Tax Act, 1961. In so doing the eligible Indexation were applied in arriving at the Long Term Capital Gain through the income received is exempt as in nature of Capital receipt.

2.6 Further the Assessee relies on the ITAT case “Chheda Housing Development Corporation Vs ACIT (ITAT Mumbai) (29­05-2019)”. The decision in this “Where amount received by the Assessee in excess of Advance was on account of compensation for extinction of its right to sue the owner, the rceipt was Capital receipt not chargeable to tax”.

2.7 The Assessee also relies on the decision of the ITAT Ahmedabad in “Bhojison Infrastructure Pvt. Ltd. Vs ITO Ward-1(1)(2), Ahmedabad (17.09.2018)”, which has delivered judgment on the Compensation as in the Nature of Capital receipt, no liable for tax.

2.8 In the Assessee case it was a clear case of Cheating by the Developers and had failed to honour the commitment to the said property and consequently the Assessee aggrieved had no other option other than to take to legal redressal and in the ultimate course. The Judgment was pronounced by the Tribunal granting some relief to the Assessee. The Assessee did loose considerably in the process, but adhered to the principal of declaring the considering the compensation as Capital gain in his declaration, which once again to be specific “is in the nature of Capital receipt and not liable to Tax”.

2.9 The Assessee alternatively desired to consider in this response an application under section 264, to your kind self, that the Assessment in treating as Capital gain be Altered to “the Consideration as Compensation in whole” and want it to be treated as Capital Receipt not liable to tax and pleads to amend the Assessment by giving this relief, and appropriately, grant him additional refund as there would no tax liability at all, if the all the consideration are considered as “Capital receipt”, as stated in the pronouncement in above 2.6 and 27.

2.4 The Ld. PCIT held that the income from Capital Gain can only be arisen if there is transfer of capital asset in the case of the assessee, there is neither capital asset in assessee’s hand as far as booking of the Villa is concerned nor transferred of the said asset. Therefore the provisions of Section 45 of the Act will not be applicable in assessee’s case. The A.O. has allowed benefit of indexation to the assessee without discussion findings in the assessment order as well as without making any verification of the claim by the assessee. The Assessing Officer failed to verify high ratio of refund by TDS u/s. 195. Thus the order passed by the Assessing Officer is an erroneous order and prejudicial to the interest of Revenue thereby the same is set aside and the Assessing Officer is directed to make fresh assessment keeping in mind, the issue discussed in the 263 order.

3. Aggrieved against the same, the assessee is in appeal before us raising the following Grounds of Appeal:

1. The learned Pr. CIT erred in passing the revision under us 263 of the Act holding the assessment order dated 7/08/2017 is erroneous as well prejudicial to the interest of revenue on the alleged ground that the amount of Rs.1,92,18,157/-received from the builder pursuant to the order passed by the National Consumer Disputes Redressal Commission, New Delhi (hereinafter referred as NCDRC) dated 28/11/2014, was in nature of compensation/damages for breach of contract with builder liable to be assessed as Income from other sources and not under the head Capital Gains as claimed by assessee, without appreciating that assessee had acquired a valuable right in an immovable property pursuant to the allotment letter dated 5/8/2005 and subsequent payment made to the builder and this fact has been upheld by NCDRC, and therefore the same was rightly offered to tax under the head Capital Gains; therefore the Pr. CIT under revisionary jurisdiction u/s, 263 ought not to have interfered with the assessment order dated 7/8/2017.

2. The learned Pr. CIT failed to appreciate that, assessee had acquired a valuable right in the property pursuant to the letter of allotment and subsequent payment, therefore to hold that assessee didn’t had any rights in the underlying asset is incorrect and contrary to order of the National Consumer Disputes Redressal Commission, therefore to treat the assessment order as erroneous and prejudicial to the interest of revenue on the alleged grounds of non discussion of issue, failed to conduct proper inquiries, investigation and examination is not justified, therefore the order issued u/s. 263 of the Act is bad in law.

3. Without Prejudice to above learned Pr.CIT erred in concluding the issue and giving a final verdict on the same without appreciating the order of National Consumer Disputes Redressal Commission, New Delhi and thereafter also holding the explanation of assessee wrong and directing the Assessing officer to complete the assessment on basis of his discussion in the revision order, thereby denying the assessee a fair, reasonable and adequate opportunity to present its case before Assessing officer.

4. Without prejudice the learned Pr.CIT failed to address the issue raised by the assessee that compensation received was in nature of capital receipt not liable to be taxed. Further, learned Pr.CIT failed to appreciate that where two views are possible revision u/s. 263 of the Act is not justified.

3.1 The Ld. Counsel submitted that during the original assessment proceedings pursuant to 142(1) notice dated 18.04.2017, the assessee filed the details to the Assessing Officer vide letter dated 01.06.2017 namely Return of Income for the Assessment Year 2015-16 assessee’s status as Non-Resident as per the Performa along with the copy of the Passport, copies of the NRO Bank and NRE Bank Account with proper explanation and other properties details held by the assessee which are placed in page Nos. 31 to 44 of the Paper Book. After considering the details, the Ld. Assessing officer passed the assessment order accepting the claim of the assessee. Thus the order passed by the Assessing Officer is neither an erroneous order nor prejudicial to the interest of Revenue. The assessee also placed before us the reason for the present reopening is Revenue Audit Objection by the Department. In fact the Ld. Assessing Officer vide his reply dated 01.07.2019 replied to the Revenue Audit Party as follows:

3.2.3. According to the aforementioned definition of Section 2(14), capital asset means a property of any kind held by an assessee whether or not connected with the business or profession and it excludes certain items which while considering the facts of the present case are not relevant. Therefore, it has to be seen that whether by entering into an agreement vide which the assessee was allotted a particular villa by allotment letter whether the assessee has held any asset or not? By entering into an agreement to allot a villa, the assessee has identified a particular property which he is intended to buy from the builder and the builder is also bound to provide the applicant with that property by accepting certain advance amount and making agreement for balance payment as scheduled in the agreement. Thus, going into the provisions, it is not necessary that to constitute a capital asset, the assessee must be the owner by way of a conveyance deed in respect of that asset for the purpose of computing capital gain. The assessee had acquired a right to get a particular villa from the builder and that right of the assessee itself is a capital asset. The word ‘held’ used in Section 2(14) as well as Explanation to Section 48 clearly depicts that assessee must have some right in the capital asset which is subject to transfer. By making the payment to the builder, the assessee will be holding capital asset and thus, the compensation received by virtue of the order of the NCDRC is nothing but a capital receipt.

3.3 The similar issue has been decided in the following judgment holding it a Long Term Capital Asset. The same is given hereunder:

(I) ACIT VS Ashwin S. Bhalekar (ITAT Mumbai) Appeal Number: ITA No. 6822/Mum/2016 Date of Judgment/Order: 21/05/2019 AY 2012-13:

“………………. Claim of the assessee that extinguishment of rights in the

capital asset is a transfer of capital asset and capital gains and consequent allowance of claim of deduction under section 54 of the Act. The facts clearly show that the extinguishment of assessee’s right in Flat No. 1703, 1704 and 1705 proposed building known as “Shubh Residency” allotted vide allotment letter dated 20/06/2008 is actually extinguishment of any right in relation to capital asset in view of the provisions of section 47 of the Act and falls in the definition of transfer and hence, result in capital gain chargeable under section 45 of the Act. It is a fact that assessee held this right for more than 3 years for a reason that this flats were subject to allotment vide allotment letter dated 20.06.2008 and assessee received compensation of rightly deleted addition made by the AO in regard to disallowance of the claim of the assessee disallowing deduction of long term capital gain under section 54 of the Act on the premise that the compensation received in income from other sources. We noted that the CIT(A) has rightly allowed the claim of the assessee and we confirm the same.”

4.0 Thus in view of the above, the objection of the revenue audit is not acceptable. The reliance is placed on the following:

(a) CBDT Circular No. 471 dated 15.10.1986

(b) CIT vs Ram Gopal [2015] 55 in 536 (Delhi)

4.1 The revenue audit may thus, please be requested to withdraw the same.”

3.2 However overlooking the above reply of the A.O. and decision of the Mumbai Tribunal in the case of Ashwin S. Bhalekar, Ld. CIT initiated the present Revision proceedings.

3.3 The Ld. Counsel further relied on the judgment of the Hon’ble Supreme Court in the case of PCIT Vs. Shreeji Prints (P.) Ltd. (282 taxmann.com 464) wherein it is held that when Assessing Officer had made inquiries in detail and accepted genuineness of the same, such view of Assessing Officer being a plausible view, the same could not be considered erroneous or prejudicial to the interest of Revenue. Thus the Hon’ble Supreme Court dismissed the SLP filed by the Revenue. The Ld. A.R. further relied on Co-ordinate Bench judgment of the Tribunal in Smt. Abha Bansal vs. PCIT, (Central), Gurgaon [2021] 132 taxmann.com 231 on identical issue.

3.4 The Ld. Counsel further relied upon Bombay High Court judgment in ITA No. 707 of 2015 dated 02.08.2017 in the case of CIT vs. Vinod Kumar Goel HUF as follows:

7. It is a settled position of law that the Commissioner of Income Tax can exercise his power under Section 263 of the Act only on satisfaction of twin conditions i.e. the order being erroneous and also prejudicial to the interest of the Revenue. In the present facts, the view taken by the Assessing Officer on detailed examination of the issues, as is evident from the questionnaire posed to the respondent assessee and the response thereto during the assessment proceedings, on facts is a possible view. The view taken by the Assessing Officer does not became erroneous merely because the view of the Commissioner of Income Tax is different from the view taken by the Assessing Officer. This Court in Commissioner of Income Tax Vs. Gabriel India Ltd. 203 ITR 108 while discussing the meaning of the word “erroneous” for the purposes of exercising powers under Section 263 of the Act inter alia observed as under:-

“From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the fact and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of sou motu revision because the first requirement viz, that the order is erroneous, is absent……………………

8. In this case, moreover it is evident from the order dated 28″ August, 2011 of the Commissioner of Income Tax that enquiry into both the issues were conducted by the Assessing Officer before passing the assessment order dated 28 October, 2009. Thus, it is not a case of no enquiry which could make the order erroneous. An inadequate enquiry would not make the assessment order vulnerable as being erroneous. The view taken by the Assessing Officer is a possible view and nothing has been shown to us which would even remotely suggest that the conclusion reached by the Assessing Officer was perverse and/or arbitrary on the basis of the evidence available before him.

9. In the above view, the impugned order of the Tribunal does not give rise to any substantial question of law. Thus, not entertained.

3.5. Thus the Ld. A.R. pleaded that the invocation of Revision proceedings u/s. 263 is bad in law and liable to be quashed.

4. Per contra, the Ld. D.R. appearing for the Revenue supported the order of the Ld. PCIT and submitted the Assessing Officer has not made proper enquiries on the claim of the assessee and simply granted the relief which is no doubt an erroneous order and prejudicial to the interest of Revenue, since huge refund is granted to the assessee. Therefore the Revision proceedings is required to be upheld.

5. We have given our thoughtful consideration and perused the materials available on record. During the assessment proceedings, the ld. AO. vide his notice u/s. 142(1) called for various details which were submitted by the assessee. The A.O. passed the assessment order after taking into consideration the submissions of the assessee and by verifying the documentary evidences produced before him.

5.1. Further it is seen from record as against the Revenue Audit Objection raised by the Department, the Assessing Officer himself replied to the Revenue Audit Objection by relying upon decision of the Mumbai Tribunal in Ashwin S. Bhalekar case on identical facts namely compensation received by the assessee was treated as Long Term Capital Gain. Thus the Ld. A.O. requested the Audit Party to withdraw/drop the Revenue Audit Objection.

5.2. Further the Co-ordinate Bench of the Tribunal in Smt. Abha Bansal (cited supra) held as follows:

“…Section 45. read with sections, 2(47) and 263, of the Income-tax Act, 1961 Capital gains Chargeable as (Revision) – Assessment year 2017-18 Assessee had entered into a Builder-Buyer Agreement (BBA) for allotment of a villa – On builder’s failure to given possession of villa to assessee within stipulated time, BBA was cancelled – Assessee received compensation for same and showed it as capital receipt chargeable to tax as capital gain under section 45-Assessing Officer accepted same -Commissioner invoked revisionary powers under section 263 on ground that such compensation received by assessee was revenue in nature and Assessing Officer had passed impugned assessment order without making sufficient enquiry-It was noted that copies of show cause notice, order-sheets, replies submitted by assessee along with documentary evidences during original proceedings showed that Assessing Officer had examined issue in detail after conducting detailed enquiry- Whether since entire material on record clearly showed that Assessing Officer had applied his mind before passing impugned assessment order and accepting claim of assessee, even if details of enquiry were not mentioned in assessment order, same would not make assessment order cryptic or liable for revision under section 263-Held, yes [Para 22.2] [in favour of assessee]”

6. The Co-ordinate Bench judgment in the case of Indu Fine Lands (P.) Ltd. vs. CIT (Central), Hyderabad [2014] 45 com 307 where it has been held as follows:

Section 28(1), read with sections 263, of the Income-tax Act, 1961-Business income-Chargeable as (Compensation) Assessment year 2007-08- Assessee company, engaged in real estate business, had advanced a sum of Rs.20 crores to a company (LECC) with an intention to buy piece of land-Further, it entered into development agreement with its group company However, deal could not get materialized and group company paid a sum of Rs.20 crores to assessee as compensation-Assessing Officer held that amount paid to LECC was capital expenditure and sum received was capital receipt in hands of assessee Commissioner held that since assessee had not offered said compensation to tax, assessment order was erroneous inasmuch as it was prejudicial to interests of revenue and directed for further inquiry-It was found that Assessing Officer made enquiries, elicited replies and thereafter passed assessment order Whether assumption of jurisdiction under section 263 by Commissioner itself was not proper since view taken by Assessing Officer was one of possible views and there was no material before Commissioner to vary with opinion of Assessing Officer and-Held, yes [Para 27] [In favour of assessee]

7. Respectfully following the above decisions, we have no hesitation in holding that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue. It is been held by the Co- ordinate Benches of the Tribunal that compensation received by the assessee from the proposed building by way of allotment is actually extinguishment of a right in relation to capital asset, in view of the provisions of section 2(47)(vi) of the Act. This clearly falls within the definition of transfer and hence provisions of section 45 is applicable. Therefore the Revision proceedings initiated by the Ld. CIT (IT &TP) is liable to be quashed. Thus, the grounds raised by the assessee are hereby allowed.

8. In the result, the appeal filed by the Assessee is allowed.

Order pronounced in the open court on 24 -02-2023

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