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2021 (11) TMI 1072 - AT - Income TaxCapital gain - taxability of compensation receipts under normal provisions of the Act - sale of land which is a capital asset u/s 2(14) - As submitted that the amount in question was received by the assessee against its right to receive damages which arose from the arbitration ward and not formed the right to sue as erroneously contended by the assessee - as contended that the amount received was in the nature of compensation and would squarely fall within the definition of ‘capital asset’ under s.2(14) of the Act which is defined in widest possible terms and seeks to an encompass property of any kind and includes any right whatsoever arising from such transactions - whether damages received by the assessee for relinquishment of right to sue in the context of the facts of the case are capital receipt excludible from the definition of Section 2(14) of the Act or not and consequently, such receipts arising from release of right to sue is taxable under the scheme of the Act or not? - HELD THAT:- In the instant case, the rights of the assessee arising under the sale agreement with the original land owners were frustrated in view of another sale agreement of the same land parcels in favour of other party. The assessee received certain consideration by way of damages as a culmination of ongoing vexatious dispute towards rightful ownership of land parcels in question. The amount arose to the assessee by virtue of arbitral award adhered to by the parties to the dispute. The assessee has received consideration for its release of right to sue. Despite the definition of expression ‘capital asset’ in the widest possible term of Section 2(14) of the Act, a right to a capital asset must fall within the expression ‘property of any kind’ and must not fall within the exceptions. Section 6 of 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 issue is no longer res integra. There are long line of judicial precedents which echoes the view that the right to receive the compensation for release of right to sue on account of breach of contract for sale of land is not a capital asset and thus not chargeable to tax as capital gains. Support is drawn from CIT vs. J. Dalmiya[1984 (5) TMI 32 - DELHI HIGH COURT]; Baroda Cements & Chemicals Ltd. vs. CIT [1985 (12) TMI 55 - GUJARAT HIGH COURT]; CIT vs. A. A. Dehgamwalla & Ors. [1991 (4) TMI 38 - BOMBAY HIGH COURT] - As decided in BHOJISON INFRASTRUCTURE PVT. LTD. VERSUS THE INCOME TAX OFFICER, AHMEDABAD [2018 (9) TMI 1239 - ITAT AHMEDABAD] mere ‘right to sue’, while a capital receipt, is not a capital asset under s.2(14) of the Act and thus compensation received on release of right to sue is not a taxable receipt. Thus such capital receipts towards compensation do not fall within the sweep of expression ‘property of any kind’ notwithstanding its very wide connotations and consequently such capital receipts (not being capital asset) are not susceptible to capital gain tax having regard to provisions of charging section 45 of the Act. Merely because such right towards compensation surfaced as a result of sale of disputed land would not per se govern its taxability unless such right can be termed as a ‘capital asset’ which it is not. Thus, in totality, we see no error in the conclusion drawn by the CIT(A) in favour of the assessee under the normal provisions of the Act for excluding impugned capital receipts from ambit of taxation. Hence, We decline to interfere with the first appellate order on this score. Taxability of compensation on the contours of MAT provisions embodied under section 115JB - HELD THAT:- The compensation received for release of right to sue being a capital receipt is not deemed to be ‘income’ and hence not chargeable to tax. Significantly, the Constitution itself uses the term ‘tax on income’ and the term ‘income’ must be construed in the same manner as the one defined under Income Tax Act. As a corollary, it is impermissible to cover such capital receipts under S. 115JB in an unregulated manner. At this stage, we notice a pertinent plea taken on behalf of the assessee that the receipt being of capital nature does not enter into the computation provision at all and hence, there is no question of including the same in book profits for the purposes of Section 115JB of the Act. Since capital receipts are not ordinarily construed as income under rudimentary understanding of accounting and tax laws, they do not find a specific mention in Section 10 of the Act and consequently Explanation 1 to Section 115JB of the Act is silent on exclusion of capital receipts. In tandem, on facts, the capital receipt has been credited in appropriation of profits account and is not regarded as income per se in the profit & loss account prepared under schedule VI of Companies Act, 1956. Hence, when the factual position and law is read conjointly, it appears that such capital receipts are not susceptible to tax under s.115JB of the Act. The AO cannot bring such capital receipts to tax by including it in book profit artificially We concur with the view adopted by the CIT(A) in favour of the assessee towards inapplicability of MAT provisions to the impugned capital receipts. In parity with judicial precedents governing the field, we see no error in the conclusion drawn by the CIT(A) in this regard.
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