2018 (6) TMI 956 - AT - Income Tax

Long term capital loss - allotment of land - acquisition of right title and interest acquired - builder failed to hand over the possession - Liquidated Damages received as compensation for loss of source of income - assessee in terms of cancellation of MOU relinquished its right title and interest in the constructed area - AO treated Rs. 10 crs as Short Term Capital Gain while AO did not allow Long Term Capital Loss. - Held that - As per the terms and conditions of the MEMORANDUM OF UNDERSTANDING a right in the immovable property to be constructed has been created in favour of the assessee when the assessee has made payment of Rs. 40 crores and the specific area is allotted to the assessee vide letter dt 3.4.2007 - Right to acquire immovable property is a capital asset - Right in immovable property is a capital asset u/s 2(14) - the liquidated damages in our view is inextricably connected with the consideration received by the assessee for relinquishment of his right in the capital asset created by the allotment letter dt 3.4.2007 - thus we held that right as a capital asset created by MOU duly registered and the allotment letter within the meaning of section 2(14) therefore when this right got relinquished the consideration received thereof will be consideration for transfer of capital asset as relinquishment falls within the definition of transfer u/s 2(47) and is therefore chargeable to tax u/s 45 as capita gain. The capital gain has to be computed in accordance with the provisions of section 48 - The full value of consideration has to be taken to be Rs. 50 crores received by the assessee for relinquishment of right in the capital asset. The cost of acquisition of right in the capital asset in this case is Rs. 40 cr. We therefore set aside order of CIT(A) on both the issues and direct AO to recompute LTCG/Loss by reducing from total consideration of Rs. 50 cr the indexed cost of acquisition amounting to Rs. 40 cr in accordance with the provisions of section 48. MAT - Book adjustments u/s 115JB - Held that - book profit disclosed by the assessee company in audited P & L a/c for impugned assessment year cannot be altered by adding back Capital Reserve. - AO directed for not to take the sum of Rs. 10 crores as part of the book profit by rewriting the audited P&L a/c of the assessee company. Disallowance u/s 35D in respect of share issue expenses and preliminary expenses - Held that - assessee claims that these expenses were incurred after the commencement of the business in connection with the extension of its business of industrial undertaking. Since all these expenses are incurred in the formation of the company and extension of the business the assessee claims l/5th of such expenditure every year and accordingly on the basis of the claims made in the earlier year l/5th of said expenditure were claimed during the impugned assessment year - assessee is covered by the decision of this Tribunal in the case of Fine Jewellery Manufacturing Ltd v DCIT 2013 (11) TMI 897 - ITAT MUMBAI - thus we allow claim of the assessee made u/s 35D - Decided in favor of assessee

Summary

Issues Involved:
1. Claim of Long Term Capital Loss amounting to Rs. 14,79,76,879.
2. Treatment of Rs. 10 Crores received as Liquidated Damages.
3. Disallowance of expenses amounting to Rs. 5,87,400 claimed under section 35D of the Income Tax Act.
4. Applicability of Minimum Alternate Tax (MAT) on Rs. 10 Crores.

Issue-wise Detailed Analysis:

1. Claim of Long Term Capital Loss:
The assessee entered into a Memorandum of Understanding (MOU) on 26/03/2007 with a builder to acquire 213,000 sq.ft. in an IT project for Rs. 40 Crores. The MOU was followed by an allotment letter dated 03/04/2007. The builder failed to deliver possession within the stipulated period, leading to legal disputes and arbitration. Ultimately, the MOU was canceled on 27/10/2010, and the assessee received a refund of Rs. 40 Crores. The assessee claimed a Long Term Capital Loss of Rs. 14,79,76,879 by indexing the cost of acquisition. The Assessing Officer (AO) disallowed the claim, arguing that no "transfer" of a capital asset occurred as per the Transfer of Property Act. The Tribunal, however, held that the right to acquire property, created by the MOU and allotment letter, constitutes a "capital asset" under section 2(14) of the Income Tax Act. The relinquishment of this right is considered a "transfer" under section 2(47), making the loss allowable.

2. Treatment of Rs. 10 Crores as Liquidated Damages:
The assessee received Rs. 10 Crores as liquidated damages due to the builder's failure to deliver possession. The assessee claimed this amount as exempt, arguing it was compensation for the loss of a "source of income." The AO treated it as Short Term Capital Gain, while the CIT(A) considered it as revenue receipt. The Tribunal concluded that the Rs. 10 Crores should be part of the total consideration for the relinquishment of the right in the capital asset. Thus, it should be included in the computation of Long Term Capital Gain/Loss.

3. Disallowance of Expenses under Section 35D:
The assessee claimed expenses of Rs. 5,87,400 under section 35D, related to share issue and preliminary expenses incurred in AY 2007-08. These expenses were for the formation of the company and the extension of its business. The Tribunal noted that the claim was consistent with earlier years and allowed the expenses, citing the decision in Fine Jewellery Manufacturing Ltd v DCIT.

4. Applicability of MAT on Rs. 10 Crores:
The Tribunal held that the Rs. 10 Crores received as liquidated damages should not be included in the book profit for MAT purposes. This decision was based on the fact that the amount was directly credited to the Capital Reserve and not to the Profit & Loss account. The Tribunal relied on the Supreme Court's decision in Apollo Tyres and the Mumbai High Court's decision in CIT v Bisleri Sales Ltd, which emphasized that the book profit cannot be altered by adding back amounts not credited to the P&L account.

Conclusion:
The Tribunal allowed the appeal in part, directing the AO to recompute the Long Term Capital Gain/Loss by including the Rs. 10 Crores in the total consideration and allowing the indexed cost of acquisition. The Tribunal also allowed the claim under section 35D and ruled that the Rs. 10 Crores should not be included in the book profit for MAT purposes.