TMI Blog2009 (10) TMI 637X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment order, treating it as a revenue receipt - HELD THAT:- A liability created for purchase of stock-in-trade on credit is certainly a trading liability. Where A purchases his stock-in-trade from B on credit, the liability of A to B is a trading liability. But if A borrows money from C in order to pay off his liability to B, A s liability to C on such borrowing is not a trading liability. It is thus clear that section 41(1) cannot be invoked if C remits a part or whole of his loan to A. Where the assessee had not claimed nor obtained a deduction in respect of a security deposit treating it as a trading liability, section 41(1) cannot be invoked when such security deposit is refunded to the assessee. In the present case, none of the above probabilities existed and this is a case of amount received from assessee-firm shown as a liability in the shape of cash credit in assessment year 1997-98. The assessee has not claimed the same as deduction or expenses in any of the years till date. The assessee has written off the same as compensation/damages for relinquishment of right to sue in court of law and credited the same in the capital account as capital receipt. In vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is allowed. In the result, assessee s appeal is allowed. - P.K. BANSAL AND MAHAVIR SINGH, JJ. Dhiren Shah for the Appellant. Smt. Neeta Shah for the Respondent. ORDER Mahavir Singh, Judicial Member. - This appeal by the assessee is arising out of the order of Commissioner of Income-tax (Appeals)-XV, Ahmedabad in Appeal No. CIT(A)-XV/DCIT/CCir.9/167/07-08, dated 4-3-2009. The assessment was framed by the DCIT, Circle-9, Ahmedabad under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) vide his orders dated 28-12-2007 for the assessment year 2005-06. 2. The only issue in this appeal of the assessee is: "Whether the amount received from Saumya Construction (P.) Ltd. on account of development rights is business income under section 28( va ) of the Act or the same is assessable under section 41 (1) of the Act or a non-taxable capital receipt." For this, the assessee has raised the following effective grounds: "1. The ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 2,93,00,000 on account of accretion to capital account as made by the Assessing Officer while making an observation tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant to assessment year 2005-06 it was decided by the assessee that the liability standing in books of account for an amount of Rs. 2.93 crores received by account-payee cheque from Saumya Construction (P.) Ltd. is not to be repaid by the assessee in pursuance of the understanding with Saumya Construction (P.) Ltd. as the same is required to be written off by assessee towards the compensation/damages for relinquishment of assessee s right to sue it in the court of law. The assessee further submitted that the liability of Rs. 2.93 crores standing in assessee s balance-sheet which has been credited as capital is a capital receipts not subject to Income-tax, as per the provisions of the Act. That the said credit in financial year 1996-97 relevant to assessment year 1997-98, which has been credited into the capital account of the assessee in assessment year 2005-06 and the provisions of section 41(1) of the Act does not apply for the reason that the said liability was not allowed as business expenses or liability in earlier assessment year and accordingly the provisions of section 41(1) is not applicable to the writing off liability of Rs. 2.93 crores in the capital account. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl. No. Name of the payer Ch. No. Date Amount Rs. 1. Miraj Impex (P.) Ltd. 610000 1-8-1996 10000000 2. Miraj Impex (P.) Ltd. 618083 29-8-1996 10000000 3. Miraj Impex (P.) Ltd. 6118098 11-9-1996 9300000 As such the assessee received total amount of Rs. 2,93,00,000 as shown above in the year 1996 (financial year 1996-97). It is not known how this amount which was received by the assessee in financial year 1996-97 from Miraj Impex (P.) Ltd. can be the capital of the assessee in financial year 2004-05 (assessment year 2005-06). In fact that amount is liability in the hands of the assessee or he might have purchased one asset from Miraj Impex (P.) Ltd. full and complete detail regarding the facts which resulted in this transaction Rs. 2,93,00,000 have not furnished by the assessee in spite of several remainders, discussion during the course of assessment proceedings. It appears flimsy that a person getting an advance of a sum and directly credited in his capital account either the assessee should not written the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts have already been reproduced in the preceding para. Therefore, the addition of Rs. 2,93,00,000 is made under section 68 as unexplained credit in the capital account and accordingly an addition of Rs. 2,93,00,000 is made to the total income of the assessee." 4. Aggrieved, the assessee preferred an appeal before the CIT(A). The CIT(A) confirmed the addition by reproducing certain facts and submissions made by the assessee before him. The relevant extract from the CIT(A) s order is as under: "This addition has been discussed by the Assessing Officer from pages 2 to 13 and then from pages 15 to 17 of the assessment order. The Assessing Officer treated amount of Rs. 2,93,00,000 credited in the capital account of the appellant as a taxable receipt. 6. Facts in brief of this case as evident from the latest agreement dated 13-8-2004 furnished by the appellant are as under: 1. Through Development Agreement dated 28-12-1977 executed between Harsh Enterprise and Silver Arc Members Association all the rights relating to the development of property admeasuring 10,585 sq. yards were entrusted to Harsh Enterprise. 2. Vide Assignment Deed dated 18-3-1996 Harsh Enterprise assigned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that of Miraj Impex (P.) Ltd. only in the said property. It was stated that the compensation/damages received by way of appropriation of liability of Rs. 2,93,00,000 by cheque payment in the year 1996 against assessee s right to sue in the courts of law being not pursued by the assessee in the courts of law against Saumya Construction (P.) Ltd. cannot be taxed as capital gains because right to sue is not a property with any cost of acquisition. It was stated that provisions of section 41(1) were also not applicable and neither section 68 because identity of Saumya Construction (P.) Ltd. was well established. It was also stated that Rs. 2,93,00,000 credited in the capital account did not attract provisions of section 28( va ) because it was not the amount received in respect of not competing the business activity with any other party. In the present case it was argued that the appellant was proceeding to acquire the rights in immovable property and the appellant had received the compensation for right to sue being not pursued in courts of law and it was not in respect of not competing the business of any other party. Several case laws were also cited but they are not being dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt taxable as business income under section 28( va ) of the Income-tax Act reproduced below: "any sum, whether received or receivable, in cash or kind, under an agreement for ( a )not carrying out any activity in relation to any business...." is chargeable as business income. The language of the Act is very clear. Rs. 2,93,00,000 as per the appellant himself was received by him for not attempting to acquire Development Rights by way of litigation etc. in the said property. And was to understand this amount received from Miraj Impex (P.) Ltd. in the year under consideration for recognizing Miraj Impex (P.) Ltd as the sole owner with Development Rights and for not creating any litigation. The addition of Rs. 2,93,00,000 is therefore confirmed under section 28( va ) of the Income-tax Act." 5. Aggrieved, the assessee preferred second appeal before us. Before us the ld. counsel for the assessee, Shri Dhiren Shah, CA stated that the Assessing Officer has made addition by considering that the amount as liability in the hands of the assessee or he might have purchased some assets from Miraj Impex (P.) Ltd. According to the Assessing Officer, the ld. counsel argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not applicable to the writing off liability of Rs. 2.93 crores in the capital account. It was stated that the said liability has not been credited in the profit and loss account but the same has been taken as capital receipts in the books of account by crediting the capital account and the said liability is credited on account of compensation/damages for breach of agreement by Saumya Construction (P.) Ltd. and it is in respect of right to sue not pursued in the court of law for breach of agreement. 6. The ld. counsel, Shri Shah further stated that the CIT(A) has entirely went wrong in treating the receipt as revenue receipt taxable as business income under section 28( va ) of the Act. He stated that the same amount received from Saumya Construction (P.) Ltd. is in respect of relinquishment of assessee s right to sue in a court of law and the right to sue in a court of law cannot be treated as revenue receipt taxable as business income under section 28( va ) of the Act. The ld. counsel argued that for making any receipt income chargeable to tax under the head, "Profits and gains of business or professions" under section 28( va ) of the Act, there should be any sum whether re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in between four parties: 1.Miraj Impex (P.) Ltd. 2.Ganesh Housing Corporation 3.Saumya Construction (P.) Ltd. 4.Govindbhai C. Patel In view of these facts, she stated that the assessee was under this impression that he would acquire Development Rights and would pass them over to Saumya Construction (P.) Ltd. for which he had received Rs. 2.93 crores from Saumya Construction (P.) Ltd. in the year 1996-97, which he was showing as a liability in balance-sheets of his income-tax returns since assessment year 1997-98. According to her, this amount only in assessment year 2005-06 became clear that Rs. 2.93 crores could be treated as solely owned by the assessee because of agreement dated 13-8-2004 and this amount was credited in the capital account by the assessee in assessment year 2005-06 on which no tax has been paid. She stated that the Assessing Officer has rightly treated it taxable and has added it as a revenue receipt. She further argued that the CIT(A) has rightly applied the provisions of section 28( va ) of the Act as the receipt is a revenue receipt relating to business directly in view of the above facts. 8. We have heard the rival contentions and gone throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained or the value of benefit accruing to him shall be deemed to be the profits, and, accordingly, chargeable to income-tax as income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Clause ( b ) of this sub-section makes similar provision in the case of successor in business in regard to any amount in respect of which loss or expenditure, etc., was incurred by the predecessor. Further, it was found that a number of assessees were escaping tax liability under this sub-section in regard to the credit of trading liabilities to profit and loss account, even when the recovery of the debt had become barred by limitation or when there was no likelihood of the liability being enforced against them and this was on account of the fact that some courts held that the liability can remit or cease only by a bilateral or a multilateral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered view that the provisions of section 41(1) or section 68 of the Act will not apply to the writing off this liability in the capital account and the liability has not been credited in the profit and loss account but the same has been taken as capital basis in the capital account in the books of account of the assessee. 9. We find that, exactly on similar facts, the Hon ble jurisdictional High Court in the case of Baroda Cement Chemicals Ltd. ( supra ) has stated that the compensation received by the assessee was not for consideration for the transfer of capital assets, however, the damages are in capital in nature. For this, the Hon ble jurisdictional High Court held as under (para 18) : "18. The assessee had undoubtedly a right to sue M/s. K.C.. Ltd. for damages for breach of contract. Instead of litigating in a Court of law, the parties arrived at a settlement whereunder compensation in the sum of Rs. 1,40,000 came to be paid in full and final satisfaction to the assessee. Counsel for the Revenue contends that the compromises/arrangement resulted in extinguishment of the assessee s right to sue for damages within the meaning of section 2(47) of the Act. While accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concept of breach of contract as discussed by Hon ble Bombay High Court in the case of Iron Hardware (India) Co. v. Shamlal Bros. AIR 1954 Bom. 423 as under (in paras 10 to 12): "10. Chagla, C.J. had an occasion to consider this aspect of the law in Iron Hardware Co. v. Shamlal Bros. AIR 1954 Bom 423. The learned Chief Justice observed as under : It is well-settled that when there is a breach of contract, the only right that accrues to the person who complains of the breach is the right to file a suit for recovering damages. The breach of contract does not give rise to any debt and, therefore, it has been held that a right to recover damages is not assignable because it is not a chose-in-action. An actionable claim can be assigned, but in order that there should be an actionable claim there must be a debt in the sense of an existing obligation. But inasmuch as a breach of contract does not result in any existing obligation on the part of the person who commits the breach, the right to recover damages is not an actionable claim and cannot be assigned. Proceeding further, the learned Chief Justice stated: In my opinion, it would not be true to say tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining of the breach become entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has, is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in section 6( e ) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. Quoting the statement of law enunciated by Chagla, C.J., which is extracted earlier, the Supreme Court stated: "This statement in our view represents the correct legal position and has our full concurrence". 12. It would seen well-settled from the above discussion that after there is a breach of contract for sale of goods, nothing is left in the injured party save the right to sue for damages or specific performance which cannot be transferred under section 6( e ) of the Transfer of Property Act since it is a mere right to sue and not an actionable claim." In view of the above facts, discussion carried above and the case laws relied on, we decide this issue in favour of the assessee and confirmed the order of CIT(A). 10. Now coming to the issue decided by the CIT(A) whether this recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of anticipation that Shri Govindbhai C. Patel will acquire the rights in the aforesaid property from M/s. Harsh Enterprises, he received three cheques of an aggregate amount of Rs. 2.93 crores from Saumya Construction (P.) Ltd. and the particulars of which are as under: ( i )Rs. 1 crore by cheque dated 24-8-1996 ( ii )Rs. 1 crore by cheque dated 29-8-1996 ( iii )Rs. 93 lakhs by cheque dated 11-9-1996 The amount of Rs. 2.93 crores received from Saumya Construction (P.) Ltd. was shown as a liability of the assessee in financial year 1996-97 relevant to assessment year 1997-98 and the same was disclosed in the return of income filed for assessment year 1997-98 and thereafter in subsequent assessment years till 2004-05. We find that the amount of Rs. 2.93 crores was shown as a liability by the assessee in his balance-sheet as the assessee did not get the rights of the said property from M/s. Harsh Enterprises and, therefore, could not transfer it to Saumya Construction (P.) Ltd. and, accordingly, the assessee shown the amount of Rs. 2.93 crores received from Saumya Construction (P.) Ltd. as a liability being payable back to Saumya Construction (P.) Ltd. We further find that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriated the said liability of Rs. 2.93 crores payable to Saumya Construction (P.) Ltd., while crediting in his capital account being compensation for rights to sue being not enforced in the court of law. 11. First of all, we have to go to the provisions of section 28( va ) of the Act. By section 13 of the Finance Act, 2002 (20 of 2002) in section 28 of the 1961 Act, after clause ( v ), the following clause ( va ) has newly been inserted with effect from 1-4-2003, i.e., for and from assessment year 2003-04, namely: "( va )any sum, whether received or receivable, in cash or kind, under an agreement for ( a )not carrying out any activity in relation to any business; or ( b )not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause ( a ) shall not apply to ( i )any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any business, which is chargeable under the head "Capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol for the phasing out of the business of manufacture of Chloro-Fluoro Carbons (CFC) and Hydro Chloro-Fluoro Carbons (HCFC), the provision lays down that any sum received as compensation from the multilateral fund of the Montreal Protocol under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India, will not be taxable as profits and gains of any business or profession. 26.3 This amendment shall be effective from 1-4-2002 and will, accordingly, apply in relation to the assessment year 2002-03 only. Similarly, the provisions were explained in the note on clauses to Finance Bill, 2002 [254 ITR (St.) 118, 120], as under: "Clause 3 seeks to amend section 2 of the Income-tax Act relating to definitions. It is proposed to insert a new clause ( vii ) in section 28 of the Income-tax Act vide clause 13 of the Bill so as to provide that any sum whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business; or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business for not competing. The provisions of section 28( va ) of the Act provides that any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services, shall be chargeable to income-tax under the head "Profits and gains of business or professions". In view of the above facts and discussions, the compensation received in lieu of foregoing a right to sue does not fall under provisions of section 28( va ) of the Act. We further find from the facts of the case that the assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services, under the head "Profit gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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