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2018 (4) TMI 794

ate was cancelled - revenue or capital receipt - chargeability to tax - Held that:- In the present case, the sum is received by the assessee on cancellation of sale contract as per the auction of Sanmati Rice Mills. Further, the sum received by the assessee had direct nexus to the cancellation of acquisition of the immovable property obtained by him in auction. Further, it is clear that excess of amount then what assessee deposited, received by the assessee for a breach of a contract and hence same is a capital receipt. - DR has heavily relied on the provision of section 56(2) (viii) of the act. The above section provides that income shall be chargeable to tax under the head income from other sources if it is income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A - provision of section 145A speaks about the timing of taxability and section 56 (2) (viii) the head under which it is chargeable - the character of income should be interest on compensation or enhanced compensation. As held that it is not interest but compensation. Section 56 (2) (viii) also does not provide for taxation of compensation but only interes .....

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xing the interest receipt in preceding years on proportionate basis. 3. The brief facts of the case are that Assessee Company is engaged in the business of finance and investment. It filed its return of income on 30.09.2011 for ₹ 422107/-. The assessment u/s 143 (3) of the Act was passed on 30.03.2014 at ₹ 32329780/-. In the assessment proceeding a solo addition of ₹ 31907676/- was made because of sum received by the assessee on cancelation of auction holding it to be revenue receipt. On appeal before CIT (A), this addition was confirmed. Therefore assessee in appeal before us in ITA No 505/ del/2016. 4. Subsequently assessee preferred an application before CIT (A) u/s 154 of the act and in response to that application ld CIT (A) rectified his order vide order dated 23/3/2016 holding that amount received by the assessee is subjudice and not final and further is a capital receipt. Therefore, revenue is in appeal before that order of CIT (A) in ITA no 3099 / Del/2016. 5. In ITA No 505/ Del/2016 by assessee, Ground No 1 is against the charging of ₹ 31907676/- to tax by the ld AO where the claim of the assessee is that it is a capital receipt. It was found by th .....

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provisional and contingent in nature. He further stated that further the refund was in respect of the capital asset and is in nature of damages and is capital receipt. He therefore, held that ₹ 31907676/- is not interest but a capital receipt. He denied that such sum is an interest at all referring to section 2 (28A) of the act. He submitted that when the Ld. CIT (A) has already rectified his order based on correct facts after considering the detailed argument following the judicial precedents that the above sum is not chargeable to tax. He further relied on several decisions to state that amount received by the assessee as compensation for breach of contract is a capital receipt. He further submitted that merely because the damages were described as interest it does not partake the character of interest but remains the damages. He submitted that before considering any sum as interest it needs to be tested whether such sum is in relation to any debt incurred by the assessee. He further referred to the order of the Hon ble Punjab & Haryana High Court dated 25.8.2010, 21.09.2010 to state that amount received by the assessee is not interest but capital receipt. 9. The Ld. DR .....

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finally. The assessee further relied on the decision of Ghaziabad Development Authority Vs. Dr. N. K. Gupta 258 ITR 337 wherein it has been held that merely because the damages are stated to be interest they cannot be subject to tax as interest. We have also carefully perused the order of the Debt Recovery Tribunal, Chandigarh dated 03.12.2008 wherein in para No. 22 has set aside the sale, and the bank was directed to refund the sale consideration originally accepted from the appellant along with any interest accrued on it, which has been kept in the office of the Debt Recovery Tribunal. Therefore, the Debt Recovery Tribunal has not awarded any interest to the appellant but it has just refunded the money deposited by the assessee in auction along with any interest earned by the bank on that sum in favour of DRT. The revenue could not show that at the time of auction there was any condition of payment of interest to the assessee in case the auction is cancelled. In fact as per certificate of sale dated 02.03.2007 even the possession of the property was also given confirming the sale absolutely in favour of the assessee. Even otherwise as per the provisions of section 2(28A) of the A .....

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wire) which was ordered to be wound up on 1.2.2001. Later on on 4.1.2002 Company Judge permitted the official liquidator to sell the assets of Punwire. Sale committee was constituted (consisting of the official liquidator and two of the major creditors, namely Canara Bank and IFCI) to chalk out the modalities of sale. Sale committee divided the assets of Punwire to be sold into 25 separate lots for convenient sale. Official liquidator issued a sale notification dated 15.6.2004 inviting sealed tenders. Sale notice was widely published on 25.6.2004 in leading newspapers. Reserve prices of item No. 17, 19 & 20 as per said notice were as under: Item 17: Industrial plot bearing No. B- 77, Phase VII, Industrial Area, Mohali (near Chandigarh), Punjab. Measuring 14,550 sqyds with the structure thereon (reserve price Rs . 3 crores) . Item 19: Furnitue in item No. 17 (reserve prices ₹ 4 lakhs) Item 20: Air conditioners and generator sets in item No. 17 (reserve priced ₹ 15 Lakhs). The assessee company gave its bid to these three items i.e. item No. 17, 19 & 20 at ₹ 3.14 crores, ₹ 4.5 lakhs and ₹ 15.5.lakhs respectively. On 10.12.2004 there was an inter s .....

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during the inter se bidding on 10.12.2004 namely Star Point Financial Services Ltd. was a sister concern of Winsome and therefore sale was not legal. The Employees Union of Punwire further contended that notice should have been issued by the Company Court to the Union before confirming the sale in favour of Winsome as the employees were vitally interested in the outcome of the sale. In response Winsome group contended before the Hon'ble Supreme Court that they have purchased item No. 17, 19 & 20 at the prevailing market rate and sale notification was rightly published in all the leading Newspapers. During detailed arguments before the Hon'ble Supreme Court the Sun Group further submitted that they have purchased the adjoining property and therefore they were interested to purchase plot No. B-77, Ph VII, IA, Mohali and Sun Group was willing to offer the same price of ₹ 11.6 crores for the property (item No. 17). The Employees Union further submitted that in the interest of workers Winsome should take reasonable profit and give up the property in favour of Sun Group so that the workers and creditors will be benefited. At this juncture the Hon'ble Supreme Court .....

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the assessee by the Hon'ble Supreme Court for depriving the rights of the assessee in property B-77, Ph VII, IA, Mohali. In that case receipt of ₹ 26983000/- would be treated as interest income and would be taxable as revenue receipt. 13. On appeal it was mainly contended that the Hon'ble Supreme Court had set aside the order of Hon'ble High Court by invoking Article 142 of Constitution of India. Reference was also made to Article 142 and it was contended that based on this Article, the Hon'ble Supreme Court took the decision for enforcing the settlement by invoking its extraordinary powers under Article 142, keeping in mind the larger interest of all the parties, including the employees of Punwire. This would mean that the assessee received the amount of ₹ 269.83 lakhs on the basis of negotiated settlement and therefore nature of receipt was capital and was not for transfer of any capital asset so as to be liable to tax under the provisions of the Act. It is to be appreciated that legal effect of the order of the Hon'ble Supreme Court was that sale of land in the first instance, in favour of assessee was set aside which mean that sale was not valid .....

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hereon. In view of this the amount of compensation determined by both the parties and duly endorsed by the Hon'ble Apex Court is hereby treated as capital receipt and the addition of ₹ 26983000/- on account of short term capital gain made by the Assessing Officer is deleted.' 15. Before us, the Ld. D.R for the revenue carried us through the facts mentioned in the assessment order and submitted that after the Hon'ble High Court of Punjab & Haryana confirmed the sale in favour of the assessee then assessee became absolute owner of this property. He referred to the contents at page 7 of the assessment order wherein it is clearly mentioned that as property was lease hold and official liquidator had given no objection to for transfer of the lease from the name of Punwire to the name of Winsome on 29.12.2004. In pursuance of this NOC the assessee had applied for transfer of lease to PSIEC and also paid transfer fee amounting to ₹ 1178550/-. Thereafter the lease was transferred in the name of assessee on 25.10.2005. This clearly mentions that the assessee became complete owner of this property and it cannot be said that the assessee was not owner of the propert .....

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essee. 17. The Ld. Counsel for the assessee pointed out that the Assessing Officer has alternatively assessed the compensation by observing that same was in the nature of interest and therefore chargeable as revenue receipt. He contended that it is totally wrong conclusion. He submitted that the assessee wanted to set up manufacturing unit by purchasing industrial shed and any compensation received against the surrender of capital asset cannot be treated as revenue receipt and in this regard he relied on the following decisions: Saurashtra Cement Ltd. (supra), Kettlewell Bullen & Co. Ltd. (supra), Oberoi Hotel (P.) Ltd. v. CIT [1999] 236 ITR 903/103 taxman 236 (SC) 18. We have considered the rival submissions carefully. The assessee has originally purchased an industrial plot bearing NO. B-77, Ph VII, IA, Mohali through auction. The auction was conducted by sale committee appointed by Court on winding upon of Punwire. The sale was challenged before the Company judge by Sun Group. The Company judge allowed the application of Sun Group and directed the assessee-company to deliver back the possession of this industrial shed. The assessee challenged this order before Hon'ble Hi .....

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SUNGROUP or for the sale in its favour being set aside and a fresh sale being confirmed in favour of SUNGROUP. 14. There was no objection to the proposal by the other parties, obviously having regard to the fact that everyone is benefited by the said arrangement. In view of the above we consider it a fit case to exercise our power under Art 142 of the Constitution and accept the settlement as regarded in the lager interest of parties and to benefit the workmen. We take to clear that he sale which has already been confirmed in favour of WINSOME is set aside not on merits, but in pursuance of the negotiated settlement arrived at among SUNGROUP the Employees Union and WINSOME. Accordingly we allow these appeals in part accepting the settlement on the following items: (i) to (iv) ** ** ** (v) On receipt of the payments as aforesaid by WINSOME and the official liquidator the sale in favour of WINSOME in respect of items 17, 19, 20 shall stand set aside and sale of said item No. 17 (Plot No. b-77 and structure thereon) shall stand confirmed in favour of SUNGROUP. The official liquidator or shall issue a fresh NOC to enable SUNGROUP to obtain transfer of lease from PSIEC in respect of Pl .....

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him. During the assessment year 1968-69 the question of taxability of the sum of ₹ 20,000 received by the assessee arose for consideration before the ITO. The ITO held that the entire sum of ₹ 20,000 represented long term capital gain and was liable to be taxed under the Act. Aggrieved by the order of the ITO, the assessee filed an appeal before the Appellate Assistant Commissioner of income-tax and that appeal was dismissed. On further appeal to the Income Tax Appellate Tribunal, it was held that the sum of ₹ 20,000 was an item of capital gain which attracted tax. 20. When the matter traveled to the Hon'ble Karnataka High Court it was held as under: Held, that since the court sale itself was set aside ultimately by the appellate court, the assessee never acquired any interest in the property and that it never became a capital asset of the assessee. The department cannot treat the transaction as a transfer of capital asset by he assessee when the assessee had not acquired any interest in the property and had not done any act which would either directly or indirectly amount to a transfer of an asset. The Tribunal was therefore in error in holding that the sum o .....

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lessee. The property was purchased by the Government on April 18, 1974 and the assessee received ₹ 271110/- on April 26, 1974 out of the sale proceeds as consideration for premature surrender of its leasehold interest in the property. The ITO brought the case of the assessee within the definition of transfer contained in section 2(47) of the IT Act, 1961. 22. When the matter traveled to the Hon'ble Calcutta High Court it was held as under: Held that leasehold interest is an interest in land. The assessee had acquired the leasehold right for 99 years. This valuable right was acquired by virtue of an agreement entered into by the assessee with the lessor. The interest in land cannot be equated with self created goodwill. The land was acquired by the assessee by an agreement and for possession of the land, moneys were regularly paid under the agreement. This valuable right was surrendered by the lessee and compensation was received for premature termination of the lease. Transfer of a capital asset includes not only relinquishment of the asst or extinguishment of any rights therein but also the compulsory acquisition of the asset. The Govt. had acquired the land and the asse .....

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e Supreme Court in case of Kettlewell Bullen & Co. Ltd. (supra). In that case the assessee-company was carrying on the business of managing agency and was managing agent of six companies including the Fort William Jute Co. Pursuant to an arrangement with Mugneeram Bangur and Co. whereby the latter agreed(i) to purchase the entire holding of shares of the appellant in the Fort William Jute Co., the managed company, (ii) to procure repayment of all loans made by the appellant to that managed company and (iii) to procure that the managed company will compensate the appellant for loss of office by the payment of the sum of ₹ 350,000 after the appellant resigned its managing agency and reimburse that amount to the managed company, the appellant company tendered resignation of the managing agency, and received the sum of ₹ 350,000/- from the managed company. Under the terms of the managing agency agreement, the managed company was not obliged to pay any compensation to the appellant for voluntary resignation of the managing agency. 27. On these facts the question arose whether the amount received by the assessee-company to relinquish the managing agency was a revenue rece .....

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urther periods of 10 years each by mutual agreement. Article XVIII of the said agreement gave the assessee a right to exercise the option of purchasing the hotel in case its owners desired to transfer the same during the currency of the agreement. Thereafter on Sept 14, 1975 a supplementary agreement was executed between the assessee and the receiver who had been appointed for the property. The right to exercise its option was given up by the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation regarding the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return agreed consideration was to be paid to the assessee. On the basis of the agreement the assessee received the amount of ₹ 2947500/- and claimed that it was a capital receipt. 29. When the matter traveled to the Hon'ble Supreme Court it was held as under: Held, reversing the decision of the Hon'ble High Court that the amount received by the assessee was the consideration .....

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ould not show that if the amount received is interest on compensation what the amount of compensation itself is. In view of this, we reject the contention of the revenue that provision of section 56 (2) (viii) applies to the impugned amount. 12. In view of above decision of coordinate bench, which has considered identical issue as per principles enunciated by the Hon Sc, we respectfully following it hold that ₹ 31907676/- is a capital receipt and is not chargeable to tax therefore. Hence, Ground no 1 of the appeal of the assessee is allowed. 13. In view of our decision in Ground no 1, Ground no 2 & 3 are not required to be adjudicated and hence, dismissed. 14. In the result, appeal of the assessee in ITA No 505/Del/2016 is partly allowed. ITA No 3099/Del/2016 A Y 2011-12 15. Now coming to the appeal of the revenue in ITA No 3099/Del/2016 against the order of the ld CIT (A) passing rectification order u/s 154 of the act. 16. The grievances of the revenue is that when once the ld CIT (A) has passed an order giving detailed reasoning for holding a sum is chargeable to tax, subsequently rectifying it and giving exhaustive further reasoning holding it to be capital receipt its .....

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