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TMI Blog2022 (12) TMI 1076X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and therefore, the said amount was a capital receipt not chargeable to tax. 2. The learned CIT(A) further erred in holding that the amount of Rs. 18,51,61,000/- was taxable as a revenue receipt in the hands of the assessee firm since it represented the net present value of the future cash flows to be received by the assessee. 3. The learned CIT(A) failed to appreciate that the amount received by the assessee was on account of pre-closure of its BOT projects and therefore, the same was a capital receipt and the provisions of section 28(ii)(d) were not applicable to the facts of the present case. 4. The learned CIT(A) ought to have appreciated that even thought the amount of compensation was quantified by considering the net present value of the future income, the income earning source of the assessee was extinguished and accordingly, the compensation received was a capital receipt in the hands of the assessee. 5. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal." 3. We next note that the Revenue's cross appeal ITA No.692/PUN/2019 challenges correctness of CIT(A)'s action partly accepting the assessee's section 80-IA deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table as the accounting treatment adopted by the assessee by crediting the amount of Rs.18,51,61,000/- to the capital accounts of the partners is a violation of provisions of Sec. 28(ii)(d) of the Income Tax Act, 1961. The relevant portion of Sec 28 Profits & Sains of Business or Profession is reproduced below: "28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",- (i) .. (ii) any compensation or other payment due to or received by,- (a).,(b)..(c).... (d) any person, for or in, connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;" On perusal of the provisions of Sec, 28(ii)(d) if is evident that any amount received by way of compensation or other payment due to or received by any person for or in connection with the management of any property or business of the government or any corporation owned or controlled by the government is taxable as a revenue receipt, Further, what the assessee has received is the Net Present Value of the future cash flows that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,81,32,000 Total 18,51,61,000 1.3] The assessee in its return claimed the amount received as a capital receipt not chargeable to tax. The learned A.O. has not accepted the claim made by the assessee. According to him, the amount of compensation received is a revenue receipt. The learned A. O. has stated that the assessee has only received the net present value of the future cash flows that it would have received had the toll plazas were in operation. The learned A.O. stated that the Govt, of Maharashtra has given to the assessee present value of the future cash flow statements and according to him, the assessee has received the entire income stream at its present value. Hence, the learned A.O. has held that there is no loss of source of income to the assessee. The learned A.O. has also referred to the provisions of section 28(i)(d) and according to him, as per the said provision, the compensation received is a revenue receipt. Thus, the learned A.O. has held that the compensation received of Rs. 18,51,61,000/- is a revenue receipt. 1.4] The assessee submits that the learned A.O. is not justified in treating the compensation received as a revenue receipt. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's profit making apparatus & affects the conduct of business, the sum received for cancellation or variation of such agreement would be capital receipt. II. Oberoi Hotels Pvt Ltd vs CIT (1999) 103 Taxman 236 (SC) Where certain amount was received because the assessee has to give up its right to purchase and / or to operate certain hotel & it was loss of source of income to the assessee, amount received by the assessee would be capital receipt. III. CIT vs State Trading Corporation (2001) 247 ITR 114 (Delhi) & CIT vs Prabhu Dayal(1971) 82 ITR 804 (SC) Whereby due to cancellation of contract, the trading structure of the assessee is impaired or such a cancellation results in loss of what may be regarded as the source of assesses's income, the payment made to compensate for cancellation of agreement is capital receipt. IV. Charge of income-tax-Capital or revenue- Termination of Agreement- Compensation so received was capital receipt and hence, not taxable. [S.28(i)] Compensation was received by assessee for termination of agreement for providing back office Support services to bank Assessee had parted with personnel who were handling this activity of Assessee Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed upon. The government then gave an amount of Rs 18,51,61,000/- as compensation for such action. 5.5 The appellant insisted before the AO that as all the projects of the appellant firm were closed based on the termination letters of the GOM, the appellant firm was left with no assets and the total source of income of the appellant firm was abandoned. Therefore, the appellant firm, on loss of source of income, has written off the cost of projects appearing in the books of account as capital loss & debited to partner's capital accounts in the profit sharing ratio. Similarly the firm credited the compensation received from the GOM on closure of all the toll projects of the firm to partner's capital account in the profit sharing ratio treating the same as capital receipt against the loss of source of income. 5.6 Whereas the AO was of the opinion that such compensation was business income of the appellant. 5.7 The observation of the AO and the submission of the appellant have been considered. 5.8 In this regard, it is relevant to refer to the provisions of the sec 28(ii)(d) of the Act which are reproduced below: "28. The following income shall be chargeable to income-tax un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities have invoked section 28(ii)(d) of the Act (supra) that such a compensation received partakes character of a revenue receipt as taxable income only. Learned CIT(DR) has also quoted (2018) 97 taxmann.com 136 (SC) CIT V/s. Parle Soft Drinks Bangalore Pvt. Ltd. which is not found germane to the instant issue since not dealing with specific application of section 28(ii)(d) involving compensation received from a government as is the case before us. 6. It emerges during the course of hearing that the forgoing statutory provision section 28(ii)(d) stood inserted in the Act by the Finance Act 1973 with retrospective effect from 01.04.1972. Relevant memo of explanation thereto clarified that "Several laws have been enacted in recent years for taking over the management of industrial undertakings, mines, insurance companies etc. pending their final takeover by the Government. These laws provided for the payment of compensation in respect of the vesting in the Government of the management of the business of industrial undertakings etc. taken over by the government". This statutory provision later on underwent interpretation by hon'ble Calcutta high court in Ram Saran Das & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner (Appeals) by observing, inter alia, that section 28(ii)(d ) of the Act had no application to the assessee's case and it was held that the loss of Rs. 4,57,844 was a capital loss and not a business loss. The reasoning given by the Tribunal may be found in paragraph 2 of their order which reads as follows : "The Commissioner of Income-tax (Appeals) held that as there was a provision for treating the compensation received as business income if there was a loss in the matter of take over of the business by the Government, the loss would be a business loss on the same analogy. The Departmental representative argued that here not only the management was taken over but all the assets were taken over and compensation given for the same. It was argued that section 28(ii)( d) which has been relied upon by the Commissioner of Income-tax (Appeals) would operate only if merely the management had been taken over by the Government and not the property or business (sic) only the management but all the assets and business were taken over and hence the provisions of section 28(ii)( d) are not applicable. The Authorised Representative argued that the order of the Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or such payment received "at or in connection with termination or the modification of the terms and conditions, if any, contract relating to his business" is assessed has seem held taxable as profits and gains of business or profession. This latter amendment is applicable w.e.f. 01.04.2019 whereas we are in AY 2015-16 only. We also take note of the explanatory memo thereof that this latter amendment proposes to invoke section 28 of the Act qua any compensation; including both revenue as well as capital u/s.28 of the Act. We thus conclude that both the learned authorities have erred in law and on facts in invoking section 28(ii)(d) qua assessee's impugned compensation of Rs.18,51,61,000/- thereby holding it as a revenue receipt. The assessee succeeds in its sole substantive grievance as well as the main appeal ITA No.572/PUN/2019. The Revenue's cross appeal ITA No.692/PUN/2019 is rejected as the necessary consequence in treating terms. Ordered accordingly. 9. To sum up, the assessee's appeal ITA No.572/PUN/2019 is allowed and Revenue's cross appeal ITA No.692/PUN/2019 is dismissed in above terms. A Copy of this common order be placed in the respective case files Order pronounc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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