1991 (4) TMI 38 - HC - Income Tax

Damages for extinguished lease right not taxable as capital gains; only interest component taxed as revenue income

HC held that the assessee's contractual right to obtain a lease, though a 'capital asset', stood extinguished upon refusal of specific performance and ... Liability to be taxed - Treatment of compensation received from the Central Government - transfer of a 'capital asset' u/s 45 - Whether, the sum received by the assessee as per the terms of the consent decree dated June 11, 1969, is liable to be taxed as income of the assessee ? - The case of the Department was that even the amount of compensation, ought to have been taxed as capital gains - case of the assessee was that the amount was not taxable as the income of the assessee at all. - HELD THAT:- In terms of the decree passed, the assessee's claim to specific performance of the agreement was rejected. As regards the alternative claim for damages for breach of agreement, the Commissioner was directed to take accounts and determine the amount of compensation, if any, for breach of the agreement. Thus, while, in view of our court's judgment in CIT v. Tata Services Ltd. [1979 (1) TMI 26 - BOMBAY HIGH COURT] and CIT v. Vijay Flexible Containers [1989 (9) TMI 16 - BOMBAY HIGH COURT], upon by Dr. Balasubramanian, we have no difficulty in holding that such right constituted a 'capital asset', we cannot but conclude that such right got extinguished at least on September 20, 1961, when our court refused to grant specific performance of the agreement, if not earlier on January 7, 1958, i.e., the date of breach of contract mentioned by our court in its decree. It is true that, in the year 1968, the Commissioner submitted his report whereby he recommended damages to the extent. However, as stated earlier, both the parties filed their objections to the report and but for the compromise reached between the parties, there would have been prolonged litigation between the parties and it is difficult to say with any amount of certainty as to what would have been the fate of the litigation. In our judgment, the only reasonable conclusion is that the right to receive damages in this case accrued to the assessee on the date of the consent decree only. Since, as already stated by us, the right under the agreement came to an end in the year 1961, if not earlier, and the right acquired in lieu thereof was only a mere right to sue, it cannot be accepted that the was received as consideration for the transfer of a 'capital asset', i.e., his right to the execution of a lease deed in terms of the 1945 agreement during the previous year. In that view of the matter, we are in agreement with the Tribunal that no part of the amount was taxable as capital gains. In the premises, it is not necessary to consider the other aspects of the question such as whether there was any transfer at all or whether there being no cost of acquisition of such a capital asset, the amount was taxable. It is seen that the consent decree, clearly and categorically, mentions the fact that the amount represents interest for the period from January 30, 1959, up to the date of the consent decree on the amount of damages for breach of contract determined. The Tribunal was, therefore, right in holding that the amount was not a part of the compensation for breach of contract merely because the decree in the first instance refers to the total amount payable though the break up of the amount is clearly given in the following sentence. In this view of ours, we are fortified by the decision of the Supreme Court in the case of Dr. Shamlal Narula [1964 (4) TMI 10 - SUPREME COURT] that interest on the amount of compensation is not a capital receipt but a revenue receipt. Accordingly, we answer the question at the instance of the assessee in the affirmative and in favour of the Revenue. The Supreme Court decisions CIT v. T.N.K. Govindarajulu Chetty [1987 (2) TMI 3 - SC ORDER] and Rama Bai [1989 (11) TMI 2 - SUPREME COURT] appear to us to clearly lay down that interest in the case of an assessee following the mercantile system of accountancy must be taken to have accrued from year to year and not on the date of the order of the court granting enhanced compensation from the date of delivery of possession of the land till the date of such order. In the circumstances, we take the view that interest in the present case also is taxable as if it had accrued from year to year from January 30, 1959, to the date of consent decree. Thus, that part of interest which is referable to the amount of compensation for the year under reference alone will be taxable as the income of the previous year. We are aware that there is some contradiction between our judgment in the wealth-tax references and the judgment herein. While deciding the wealth-tax references, we have held that the right to receive damages and interest thereon accrued to the assessee on the date of the consent decree. In this income-tax reference, we have held that interest has accrued from year to year. Despite the conclusion that interest in such cases accrues from year to year, it is doubtful whether it will be possible to hold the assessee responsible for not disclosing interest income in the past on accrual basis. The assessee can always take a stand that the amount of compensation including enhanced compensation or damages having been determined subsequently, he could not possibly anticipate accrual of interest. In the result, the question at the instance of the assessee is answered thus : 'Only that part of the interest which pertains to the period from April 1, 1969, up to the date of the consent decree is taxable as the assessee's income of the year under reference.' Issues Involved:1. Taxability of compensation received as capital gains.2. Taxability of interest received as income.3. Assessment year for taxability of interest.Summary:Issue 1: Taxability of Compensation Received as Capital GainsThe primary issue was whether the compensation of Rs. 2,52,000 received by the assessee from the Central Government could be treated as capital gains. The court examined whether the right to get the deed of conveyance executed under the 1945 contract constituted a capital asset. The court concluded that the right was extinguished at least by September 20, 1961, when the court refused specific performance of the agreement. The court held that the amount received was not for the transfer of a capital asset but as damages for breach of contract. Thus, the amount of Rs. 2,52,000 was not taxable as capital gains for the assessment year 1970-71.Issue 2: Taxability of Interest Received as IncomeThe second issue was whether the sum of Rs. 1,56,030 received as per the consent decree dated June 11, 1969, was liable to be taxed as income. The court noted that the consent decree clearly mentioned that the amount represented interest from January 30, 1959, to the date of the consent decree on the amount of damages. The court, relying on the Supreme Court decision in Dr. Shamlal Narula v. CIT [1964] 53 ITR 151, held that interest on compensation is a revenue receipt and not a capital receipt. Therefore, the amount of Rs. 1,56,030 was taxable as income.Issue 3: Assessment Year for Taxability of InterestThe third issue was whether the interest amount was taxable for the assessment year 1970-71. The court referred to the Supreme Court decisions in CIT v. T.N.K. Govindarajulu Chetty [1987] 165 ITR 231 and Rama Bai v. CIT [1990] 181 ITR 400, which held that interest in the case of an assessee following the mercantile system of accountancy must be taken to have accrued from year to year. Consequently, only the interest pertaining to the period from April 1, 1969, to the date of the consent decree was taxable as the income of the previous year.Conclusion:The court concluded that the compensation amount of Rs. 2,52,000 was not taxable as capital gains, while the interest amount of Rs. 1,56,030 was taxable as income. However, only the interest accrued from April 1, 1969, to the date of the consent decree was taxable for the assessment year 1970-71. There was no order as to costs.