2015 (4) TMI 838 - HC - Income Tax

Tax Tribunal Rules in Favor of Taxpayer: Compensation Not Taxable Under Capital Gains

The Tribunal overturned the Commissioner of Income Tax's decision, ruling that the Assessing Officer's order was not erroneous. The compensation received ... Revision u/s 263 - whether the Order passed by the AO under Section 143(3) r.w.s. 144A was erroneous and prejudicial to the interest of the revenue? - whether compensation received by the Appellant as per the Consent Terms dated 19.08.1994 was on account of relinquishment of the claim for specific performance and, therefore, the same was liable to capital gains tax ? - Held that:- In the present Appeal, the Tribunal failed to note that in this case as well the specific performance of the agreement was refused. It is erroneously held that the claim of the Assessee regarding specific performance had never been rejected by this Court. A reading of the order passed by the Division Bench leaves us in no manner of doubt that such a Decree was expressly denied. The Consent Terms may constitute an agreement or contract between the parties, however, a Consent Decree is passed after the agreement is placed before the Court and the Court applies its mind and records a satisfaction that the terms are not contrary to law or public policy. That they can be accepted and based on that a Decree can be passed. Therefore, it is not an agreement between the parties, by which the Suit was disposed of but on that agreement there is a seal of approval or satisfaction of the Court and in terms of Order XXIII Rule 3 of the Civil Procedure Code, 1908. In such circumstances, even if there was any interim order in favour of the Assessee in the present case eventually the Suit ended in the Assessee's claim for specific performance being refused and he being entitled to receive the sum stipulated in this Court's order in lieu of the specific performance. In these circumstances, the Assessee was right in urging that he has no right, title or interest in the immovable property. The Tribunal completely misread and misconstrued this Court's order. In the Consent Terms, which are drawn up and based on which the Suit is decreed by the Court, it does not deal with the rival cases on merits. There is no requirement of the Court then passing an order and Judgment on merits of the claim of the parties. The Court is required to apply its mind and consider as to whether the arrangement reached by the parties can be accepted by it. Once it is accepted and an order or decree is passed in terms thereof, then, it is an order of the Court. Thus, the Court has not undertaken any mechanical exercise or has not casually and lightly accepted the terms and approved the same. We do not think that the Assessee had any right left or remaining in him to claim the immovable property, which is subject matter of the oral agreement. That right got extinguished once the specific performance was refused. Even if the refund of earnest money or compensation is the relief granted, it is apparent on a reading of the Specific Relief Act, 1963 that the Court has power to grant relief of possession, partition or refund of earnest money if any person sues for specific performance of a contract for the transfer of immovable property.The agreement for sale of immovable property itself does not create any right, title or interest in the immovable property, which is subject matter of such agreement but creates a right to obtain performance of the agreement by approaching Court of law and seeking a Decree of specific performance in terms of the Specific Relief Act, 1963. It is that limited right which is recognised by law and the difference between contract for sale of an immovable property and sale as emerging from section 54 of the Transfer of property Act, 1882 is thus explained. The Tribunal was not justified in holding that the order passed by the Assessing Officer under section 143(3) read with section 144 A was erroneous and prejudicial to the interest of the Revenue and, therefore, the Commissioner of Income Tax was justified in exercising the jurisdiction under section 263 of the IT Act. The answer is in favour of the Assessee holding that the amount of compensation received by the Assessee/Appellant was not liable to capital gains tax. It is held that the Appellant's case was covered by the ratio of this Court in the case of Commissioner of Income Tax vs. Abbasbhoy A. Dehgamwalla and Ors. [1991 (4) TMI 38 - BOMBAY High Court] - Decided in favour of assessee. Issues Involved:1. Justification of the Tribunal's decision regarding the order passed by the AO under Section 143(3) read with Section 144A.2. Taxability of compensation received by the Appellant as per Consent Terms dated 19.08.1994 under capital gains tax.3. Applicability of the ratio laid down in the case of Vijay Flexible Containers vs. Abbasbhoy A. Dehgamwalla.4. Tribunal's judgment on the merits of the case despite the CIT directing the AO to make a fresh assessment as per law.Issue-wise Detailed Analysis:1. Justification of the Tribunal's Decision Regarding the Order Passed by the AO under Section 143(3) read with Section 144A:The Tribunal upheld the Commissioner of Income Tax's (CIT) decision under Section 263 of the Income Tax Act, 1961, asserting that the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue. The Tribunal believed that the AO failed to consider the decision in the case of Commissioner of Income Tax vs. Vijay Flexible Containers (186 ITR 693). However, it was argued that the AO made inquiries and arrived at conclusions based on the material available, and merely because another view is possible, the CIT should not have invoked Section 263. The court concluded that the Tribunal was not justified in holding the AO's order as erroneous and prejudicial to the Revenue's interest.2. Taxability of Compensation Received by the Appellant as per Consent Terms Dated 19.08.1994 Under Capital Gains Tax:The Appellant received Rs. 5 crores as damages from ECL after a breach of an oral agreement to purchase property. The AO, after directions from the Deputy Commissioner of Income Tax, treated this amount as a capital receipt not chargeable to tax. The CIT overturned this, treating the damages as taxable under capital gains, referencing the case of Vijay Flexible Containers. The court, however, found that the Appellant's case was more aligned with the case of Commissioner of Income Tax vs. Abbasbhoy A. Dehgamwalla (195 ITR 28), where damages received for breach of contract were considered a capital receipt not liable to tax. The court held that the compensation received was not liable to capital gains tax.3. Applicability of the Ratio Laid Down in the Case of Vijay Flexible Containers vs. Abbasbhoy A. Dehgamwalla:The Tribunal applied the ratio from Vijay Flexible Containers, which dealt with the relinquishment of a right to claim specific performance as a transfer of a capital asset. The court, however, found that the Appellant's case was governed by the decision in Abbasbhoy A. Dehgamwalla, where the right to sue for damages was not considered a capital asset. The court concluded that the Appellant's case was covered by the ratio in Abbasbhoy A. Dehgamwalla.4. Tribunal's Judgment on the Merits of the Case Despite the CIT Directing the AO to Make a Fresh Assessment as per Law:The Tribunal's decision to give a judgment on the merits of the case was challenged, arguing that the CIT had only directed the AO to make a fresh assessment. The court found that since it had already answered the other issues in favor of the Appellant, this question did not survive.Conclusion:The court allowed the appeal and concluded that:- The Tribunal was not justified in holding the AO's order as erroneous and prejudicial to the Revenue's interest.- The compensation received by the Appellant was not liable to capital gains tax.- The Appellant's case was covered by the ratio in Abbasbhoy A. Dehgamwalla.- No further judgment on the merits was necessary once the issues were resolved in favor of the Appellant.The appeal was allowed with no order as to costs.