2017 (2) TMI 793 - AT - Income Tax

Liquidated damages on equity shares treated as capital receipts, not revenue. ITAT criticizes FAA.

The Income Tax Appellate Tribunal (ITAT) held that liquidated damages received by the assessee, directly linked to the sale of equity shares, should be ... Addition of ‘liquidated damages received’ - revenue or capital receipt - Held that:- In the present case,we find that the FAA has not discussed anything. He has just reproduced the order of the AO and added one line to the order stating that he is convinced with the arguments advanced by the AO. We are unable to understand rational behind such an order. A reasoned order is primary pre-condition of any order-especially of appellate authorities. An order without reasons is no order at all. Appellate authorities are required to meet the arguments advanced before them during the course of hearing. In the matter before us, the FAA has not uttered a single word as to why the arguments of the assessee were not to be considered or as to why the cases relied upon by her were not applicable to the facts of the case. We have, after considering the available material, reached to the conclusion that liquidated damage received by the assessee on account of failure of the purchaser of shares of GOL to purchase the same, that it is a capital receipt as the shares were not held by the assessee as stock in trade. Reversing the order of the FAA,we decide the effective ground of appeal in favour of the assessee. Issues:1. Tax treatment of liquidated damages received by the assessee under the head 'revenue receipt' or 'capital receipt'.Analysis:1. The assessee filed an appeal challenging the order of the CIT(A)-36, Mumbai, which determined her income at a higher amount than declared in the return. The main issue was the addition of Rs. 59.98 lakhs as liquidated damages received. The Assessing Officer (AO) found that the assessee did not receive any advance money at the time of the agreement with Eleventh Land Developers Pvt. Ltd. (ELDPL) for the sale of equity shares of Great Offshore Limited (GOL). The AO held that the liquidated damages should be taxed as revenue receipts, not capital receipts, based on the provisions of Section 51 of the Income-tax Act, 1961.2. The First Appellate Authority (FAA) confirmed the AO's order without a detailed explanation. The assessee argued that the liquidated damages were capital receipts directly linked to the sale of a capital asset, as she was an investor in shares, not a trader. The FAA did not consider the submissions made by the assessee. During the ITAT hearing, the Authorized Representative (AR) argued that the damages should be treated as capital receipts, citing a similar case. The Departmental Representative (DR) supported the FAA's order.3. The ITAT noted that the liquidated damages received by the assessee were directly linked to the sale of equity shares and were part of a settlement after the purchaser failed to honor the agreement. Referring to a relevant case involving compensation for delay in procurement of a capital asset, the ITAT concluded that if the damages are linked to a capital asset, they should be treated as capital receipts. Since the assessee held the shares as an investor, not a trader, the compensation received due to the purchaser's non-performance should not be taxed as revenue receipt. The ITAT criticized the FAA for not providing a reasoned order and reversed the decision in favor of the assessee.4. The ITAT emphasized the importance of providing a reasoned order, especially for appellate authorities, and highlighted that liquidated damages linked to a capital asset should be treated as capital receipts. The ITAT found that the FAA had not considered the arguments of the assessee and reversed the decision, allowing the appeal filed by the assessee.