2018 (4) TMI 794 - AT - Income Tax

Tribunal rules in favor of assessee, deems Rs. 31,907,676 as capital receipt, not taxable. Revenue's appeal allowed, rectification order overturned.

INS Finance And Investment P Ltd. Versus ITO, Ward-11 (4), New Delhi

INS Finance And Investment P Ltd. Versus ITO, Ward-11 (4), New Delhi - TMI Issues Involved:1. Taxability of Rs. 31,907,676 as capital receipt or revenue receipt.2. Validity of rectification order under Section 154 of the Income Tax Act.Issue-Wise Detailed Analysis:1. Taxability of Rs. 31,907,676 as Capital Receipt or Revenue Receipt:The primary issue in this case revolves around whether the amount of Rs. 31,907,676 received by the assessee should be classified as a capital receipt or a revenue receipt. The assessee, engaged in finance and investment, received this sum as compensation from the Debt Recovery Tribunal (DRT) after an auction for a property was canceled. The assessee argued that this amount was a capital receipt, not subject to tax, as it was compensation for breach of contract related to the purchase of a property. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] initially treated the amount as interest, thus taxable as revenue receipt. However, upon rectification, the CIT(A) later held that the amount was a capital receipt, not subject to tax.The tribunal examined the nature of the receipt, considering the judicial precedents and the specific circumstances of the case. It was noted that the amount was received due to the cancellation of the auction sale, which had a direct nexus to the acquisition of an immovable property. The tribunal referred to the Supreme Court's decision in CIT vs. Saurashtra Cement Ltd., which established that compensation for breach of contract related to a capital asset is a capital receipt. The tribunal concluded that the amount received by the assessee had a direct connection to the cancellation of the property acquisition and thus was a capital receipt, not taxable.2. Validity of Rectification Order under Section 154 of the Income Tax Act:The second issue pertains to the validity of the rectification order passed by the CIT(A) under Section 154 of the Income Tax Act. The revenue argued that the rectification was not valid as the issue was debatable and not an apparent mistake. The CIT(A) had initially held the amount as taxable interest and later rectified the order to classify it as a capital receipt. The tribunal noted that Section 154 allows rectification of mistakes that are apparent from the record, which do not require extensive reasoning or where two opinions are possible.The tribunal found that the change in the CIT(A)'s stance from treating the amount as taxable interest to a non-taxable capital receipt indicated a change of opinion on a debatable issue. Therefore, the tribunal held that the rectification under Section 154 was not justified as it involved a debatable point of law. Consequently, the rectification order was canceled.Conclusion:The tribunal allowed the appeal of the assessee, holding that the amount of Rs. 31,907,676 was a capital receipt and not chargeable to tax. The tribunal also allowed the revenue's appeal, canceling the rectification order passed by the CIT(A) under Section 154 of the Income Tax Act. The final judgment resulted in the recognition of the amount as a capital receipt, thus not subject to tax, and the invalidation of the rectification order due to its debatable nature.