Tribunal rules on Long Term Capital Gain/Loss & MAT treatment in appeal decision

The Tribunal allowed the appeal in part, directing the AO to recompute the Long Term Capital Gain/Loss by including the Rs. 10 Crores in the total consideration and allowing the indexed cost of acquisition. The Tribunal also allowed the claim under section 35D and ruled that the Rs. 10 Crores should not be included in the book profit for MAT purposes.

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Issues Involved:
1. Claim of Long Term Capital Loss amounting to Rs. 14,79,76,879.
2. Treatment of Rs. 10 Crores received as Liquidated Damages.
3. Disallowance of expenses amounting to Rs. 5,87,400 claimed under section 35D of the Income Tax Act.
4. Applicability of Minimum Alternate Tax (MAT) on Rs. 10 Crores.

Issue-wise Detailed Analysis:

1. Claim of Long Term Capital Loss:
The assessee entered into a Memorandum of Understanding (MOU) on 26/03/2007 with a builder to acquire 213,000 sq.ft. in an IT project for Rs. 40 Crores. The MOU was followed by an allotment letter dated 03/04/2007. The builder failed to deliver possession within the stipulated period, leading to legal disputes and arbitration. Ultimately, the MOU was canceled on 27/10/2010, and the assessee received a refund of Rs. 40 Crores. The assessee claimed a Long Term Capital Loss of Rs. 14,79,76,879 by indexing the cost of acquisition. The Assessing Officer (AO) disallowed the claim, arguing that no "transfer" of a capital asset occurred as per the Transfer of Property Act. The Tribunal, however, held that the right to acquire property, created by the MOU and allotment letter, constitutes a "capital asset" under section 2(14) of the Income Tax Act. The relinquishment of this right is considered a "transfer" under section 2(47), making the loss allowable.

2. Treatment of Rs. 10 Crores as Liquidated Damages:
The assessee received Rs. 10 Crores as liquidated damages due to the builder's failure to deliver possession. The assessee claimed this amount as exempt, arguing it was compensation for the loss of a "source of income." The AO treated it as Short Term Capital Gain, while the CIT(A) considered it as revenue receipt. The Tribunal concluded that the Rs. 10 Crores should be part of the total consideration for the relinquishment of the right in the capital asset. Thus, it should be included in the computation of Long Term Capital Gain/Loss.

3. Disallowance of Expenses under Section 35D:
The assessee claimed expenses of Rs. 5,87,400 under section 35D, related to share issue and preliminary expenses incurred in AY 2007-08. These expenses were for the formation of the company and the extension of its business. The Tribunal noted that the claim was consistent with earlier years and allowed the expenses, citing the decision in Fine Jewellery Manufacturing Ltd v DCIT.

4. Applicability of MAT on Rs. 10 Crores:
The Tribunal held that the Rs. 10 Crores received as liquidated damages should not be included in the book profit for MAT purposes. This decision was based on the fact that the amount was directly credited to the Capital Reserve and not to the Profit & Loss account. The Tribunal relied on the Supreme Court's decision in Apollo Tyres and the Mumbai High Court's decision in CIT v Bisleri Sales Ltd, which emphasized that the book profit cannot be altered by adding back amounts not credited to the P&L account.

Conclusion:
The Tribunal allowed the appeal in part, directing the AO to recompute the Long Term Capital Gain/Loss by including the Rs. 10 Crores in the total consideration and allowing the indexed cost of acquisition. The Tribunal also allowed the claim under section 35D and ruled that the Rs. 10 Crores should not be included in the book profit for MAT purposes.

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