2021 (10) TMI 63 - AT - Income Tax

Tribunal upholds reassessment, finds Hardship Compensation not taxable income.

The Tribunal upheld the initiation of reassessment proceedings under Section 147 of the Act, dismissing the appeal against the reopening of the case. ... Reopening of assessment under Section 147 - notice under Section 148 - clause (b) of Explanation 2 to Section 147 - hardship/rehabilitation compensation as capital receipt - non-inclusion under definition of income in Section 2(24)(vi) - treatment of developer's payment in redevelopment as reduction in cost of acquisitionReopening of assessment under Section 147 - notice under Section 148 - clause (b) of Explanation 2 to Section 147 - Validity of initiation of reassessment proceedings and issuance of notice under Section 148 for A.Y.2011-2012. - HELD THAT: - The Tribunal examined the reasons recorded by the Assessing Officer and observed that information from assessment proceedings of the society and the development agreement showed payments to flat owners as hardship allowance and that the assessee was a beneficiary. The AO drew a prima facie satisfaction that income chargeable to tax for F.Y.2010-2011 (relevant to A.Y.2011-2012) had not been fully declared and invoked clause (b) of Explanation 2 to Section 147 in issuing notice under Section 148. The Tribunal noted that at the stage of initiation the AO need only form a prima facie inference and that the reassessment proceedings could be dropped later if the assessee established that no income had escaped assessment. On this basis the Tribunal held the initiation of reassessment proceedings and issuance of notice to be valid and based on sound legal principle. [Paras 7]Reopening and notice under Section 148 are valid; ground dismissed.Hardship/rehabilitation compensation as capital receipt - non-inclusion under definition of income in Section 2(24)(vi) - treatment of developer's payment in redevelopment as reduction in cost of acquisition - Whether amount received as hardship compensation and the benefit of a larger flat arising from redevelopment is taxable as revenue receipt or is a capital receipt not includible in income for A.Y.2011-2012. - HELD THAT: - The Tribunal, following coordinate decisions of the Mumbai Bench, found that payments received by flat owners from the developer as hardship/rehabilitation compensation on redevelopment are capital receipts simpliciter. The Tribunal noted that the AO's own reasons record the assessee received a larger flat in lieu of the old one and hardship allowance under the development agreement. Applying the reasoning in the cited precedents, the Tribunal held that such receipts reduce the cost of acquisition of the asset (the flat) and therefore fall outside the ambit of 'income' under Section 2(24)(vi) and are not taxable as revenue income in the hands of the assessee. [Paras 11]Addition of hardship compensation treated as capital receipt and deleted; grounds allowed.Final Conclusion: The Tribunal upheld the validity of reassessment proceedings and notice under Section 148/147 but allowed the appeal on merits by holding the hardship compensation and benefit of a larger flat to be a capital receipt not chargeable to tax; the addition is deleted and the appeal is partly allowed. Issues:1. Reopening of the case under Section 147 of the Act2. Determination of total income and addition of Hardship CompensationIssue 1: Reopening of the case under Section 147 of the ActThe appeal was filed against the order passed by the CIT(A)-I, Indore for the assessment year 2011-2012. The AO initiated reassessment proceedings under Section 147 of the Act based on information received regarding a substantial receipt. The assessee challenged the reopening, arguing it was unwarranted and illegal. The AO treated the compensation received as income from other sources, leading to a dispute.The Tribunal upheld the initiation of reassessment proceedings, noting that the AO had valid reasons to believe income had escaped assessment. The Tribunal emphasized that the initiation was based on sound legal principles and provisions of the Act. The assessee's failure to declare the transaction before the department was a key factor in the decision. The Tribunal dismissed the appeal on this ground.Issue 2: Determination of total income and addition of Hardship CompensationThe CIT(A) confirmed the AO's determination of total income, which included adding Hardship Compensation as revenue receipt. The assessee contended that the compensation should be treated as a capital receipt, citing relevant case law. The ITAT Mumbai Bench decisions supported the assessee's argument that such compensation should not be taxed as income.The Tribunal agreed with the assessee, ruling that the benefits received, including the larger flat and hardship allowance, constituted capital receipts. Citing precedents, the Tribunal held that these receipts were not taxable as income under Section 2(24)(vi) of the Act. Therefore, the Tribunal directed the AO to delete the addition related to the Hardship Compensation.In conclusion, the appeal was partly allowed, with the Tribunal dismissing the first ground regarding the reopening of the case and directing the deletion of the addition related to the Hardship Compensation based on the nature of the receipts being capital in nature.Note: The judgment was pronounced by SHRI C.M.GARG, JM and SHRI MANISH BORAD, AM on 29/09/2021.