1986 (9) TMI 102 - AT - Income Tax

Compensation for Surrendered Right Not Taxable as Capital Gains

The Appellate Tribunal held that the amount of Rs. 1,50,000 received by the appellant as compensation or damages was a capital receipt and not subject to ... Agricultural Land, Assessment Proceedings, Assessment Year, Jurisdiction For Reassessment, Reassessment Proceedings Issues:Taxability of compensation or damages received by the assessee amounting to Rs. 1,50,000 as a capital receipt.Detailed Analysis:Issue 1: Taxability of Rs. 1,50,000 as compensation or damagesThe appellant, a sub-lessee of four flats, agreed to return the flats to the lessee for a payment of Rs. 10,04,237, which included Rs. 1,50,000 as compensation or damages. The Income Tax Officer (ITO) treated this amount as capital gains, considering it a trading receipt compensating for loss of profits. The Commissioner (Appeals) held that the amount was consideration for not enforcing rights under the lease, thus attracting capital gains tax. The appellant argued that the amount was a capital receipt for surrendering rights without any specific cost, citing relevant case laws. The IAC's observation supported the trading receipt nature of the amount, but the department acknowledged it as a capital receipt. The appellant contended that the amount was received for relinquishing a right of occupation with indeterminable cost, thus not resulting in capital gains.Issue 2: Comparison with relevant case lawsThe appellant relied on the Bombay High Court's decision in a case involving surrender of tenancy rights, arguing that no capital gains tax applied. In contrast, the Commissioner (Appeals) referenced another case where the right to obtain conveyance of property was considered a capital asset. The appellant's case was distinguished from this, emphasizing the lack of a specific cost for the surrendered right of occupation. The Supreme Court's decision was cited to support the view that the surrendered asset had an undetermined cost, leading to the conclusion that no capital gains arose from the receipt of Rs. 1,50,000.ConclusionThe Appellate Tribunal agreed with the appellant, determining that the amount of Rs. 1,50,000 was a capital receipt without resulting in capital gains due to the surrender of a right of occupation with an undetermined cost. Other grounds raised in the appeal were dismissed, and the appeal was partly allowed based on the taxability issue of the compensation or damages received by the assessee.