Compensation for relinquished right under cancelled sale agreement is long-term capital gain under section 2(47)

ITAT held that compensation received on relinquishment of the right to acquire property under a cancelled purchase agreement is a capital receipt and taxable as long-term capital gain. The tribunal found the cancellation deed evidences transfer under s.2(47); precedents establish relinquished contractual rights in property as capital assets, and book entries or the assessee's land business do not convert the receipt into revenue. Accordingly, the appellate authority reversed CIT(A) and allowed the assessee's appeal.

---

---

ISSUES PRESENTED AND CONSIDERED

1. Whether compensation received on relinquishment of the right to acquire immovable property constitutes a transfer of a capital asset within the meaning of section 2(47) and is taxable as capital gain (long-term), or is assessable as business income.

2. Whether the classification of the advance payment as a trade receivable / deferred revenue expenditure in the assessee's books can determine the tax character (revenue v. capital) of the compensation received on cancellation.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Characterisation of compensation on relinquishment of right: capital gain v. business income

Legal framework: Section 2(47) includes transfer by way of relinquishment of any right in or over a capital asset within the definition of "transfer" for capital gains. The taxability of compensation depends on the nature of the asset or right relinquished and the nexus between the receipt and the underlying asset/right.

Precedent treatment (followed): The Tribunal relied upon higher-court decisions holding that compensation for relinquishment of a contractual or proprietary right over immovable property constitutes capital receipt taxable as capital gain, even where the taxpayer is engaged in business connected with such assets. The Tribunal also invoked authority that book classification is not decisive for tax character.

Interpretation and reasoning: The Tribunal examined the sale agreement (2006), full payment of consideration, and the subsequent cancellation deed (2015) which expressly recorded payment of compensation for relinquishment of the right to obtain the property. The Tribunal reasoned that the assessee had acquired a right in the property upon payment and execution of the sale agreement; the later relinquishment of that right is a relinquishment of a capital right captured by section 2(47). The Tribunal rejected the revenue's contention that there was never a transfer because registration remained pending due to acquisition proceedings, holding that the right itself (even if subject to acquisition proceedings) was a capital asset/right. The Tribunal further concluded the compensation was linked to termination of that capital right and thus retained capital character notwithstanding the taxpayer's business of trading in land.

Ratio vs. Obiter: Ratio - Compensation paid for relinquishment of an acquired right to a property, evidenced by cancellation deed and receipt of consideration, amounts to a transfer under section 2(47) and is taxable as capital gain. Obiter - Remarks on the presence of acquisition proceedings or the vendor's residual rights as background facts supporting the characterization (not forming the decisive rule beyond the facts at hand).

Conclusion: The Tribunal allowed the appeal, holding the compensation to be long-term capital gain and not business income.

Issue 2 - Effect of accounting treatment (trade receivable / deferred revenue expenditure) on tax character

Legal framework: Tax liability is determined by the real nature of the transaction and accrual of income; accounting descriptions or ledger entries do not conclusively determine tax character.

Precedent treatment (followed): The Tribunal applied established authorities that book entries and the manner in which an item is shown in financial statements do not convert a capital receipt into revenue or vice versa; the true nature depends on substance and context.

Interpretation and reasoning: Although the assessee had shown the advance as trade receivable and had classified the payment as deferred revenue expenditure in earlier financial statements, the Tribunal held these entries insufficient to override the intrinsic nature of the received compensation, which was for relinquishment of a right to acquire immovable property. The Tribunal emphasized that the compensation arose from termination of a right that constituted a capital asset/right and therefore could not be transmuted into revenue by account classification.

Ratio vs. Obiter: Ratio - Accounting treatment in books, standing alone, cannot alter the legal nature of a receipt; where the receipt is linked to relinquishment of a capital right, it is capital notwithstanding ledger entries. Obiter - Observations addressing the timing of legislative changes (reference to a later introduction of a specific business receipt provision) were noted but not foundational to the decision.

Conclusion: The Tribunal rejected the assessing officer's reliance on ledger classification and sustained the capital character of the compensation.

Additional reasoning points and cross-references

1. The Tribunal treated the written instruments (sale agreement, payment of full consideration, cancellation deed with compensatory payment) as determinative evidence of acquisition of a right and its subsequent relinquishment; see Issue 1 reasoning.

2. The Tribunal expressly considered and rejected the alternative characterisation advanced by the lower authority that no transfer had taken place because registration was not completed and acquisition proceedings affected the property; the Tribunal held that the right itself was a capital asset/right and its relinquishment qualified as a transfer under section 2(47) - cross-refer to Issue 1.

3. The Tribunal addressed the revenue's alternative finding that the amount could be assessed as interest under other sources, implicitly treating that as untenable once the capital nature of the receipt was established; this aligns with the primary ratio that substance governs tax character - cross-refer to Issue 2.

Final conclusion

The Tribunal set aside the lower authority's classification of the compensation as business income (and alternative treatment as interest) and held the compensation received on relinquishment of the right to acquire the immovable property to be a capital receipt taxable as long-term capital gain under the transfer definition of section 2(47); appeal allowed.

---