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2009 (10) TMI 637
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....owing effective grounds:- "1. The ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 2,93,00,000 on account of accretion to capital account as made by the Assessing Officer while making an observation that it is very clear that the ownership of the appellant on Rs. 2,93,00,000 crystallized in the year under consideration as per Agreement dated 13-8-2004 when it became clear that this amount was not to be demanded by anybody from him rather it was to be deemed to have been paid by Miraj Impex (P.) Ltd. who acquired the development rights and this is a clear cut revenue receipt taxable as business income under section 28(va) of the Income-tax Act. 2. The ld. CIT(A) has grossly erred in law and on facts in treating the amount of Rs. 2,93,00,000 as revenue receipt taxable as business income under section 28(va) of the Income-tax Act. 3. The ld. CIT(A) has failed to consider the fact that the said amount of Rs. 2,93,00,000 received from Saumya Construction (P.) Ltd. and written off by appellant is in respect of relinquishment of appellant's right to sue in a Court of law and the appellant's right to sue in a Court of law cannot be treated as revenue rece....
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....y was not allowed as business expenses or liability in earlier assessment year and accordingly the provisions of section 41(1) is not applicable to the writing off liability of Rs. 2.93 crores in the capital account. Further, it is also submitted by the assessee that the said liability has not been credited in the profit and loss account but the same has been shown and taken as capital receipt in the capital account in the books of account. Further, it is also submitted that the said liability which has been credited in the capital account is a capital receipt as the same is on account of compensation/damages for breach of agreement by Saumya Construction (P.) Ltd. and it is in respect of right to sue of the assessee not pursued in the court of law to challenge the breach of agreement by Saumya Construction (P.) Ltd. The assessee further contended that now under section 6(e) of Transfer of Property Act ('T.P. Act' for short) right to sue is not a property. The assessee further stated the fact that the compensation/damages received by way of appropriation of liability of Rs. 2.93 crores by cheque payment in the year 1996 against assessee's right to sue in the court of law being not ....
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....erson getting an advance of a sum and directly credited in his capital account either the assessee should not written the amount to Miraj Impex (P.) Ltd. or if he intends to use that amount for himself, obviously he should honestly credit the same as his income and should pay the tax on it otherwise it is not logical or even lawful that a person a right to change the nature of amount at his own fancy. The assessee has got so many decisions but these amount of Rs. 2,93,00,000 is not windfall, the amount to the Miraj Impex (P.) Ltd. and as a natural course the assessee does not intend to go further in the contract whatsoever (which said to be executed in 1996), he at, at the most, should return the money to Miraj Impex (P.) Ltd. with interest. As far as relinquishment is concerned the same is also taxable as per Income-tax Act. Further, the compensation or damaged received as taxable as per reproduced." The Assessing Officer re-produced the relevant provisions of section 41 and finally observed as under:- "Considering all the facts of the case and also considering the fact that the issue regarding taxability of the amount of Rs. 2,93,00,000 can be decided as per the provision a....
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....ing 10,585 sq. yards were entrusted to Harsh Enterprise. 2. Vide Assignment Deed dated 18-3-1996 Harsh Enterprise assigned Development Rights in favour of Ganesh Housing Corporation. 3. Vide Memorandum of Understanding dated 25-3-1996 Ganesh Housing Corporation assigned Rights of Development in favour of Saumya Construction (P.) Ltd. And at the instance of Ganesh Housing Corporation, Saumya Construction (P.) Ltd. gave vide three cheques amount totalling to Rs. 2,93,00,000 to Govindbhai C. Patel (as per last lines of clause - 12 of Agreement dated 13-8-2004). 4. As per clause-B of the Agreement Saumya Construction (P.) Ltd. would not ask for this amount from Govindbhai C. Patel. 5. As per clause-C of the Agreement Rs. 2,93,00,000 would be henceforth considered as the payment made by Miraj Impex (P.) Ltd. to Govindbhai C. Patel. 6. As per clause-D it was stated that Rs. 2,93,00,000 shall be considered to have been paid by Miraj Impex (P.) Ltd. to Govindbhai C. Patel towards damages/compensation. Thus in financial year 2004-05 the Development Rights of the property in question were acquired by Miraj Impex (P.) Ltd. vide Agreement dated 13-8-2004 signed in between ....
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....s not in respect of not competing the business of any other party. Several case laws were also cited but they are not being discussed here because all these case laws have been cited before the Assessing Officer also and have been dealt in the assessment order. Decision: After going through rival submissions I am of the opinion that section 41(1) is not applicable for taxing Rs. 2,93,00,000 because as per section 41(1) only that liability can be added back or taxed which has ceased but which has been allowed as a deduction in any earlier financial year, which is not the case here. The Assessing Officer also on page 17 has mentioned section 41(1) [due to typographical error section has been mentioned as 40(1)(i)] but has proceeded to taxed it under section 68 stating it to be unexplained credit in the capital account. Section 68 can also not be applied because the identity of the payer Saumya Construction (P.) Ltd. is not doubtful. PAN has been given and it was informed that returns are being filed in the same charge. Further Agreement dated 13-8-2004 clarifies the point that no addition under section 68 can be made. Interesting point is that earlier agreements for examp....
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.... he might have purchased some assets from Miraj Impex (P.) Ltd. According to the Assessing Officer, the ld. counsel argued that there is no full and complete disclosure of details regarding these transactions during the course of assessment proceedings. Accordingly, the Assessing Officer noted that it appears flimsy that a person getting an advance of a sum and directly credited in his capital account, either the assessee has not returned the amount to Miraj Impex (P.) Ltd. or intends to use that amount, i.e., he should honestly credit the same as his income and should pay the tax on it. The ld. counsel further stated that the Assessing Officer has considered the amount as not a windfall and as a natural course, the assessee do not intend to go further in the contract, whatsoever, he at the most, should return the money to Miraj Impex (P.) Ltd. with interest. Finally, the ld. counsel stated that the Assessing Officer has discussed the provision of section 41(1) of the Act and observed that this amount is his own capital which certainly tantamount to accretion/addition to his income in the relevant assessment year, in which the assessee intends to use the money as his own by crediti....
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....ead, "Profits and gains of business or professions" under section 28(va) of the Act, there should be any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not sharing any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. He stated that the provisions of section 28(va) of the Act are very clear that the compensation received in lieu of right to sue does not fall under this provision reason being the receipt does not fall under the head 'Business' or the same is not related to business. The ld. counsel further relied the case laws, i.e., in the case of Baroda Cement & Chemicals Ltd. v. CIT [1986] 25 Taxman 324 (Guj.), CIT v. Ashoka Marketing Ltd. [1986] 26 Taxman 215 (Cal.), CIT v. J. Dalmia [1985] 20 Taxman 86 (Delhi) and in the case of CIT v. Hiralal Manilal Mody [1981] 5 Taxman 153 (Guj.). 7. On the other hand, ld. Sr. DR, Smt. Neeta Shah argued on behalf of the Revenue and stated that the Development Agreement dat....
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....irectly in view of the above facts. 8. We have heard the rival contentions and gone through the facts and circumstances of the case. We have also perused the case records including the assessment order, the order of CIT(A) and the assessee's paper book. We have also gone through the case laws relied on. We find that the assessee has received an amount of Rs. 2.93 crores from Saumya Construction (P.) Ltd. and shown the same as liability in balance-sheet for assessment year 1997-98. The assessee has not shown the same as trading liability and nor claimed any deduction or expense in that assessment year. During the relevant assessment year 2005-06, the liability standing in assessee's books was written off towards the compensation/damages for relinquishment of right to sue in the court of law and the liability was credited as capital receipt in the assessee's capital account. Now, first of all, we have to ascertain whether the transaction falls under the provisions of section 41(1) or not. We find that the Assessing Officer has treated this receipt as income falling under provisions of section 41(1) of the Act. The CIT(A) has deleted the addition on this count by stating that secti....
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....ts held that the liability can remit or cease only by a bilateral or a multilateral act between the creditor(s) on the one side and the debtor on the other and not by a unilateral act. By an amendment the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof", occurring in this sub-section, has been defined to include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of this sub-section by way of writing off such liability in his accounts. We further find that section 41(1) concerns a trading liability and not other types of liability. Section 41(1), in a way, enacts statutory fictions. Therefore, the operation of such fictions should be limited to the language of the section. It is, inter alia, where the assessee has incurred a trading liability, and this trading liability has been allowed deduction in an earlier year, and something has, later on, been recovered in respect of such liability or such liability has either been remitted or has ceased to exist, that section 41(1) comes into operation. Furt....
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....ue for damages within the meaning of section 2(47) of the Act. While accepting this contention the Tribunal has placed reliance on the decision of this Court in R.M. Amin's case (supra). In that case this Court observed that the use of the word 'include' in the definition of the word 'transfer' in section 2(47) was intended to enlarge the meaning of 'transfer' beyond its natural import so as to include extinguishment/relinquishment of rights in the capital asset for the purpose of section 45 of the Act. Since the transfer contemplated by section 45 is one as a result whereof consideration has passed to the assessee or has accrued to him, extinguishment of transfer of a capital asset in order to attract liability to tax under the head 'capital gains' must be 'transfer' as a result whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by section 48 of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, there must be receipt of consideration for such extinguishment to attract liability to tax. Now, in legal parlanc....
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....ustice stated: 'In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. As already stated, the only right which he has is the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of an existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liabil....
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....ing to the issue decided by the CIT(A) whether this receipt is a revenue receipt taxable as business income under section 28(va) of the Act. We find that the CIT(A) has discussed the agreement dated 22-3-1996 entered between Ganesh Housing Corporation and the assessee and agreement dated 25-3-1996 entered between Ganesh Housing Corporation and Saumya Construction (P.) Ltd. according to which Rs. 2,93,00,000 were paid to the assessee by Saumya Construction (P.) Ltd. at the instance of Ganesh Housing Corporation in the year 1996-97 have dissolved or in other words have culminated or merged in the final Agreement dated 13-8-2004 entered among four parties namely Miraj Impex as the first, Ganesh Housing Corporation as the second, Saumya Construction as the third and Govindbhai C. Patel as the fourth. And according to various clauses of this Agreement like for example clause-B of the Agreement dated 13-8-2004 Saumya Construction (P.) Ltd. would not ask for the amount (Rs. 2.93 crores) from Govindbhai C. Patel and as per clause-C of the agreement Govindbhai C. Patel was to understand this amount received from Miraj Impex (P.) Ltd. In view of this, the CIT(A) has stated the ownership of t....
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....Saumya Construction (P.) Ltd. We further find that the said property which was under consideration for acquiring the rights by the assessee from M/s. Harsh Enterprises was a disputed property and the court litigation was going on in respect of the said property, the assessee did not get the rights into the said property as well as possessions of the said property. That the assessee shown in his balance-sheet, the liability of Rs. 2.93 crores payable to Saumya Construction (P.) Ltd. and in all the returns of income filed for assessment year 1997-98 till assessment year 2004-05 and the said liability was duly reflected in the balance-sheet of the assessee and the copy of balance-sheets were filed with the return of income and the said liability shown by the assessee in his balance-sheet has been duly accepted by the revenue for assessment year 1997-98 and till assessment year 2004-05. That in the assessment year 2005-06, ultimately the rights of the said property was acquired by Miraj Impex (P.) Ltd. and, therefore, the assessee was entitled to file a suit in the court of law for specific performance for acquiring the rights of the said property, but the assessee realizing that the l....
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....s chargeable under the head "Capital gains"; (ii )any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone Layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation - For the purposes of this clause,- (i )"agreement: includes any arrangement or understanding or action in concert,- (A)whether or not such arrangement, understanding or action is formal or in writing; or (B)whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings; (ii )"service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging." Subsequently, the Central Board of Direct Taxes has clarifi....
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....rcial right of similar nature, or information or technique likely to assist in the manufacture or processing of goods or provision for services, shall be chargeable to income-tax under the head "Profits and gains of business or professions". It is proposed to insert a new sub-clause ( xii) in clause (2A) of section 2 so as to provide that the said sum received or receivable shall be included within the definition of income as defined in that clause. This amendment will take effect from 1-4-2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. Furthermore, the provisions were explained in Memo, explaining provisions in the Finance Bill, 2002 [254 ITR (St. 190, 219] as under:- MEASURES TO CURB TAX AVOIDANCE New provisions for taxing the receipts in the nature of Non-compete fees and exclusivity rights This amendment proposes to insert a new provision in the Income-tax Act, 1961, for charging to tax any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business; or not to share any know-how, patent, copyright, trademark, licence, franchise or any other busines....