TaxTMI 
TaxTMI 
2018 (4) TMI 794
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.... That on the facts and circumstances of the case, the ld CIT(A) was not justified in the issuing direction to assessing officer for taxing the interest receipt in preceding years on proportionate basis." 3. The brief facts of the case are that Assessee Company is engaged in the business of finance and investment. It filed its return of income on 30.09.2011 for Rs. 422107/-. The assessment u/s 143 (3) of the Act was passed on 30.03.2014 at Rs. 32329780/-. In the assessment proceeding a solo addition of Rs. 31907676/- was made because of sum received by the assessee on cancelation of auction holding it to be revenue receipt. On appeal before CIT (A), this addition was confirmed. Therefore assessee in appeal before us in ITA No 505/ del/2016. 4. Subsequently assessee preferred an application before CIT (A) u/s 154 of the act and in response to that application ld CIT (A) rectified his order vide order dated 23/3/2016 holding that amount received by the assessee is subjudice and not final and further is a capital receipt. Therefore, revenue is in appeal before that order of CIT (A) in ITA no 3099 / Del/2016. 5. In ITA No 505/ Del/2016 by assessee, Ground No 1 is against the ch....
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....ot be considered to have acquired absolute legal right over such claim of amount. It was further stated that such sum is provisional and contingent in nature. He further stated that further the refund was in respect of the capital asset and is in nature of damages and is capital receipt. He therefore, held that Rs. 31907676/- is not interest but a capital receipt. He denied that such sum is an interest at all referring to section 2 (28A) of the act. He submitted that when the Ld. CIT (A) has already rectified his order based on correct facts after considering the detailed argument following the judicial precedents that the above sum is not chargeable to tax. He further relied on several decisions to state that amount received by the assessee as compensation for breach of contract is a capital receipt. He further submitted that merely because the damages were described as interest it does not partake the character of interest but remains the damages. He submitted that before considering any sum as interest it needs to be tested whether such sum is in relation to any debt incurred by the assessee. He further referred to the order of the Hon'ble Punjab & Haryana High Court dated 25.8.....
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....at the dispute had not reached any finality and therefore, no interest or damages have accrued to the assessee finally. The assessee further relied on the decision of Ghaziabad Development Authority Vs. Dr. N. K. Gupta 258 ITR 337 wherein it has been held that merely because the damages are stated to be interest they cannot be subject to tax as interest. We have also carefully perused the order of the Debt Recovery Tribunal, Chandigarh dated 03.12.2008 wherein in para No. 22 has set aside the sale, and the bank was directed to refund the sale consideration originally accepted from the appellant along with any interest accrued on it, which has been kept in the office of the Debt Recovery Tribunal. Therefore, the Debt Recovery Tribunal has not awarded any interest to the appellant but it has just refunded the money deposited by the assessee in auction along with any interest earned by the bank on that sum in favour of DRT. The revenue could not show that at the time of auction there was any condition of payment of interest to the assessee in case the auction is cancelled. In fact as per certificate of sale dated 02.03.2007 even the possession of the property was also given confirming....
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....On further enquiry it was noticed that there was a company known as M/s Punjab Wireless Systems Ltd (in short Punwire) which was ordered to be wound up on 1.2.2001. Later on on 4.1.2002 Company Judge permitted the official liquidator to sell the assets of Punwire. Sale committee was constituted (consisting of the official liquidator and two of the major creditors, namely Canara Bank and IFCI) to chalk out the modalities of sale. Sale committee divided the assets of Punwire to be sold into 25 separate lots for convenient sale. Official liquidator issued a sale notification dated 15.6.2004 inviting sealed tenders. Sale notice was widely published on 25.6.2004 in leading newspapers. Reserve prices of item No. 17, 19 & 20 as per said notice were as under: Item 17: Industrial plot bearing No. B- 77, Phase VII, Industrial Area, Mohali (near Chandigarh), Punjab. Measuring 14,550 sqyds with the structure thereon (reserve price Rs . 3 crores) . Item 19: Furnitue in item No. 17 (reserve prices Rs. 4 lakhs) Item 20: Air conditioners and generator sets in item No. 17 (reserve priced Rs. 15 Lakhs). The assessee company gave its bid to these three items i.e. i....
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....that sale price at which the item No. 17, 19 & 20 were sold to Winsome was very low and it was further alleged that during the inter se bidding on 10.12.2004 namely Star Point Financial Services Ltd. was a sister concern of Winsome and therefore sale was not legal. The Employees Union of Punwire further contended that notice should have been issued by the Company Court to the Union before confirming the sale in favour of Winsome as the employees were vitally interested in the outcome of the sale. In response Winsome group contended before the Hon'ble Supreme Court that they have purchased item No. 17, 19 & 20 at the prevailing market rate and sale notification was rightly published in all the leading Newspapers. During detailed arguments before the Hon'ble Supreme Court the Sun Group further submitted that they have purchased the adjoining property and therefore they were interested to purchase plot No. B-77, Ph VII, IA, Mohali and Sun Group was willing to offer the same price of Rs. 11.6 crores for the property (item No. 17). The Employees Union further submitted that in the interest of workers Winsome should take reasonable profit and give up the property in favour of Sun....
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....short term capital gain then same can be said to be in the form of compensation by way of interest given to the assessee by the Hon'ble Supreme Court for depriving the rights of the assessee in property B-77, Ph VII, IA, Mohali. In that case receipt of Rs. 26983000/- would be treated as interest income and would be taxable as revenue receipt. 13. On appeal it was mainly contended that the Hon'ble Supreme Court had set aside the order of Hon'ble High Court by invoking Article 142 of Constitution of India. Reference was also made to Article 142 and it was contended that based on this Article, the Hon'ble Supreme Court took the decision for enforcing the settlement by invoking its extraordinary powers under Article 142, keeping in mind the larger interest of all the parties, including the employees of Punwire. This would mean that the assessee received the amount of Rs. 269.83 lakhs on the basis of negotiated settlement and therefore nature of receipt was capital and was not for transfer of any capital asset so as to be liable to tax under the provisions of the Act. It is to be appreciated that legal effect of the order of the Hon'ble Supreme Court was tha....
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....ion has a direct and intimate connection/nexus with the capital asset i.e. Plot No. B-77 and structure thereon. In view of this the amount of compensation determined by both the parties and duly endorsed by the Hon'ble Apex Court is hereby treated as capital receipt and the addition of Rs. 26983000/- on account of short term capital gain made by the Assessing Officer is deleted.' 15. Before us, the Ld. D.R for the revenue carried us through the facts mentioned in the assessment order and submitted that after the Hon'ble High Court of Punjab & Haryana confirmed the sale in favour of the assessee then assessee became absolute owner of this property. He referred to the contents at page 7 of the assessment order wherein it is clearly mentioned that as property was lease hold and official liquidator had given no objection to for transfer of the lease from the name of Punwire to the name of Winsome on 29.12.2004. In pursuance of this NOC the assessee had applied for transfer of lease to PSIEC and also paid transfer fee amounting to Rs. 1178550/-. Thereafter the lease was transferred in the name of assessee on 25.10.2005. This clearly mentions that the assessee became....
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.... case the assessee has accepted the offer for purchase of land which was earlier given by the Govt. to the assessee. 17. The Ld. Counsel for the assessee pointed out that the Assessing Officer has alternatively assessed the compensation by observing that same was in the nature of interest and therefore chargeable as revenue receipt. He contended that it is totally wrong conclusion. He submitted that the assessee wanted to set up manufacturing unit by purchasing industrial shed and any compensation received against the surrender of capital asset cannot be treated as revenue receipt and in this regard he relied on the following decisions: Saurashtra Cement Ltd. (supra), Kettlewell Bullen & Co. Ltd. (supra), Oberoi Hotel (P.) Ltd. v. CIT [1999] 236 ITR 903/103 taxman 236 (SC) 18. We have considered the rival submissions carefully. The assessee has originally purchased an industrial plot bearing NO. B-77, Ph VII, IA, Mohali through auction. The auction was conducted by sale committee appointed by Court on winding upon of Punwire. The sale was challenged before the Company judge by Sun Group. The Company judge allowed the application of Sun Group and directed ....
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....ted that subject to payment of Rs. 6.36 crores WINSOME had no objection either for transfer of its rights to SUNGROUP or for the sale in its favour being set aside and a fresh sale being confirmed in favour of SUNGROUP. 14. There was no objection to the proposal by the other parties, obviously having regard to the fact that everyone is benefited by the said arrangement. In view of the above we consider it a fit case to exercise our power under Art 142 of the Constitution and accept the settlement as regarded in the lager interest of parties and to benefit the workmen. We take to clear that he sale which has already been confirmed in favour of WINSOME is set aside not on merits, but in pursuance of the negotiated settlement arrived at among SUNGROUP the Employees Union and WINSOME. Accordingly we allow these appeals in part accepting the settlement on the following items: (i) to (iv)  ....
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....eclared as the purchaser of a certain immovable property for Rs. 125 at a court auction held in 1962. The judgment debtors filed an application under rule 90 of Order 21 of the Code of Civil Procedure, to get the sale set aside. That application was dismissed by the executing court. Against the order of the executing court, the judgment debtors filed an appeal under Order 43, rule 1(j) of the Code of Civil Procedure, in R.A. No. 47/1967 on the file of the Ist Additional Civil Judge, Civil Station, Bangalore. During the pendency of that appeal the dispute between the parties was compromised. Under the compromise the assessee agreed to the sale being set aside on payment of Rs. 20,000 by the person in whose favour the judgment debtors had agreed to execute a sale deed conveying the property in question. The compromise was recorded by the ld. Civil judge and sale was set aside by him. During the assessment year 1968-69 the question of taxability of the sum of Rs. 20,000 received by the assessee arose for consideration before the ITO. The ITO held that the entire sum of Rs. 20,000 represented long term capital gain and was liable to be taxed under the Act. Aggrieved by the order of the....
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....e assessee a resident company took on lease several plots of land within the premises known as "Tagore Villa" at Nos. 1 and 1A, Kali Kishen Tagore Street, Calcutta, for periods varying between 30 and 50 years. The assessee agreed to develop the plots at its own cost to lay roads, drainage, etc. and make out small plots for constructing buildings thereon for sale, the proceeds of which were agreed to be shared between the lessor and the lessee as per the agreement. After several years, the Govt. of India negotiated with the lessor for purchase of a substantial portion of Tagore Villa including the portion of land leased out to the lessee free from encumbrance. Thereupon the lessor and the lessee agreed to terminate the lease on terms mutually agreed upon by them. In the meantime the assessee had spent Rs. 117563/- on improvement of the lands, but no building was however, constructed thereon by the lessee. The property was purchased by the Government on April 18, 1974 and the assessee received Rs. 271110/- on April 26, 1974 out of the sale proceeds as consideration for premature surrender of its leasehold interest in the property. The ITO brought the case of the assessee within the d....
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.... and the acceptance of compensation in lieu thereof the assessee's right in the said building stood relinquished in favour of Govt of India. There was thus a transfer of the said building within the meaning of section 2(47) of the IT Act, 1961 and the profit arising therefrom was a capital gain taxable under the Act." Thus in this case the facts are also identical to the case of Pramia Engineering (P.) Ltd. (supra). In this case also the sale was never set aside by any authority or Court of law and therefore this case is again distinguishable from the case before us. 25. In view of above discussion we are of the opinion that surplus arising on account of compensation received by the assessee cannot be assessed under the head "capital gain" because no asset came into existence with the assessee. 26. Coming to the second aspect regarding taxability of the amount as compensation. In this regard clear legal position was enunciated by the Hon'ble Supreme Court in case of Kettlewell Bullen & Co. Ltd. (supra). In that case the assessee-company was carrying on the business of managing agency and was managing agent of six companies including the Fort Willi....
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....is normally a capital receipt." From above it becomes clear that if amount is received as compensation in relation to surrender of profit making structure then such compensation is to be treated as capital receipt. 28. Similarly in case of Oberoi Hotel (P.) Ltd. (supra) the assessee-company was operating, managing and administering many hotels belonging to others for a fee at several places. As per the memorandum of association of the company, it was authorized to run hotels on its own account and also to operate, manage and administer hotels belonging to others for a fee. In terms of an agreement dated Nov 2, 1970 the company agreed to operate the hotel known as Hotel Oberoi Imperial for which the assessee-company was to receive a certain fee called management fee which was calculated on the basis of gross operating profits as provided in the agreement. The agreement was to run for an initial period of ten years; the assessee had the option to ask for renewal of the said agreement for two further periods of 10 years each by mutual agreement. Article XVIII of the said agreement gave the assessee a right to exercise the option of purchasing the hotel in case its ow....
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....sum is not chargeable to tax as it is capital receipt. Ld DR has heavily relied on the provision of section 56(2) (viii) of the act. The above section provides that income shall be chargeable to tax under the head income from other sources if it is income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A. The provision of section 145A provides that any interest received by the assessee on compensation or enhanced compensation shall be chargeable to tax in the year in which it is received. Therefore, provision of section 145A speaks about the timing of taxability and section 56 (2) (viii) the head under which it is chargeable. However, the character of income should be interest on compensation or enhanced compensation. In the present case, we have already held that it is not interest but compensation. Section 56 (2) (viii) also does not provide for taxation of compensation but only interest on such compensation. In the present case, the assessee has received compensation. Ld DR also could not show that if the amount received is interest on compensation what the amount of compensation itself is. In view of this, we rejec....