TaxTMI 
TaxTMI 
2019 (7) TMI 855
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....ed that - (a.) the said compensation was received by the appellant firm for criminal breach of contract; and (b.) due to the fraudulent Development Agreement, the appellant firm never received any right to claim specific performance and consequently there was no transfer of capital asset as envisaged in section 2(14) of the Income-tax Act, 1961. 2. The Ld. CIT(A) had confirmed the view of Ld.AO that the appellant firm even after paying an advance tax of Rs. 3 crores, had shown nil income as a pretense for making false claims for the purpose of evading tax. 2. Brief facts of the case are that the assessee is a partnership firm stated to be engaged in the business of financing, construction and development. The assessee filed its return of income for Assessment Year 2012-13 on 31.07.2012 declaring Nil income and claimed the refund of tax Rs. 3 Crore already paid in advance. The return of income was selected for scrutiny. During the assessment proceeding, the Assessing Officer noted that assessee has received Rs. 20 Crore as compensation, which is inclusive of advance of Rs. 2.50 Crore paid by assessee. The assessee claimed the receipt of Rs. 20 Crore as ....
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....having marketable title and have shown certificate dated 16.03.2004 that the land is free from all encumbrances. In the MOU it was agreed that the parties shall execute Joint Development agreement. Further a supplementary agreement was executed on 24.03.2005 by assessee and wherein besides the earlier conditions, it was agreed that the assessee would pay additional as sum of Rs. 3.35 Crore to the landowner on account of consideration of development right of 2,00,000 Sq ft FSI. As per the conditions of the MOU and supplementary agreement the owner of the land was required to obtained commencement certificate from local authorities, however, the same was not provided to the assessee. Later on the assessee came to know that the owner of said land already transferred the development right of entire 8,00,000 sq. ft. to M/s Star Habitat Pvt. Ltd. M/s Star Habitat Pvt ltd was company of family members of the land owners. The land owner Mohammed Husain Merchant not disclosed these facts to the assessee while executing MOU that the development right has already transferred to M/s Star Habitat. After a prolong negotiations the owners of said land failed to execute Joint Development Agreement....
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....llation deed the assessee agreed the assessee agreed to withdraw the Criminal Complaint pending before Metropolitan Magistrate and the Civil Suit pending before High Court. The owner and the other coowners also agreed to withdraw all allegations and counter allegation or claim against each other. The assessee also agreed for not to create any third party right, title or interest in respect of the right created under MOU. On execution of cancellation deed dated 10.09.2011 the assessee was paid Rs. 20 Crore by confirming party on account of refund of the advance with interest, loss of profit, liquidated damage and loss of opportunity to develop his own property and cost of litigation. 6. The ld. AR for the assessee further submits that the lower authorities failed to appreciate that the right title and interest in the property in respect of which are development agreement was executed was in dispute, the said property was transferred by the owners to third party prior to entering into agreement with the assessee. In fact, the owners at the time of executing the MOU have no right to do so as they have already transferred the land to M/s Star Habitat Private Ltd. The MOU was void -a....
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....nt agreement between Mohammad Merchant and assessee dated 24th of March 2004. (c) Copy of Supplementary agreement between assessee and Mohammed Marchant Husain dated 25th March 2005. (d) First information report (FIR) under section 406, 402 and 34 of Indian Penal Code dated 21 August 2005, (e) Copy final report and bail order dated 4th April 2006, (f) High Court order granting injunction in favour of assessee, (g) Copy of complaint filed before Metropolitan Magistrate Borivali in case No. PW/853 of 2006, (h) Copy of cancellation dated 10th September 2011 (i) Copy of consent term in Civil Suit No. 2180 of 2004. 8. On the other hand the learned AR for the revenue supported the order of lower authorities. The ld. DR for the revenue further submits that the word 'capital gain' means property of any kind held by the assessee. The right to execute the Joint development right of immovable property falls within the expression of "property of any kind" as used in section 2(24) and consequently is a capital asset. And giving up a right of specific performance as claimed by the assessee amounts to relinquishment of capital asse....
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....s extended to the assessee. The assessee has given advance of Rs. 2.5 Crore against the purchase of development right of 2,00,000 sq.ft. of FSI on the aforesaid piece of land. The assessee failed to explain while they entered into agreement once they became aware of the dispute between the co-owners. On the basis of above referred observation, the Assessing Officer concluded that the transaction made by assessee was a development-cum-sale transaction which involved transfer of capital asset and was liable for taxation under the Income-tax Act. The cancellation deed dated 10.09.2011 nowhere speak of giving up the right to shown as claimed by assessee. As per cancellation deed, the compensation was paid to the assessee for loss of profit, liquidated damage, for loss of opportunity, to develop the property and sale of flat in open market. The Assessing Officer concluded that by no stretch of imagination can any part of compensation be considered as liquidated damage. The initial investment of assessee of Rs. 2.50 Crore whopped 800%. The Assessing Officer also concluded that contractual rights obtained under the contract of sale are a valuable right and considered as property. The cont....
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....that arises for consideration is whether damages received by the assessee for breach of development agreement are capital in nature or otherwise chargeable to tax. It is the case of the assessee that the compensation/damages received by the assessee from the purchaser on transfer of land under development agreement is capital in nature. It is the case of the assessee that the only right that accrues to the assessee who complains of the breach is right to file a suit for recovery of damages from the defaulting party. The breach of contract does not give rise to any debt and therefore a right to recover damages is not assignable because it is not a chose-in-action. For actionable claim to be assigned, there must be a debt in the sense of an existing obligation to consider it to be an actionable claim. It is the case of assessee that the assessee had a mere 'right to sue' which is neither a capital asset within the meaning of Section 2(14) of the Act nor is capable to being transferred and therefore not chargeable under s.45 of the Act. 10.1 The essence of long list of judicial pronouncements cited on behalf of assessee is that Section 6 of the Transfer of Property Act which ....
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....d that the use of the word 'include' in the definition of the word 'transfer' in s. 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 s. 45 of the Act. Since the transfer contemplated by s. 45 is one as a result whereof consideration has passed to the assessee or has accrued to him, extinguishment of the right must relate to that 'capital asset', corporeal or incorporeal. It is, therefore obvious that a transfer of a capital asset in order to attract liability to tax under the head 'Capital gains' must be a '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 s. 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 parlance, the terms 'consideration' and 'compensation' or 'damages' have distinct connotations. The former in the context of ss. 45 and 48....
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....uld 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 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 any 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 exists. The Court in the first place must decide that the defendant is liable is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defend....
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.... At this juncture, it may be pertinent to observe that the Revenue has inter alia questioned the basis giving rise to the cause of action for creation of 'right to sue'. We do not see any purport in such aspect. A development agreement was executed which enabled the assessee to utilize the land for construction and for sharing of profits. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/compensation to shun the possible legal battle. The intrinsic point with respect to accrual of 'right to sue' has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. It is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid litigation. This amply shows the existence of 'right to sue' in the perception of the defaulting party. Thus, the existence of 'right to sue' could not be....
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....as held that the amount so received was a capital receipt and could not be taxed as income. The relevant part of the order is extracted below; "11. The question whether a particular receipt is capital or revenue has frequently engaged the attention of the Courts but it has not been possible to lay down any single criterion as decisive in the determination of the question. Time and again, it has been reiterated that answer to the question must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. In Rai Bahadur Jairam Valji's case (supra), it was observed thus : "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the author....
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....ot based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset, i.e., the cement plant, which would obviously lead to delay in coming into existence of the profit-making apparatus, rather than a receipt in the course of profitearning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit-earning source, not in the ordinary course of their business, in our opinion, was a capital receipt in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (i) and (ii) extracted in Para 1 (supra) and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt." 13. The Hon'ble ....
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....um of Rs. 2,52,000/- as damages as well as a sum as interest from 30-1-1959 up to the date of the consent decree. In the assessment for the assessment year 1970-71 the Income Tax Officer (ITO) held that the assessee had an enforceable right as a result of acceptance of his offer by the Union of India in 1945 and the said right was acquired back by the Government of India on payment of Rs. 2,52,000 in the year 1969. The ITO, therefore, held that the amount of Rs. 2,52,000 was taxable as capital gains in the assessment year 1970-71. The assistant appellate Commissioner (AAC) held that the assessee had no capital asset and the amount of Rs. 2,52,000/- could not be treated as capital gains. As regards the interest awarded to the assessee, the AAC held that it was rightly taxed in the year in question. The Tribunal upheld the AAC's order. On further appeal to Hon'ble Bombay High Court it was held that it is a trite law that income can be held to accrue only when the assessee acquires a right to receive the income. Unlike compensation payable by the State when it acquires a citizen's land under Acts such as Land Acquisition Act where the right to receive compensation is statutory righ....
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....xtinguishment of rights therein. Since it was not a transfer the amount received thereon was not chargeable to tax under the head 'capital gains'. 17. Further Hon'ble Calcutta High Court in CIT v. Ashoka Marketing Ltd. 26 Taxman 215 (Cal.) the assessee entered into an agreement for purchase of certain property. In the event of default by the vendor a sum of Rs. 1 lakh was payable to the assessee by way of liquidated damages. The vendor failed to complete the transaction as there was a prior mortgage of the property with the Uttar Pradesh Government and it was not possible for the assessee to purchase the property. It was held that for the transaction there was no element of cost for receiving the compensation of Rs. 1 lakh. Accordingly, it was held that as there was no element of cost involved in the acquisition of damages received and, hence, it could not be treated either as capital gain or as a revenue receipt. 18. Further the coordinate bench of Mumbai Tribunal in ACIT Vs Jackie Shroff (supra) held that amount received by assessee as compensation for withdrawing a criminal case against accused who forged his signature for sale of shares, was to be regarded as capital rece....