TaxTMI 
TaxTMI 
2022 (1) TMI 484
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....s/ securities. 3.1 M/s Jesani Realty Pvt Ltd (JRPL) and M/s Emgeen Holding Pvt Ltd entered into an agreement dated 28-10-2005 for development of the residential and commercial project jointly in Goregaon Mumbai, Maharashtra. The share/entitlement of JRPL in this development project was 36.5% in commercial premises and 34.5% in residential premises. 3.2 The assessee in the year under consideration has entered into MOU with JRPL dated 23rd August 2010. As per the MOU, the assessee acquired part of the impugned project held by M/s JRPL to the extent of 50% against the consideration fixed at E 63 crores. The assessee also made the payment of E 6.30 lakhs as token money to M/s JRPL for the acquisition of the part project at the time of agreement dated 23-8-2010. 3.3 However, on a later date i.e. 16th December 2010, a relinquishment deed between the assessee and M/s JRPL was entered. As per the relinquishment deed, the latter shall pay to the former liquidated damages of E40 crores and former will relinquish all its rights in the said property. As per relinquishment deed, the JRPL had to pay all the amount up-to 15th January 2011. 3.4 The assessee got Rs. 2.5 crores only duri....
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....of such area of saleable condition in the manner as desired by it without the consent of other parties involved in the project. iii. The assessee neither had substantial business activities from its share and securities trading nor sufficient number of employees who could acquire the residential area as the staff quarters. Likewise, there was no possibility of opening new business line or factory, show room in the commercial area. Thus, it cannot be said that the share of the project to be acquired by the assessee was representing the capital assets. In other words the compensation received by the assessee for E 40 crores represents the business activity for the purpose of making the profit. Therefore, the transactions on hand characterizes the revenue receipts. iv. The right for receiving the compensation of E 40 crores accrued to the assessee after entering into the relinquishment agreement dated 16th December 2010 which was entered in the year under consideration. Though, the part of the consideration in the form of cheque and shares was received in the subsequent year but as per the mercantile system of accounting, the income in the form of compensation pertai....
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.... shares and securities. However, it is maintaining cash system of accounting with respect to its non-recurring/ exceptional and extra ordinary items. Therefore, the capital reserve was credited by the amount of E4.83 crores based on actual receipt. The breakup of such receipt stands as under: i. Cash/ bank receipt (FY 2010-11) 2.5 crores ii. Cash/ bank receipt (FY 2011-12) 2.0 crores iii. Amount realized from the sale of shares (FY 2011-12 dated 26-9-2011) 39,05,000/- 4.5 However, the learned CIT (A) disagreed with the contention of the assessee by observing as under: i. As per the clause 17 of the other objects, appearing in the memorandum of association, the assessee is authorized to "carrying on the business of construction or dealing in immovable properties". Therefore the MOU entered with JRPL represents the business activities of the assessee. It is because it does not make any difference whether the activity of the assessee was listed in the main object or incidental /ancillary objects. Likewise, as per the MOU with JRPL the assessee was to acquire part of the residential and commercial buildings in saleable condition which represents t....
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....of the shares at E 39,05,000/- which was not yet allotted to it. i.e. allotted and sold in the month of September 2011. Accordingly, the ld. CIT-A concluded that the assessee has adopted the colourable device to avoid the payment of tax. The assessee on one hand is treating the alleged liquidated damages as capital receipt only for E4.89 crores whereas JRPL has claimed the deduction for E40 crores in its profit and loss account. vi. Without prejudice to the above, CIT (A) held that if the impugned amount is held as capital receipt. It has to be taxed as short-term capital gain in the hands of the assessee. It is for the reason that the assessee failed to bring anything on record that the amount was received on account of breach of contract. Rather the amount represents the consideration received by the assessee for relinquishment of his rights in the impugned property. It was also pointed out that MOU was entered dated 23rd August 2010 and was subsisting on the date of cancellation. Thus the impugned amount has been paid without any breach of contract and therefore the same represents the amount received for the relinquishment of right in the property. Further, the learned....
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....nd premium of Rs. 990 on 09-09-2011 6. Subsequently the assessee sold share of M/s Jasani to M/s Corora Investment Pvt. Ltd. @ Rs. 11 i.e for Rs. 39,05,000/-. 7. Accordingly the assessee claimed that actual benefit derived by it in the transaction is of Rs. 4,89,05,000 (2.5 cr + 2 cr + 39.05 lakh) only but mistakenly shown 4,83,05,000/- 8.1 From the preceding discussion, certain issues arise for our consideration as detailed below: i. Whether the amount of compensation/liquidation damages received by the assessee for E40 crores represents the capital receipt or the business receipts. ii. If such receipt is capital in nature, then whether the provisions of capital gain shall attract on account of relinquishment of right in the property. iii. Whether the amount of compensation stands at E4.89 crores against the allegation of the revenue for E 40 crores. iv. Whether the assessee has adopted colourable device along with M/s JRPL for diverting the income as well as enabling M/s JRPL to claim higher amount of deduction by way of an expense. Likewise, whether the shares were sold by the assessee to a company controlled and managed b....
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....ection 2(14) includes 'property of any kind'. Similarly section 6 of the Transfer of Property Act, 1882 uses the same expression "property of any kind" but excludes "a mere right to sue" from its coverage. Thus the right to sue when foregone for a consideration, it is not chargeable to tax as the right to sue is not a capital asset. Right to sue is not an actionable claim and it cannot be assigned. 8.7 We also note that Recently, in Bhojison Infrastructure (P) Ltd v. ITO [2018] 99 taxmann.com 26/173 ITD 436 (Ahd. - Trib) the assessee being a builder and developer entered into a development agreement with a land owner by which he had a right in the said land for development. Subsequently, the landlord sold the land to third parties. The assessee acquired "right to sue" for specific performance of its pre-emptive right to purchase the land. The assessee received Rs. 247 lakhs as compensation/damages for relinquishment of 'right to sue' in the court of law and claimed the same as capital receipt not liable to income tax. The assessee made reference to section 6 of the Transfer of Property Act where the 'right to sue' is not a property and it cannot be transf....
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.... the assessee, it seems that the compensation was paid by the other party to avoid the legal consequences in the event of any sue to be filed by the assessee. To our understanding, to prove the contention that the assessee is not supposed to file sue in reality to justify its intent. Every businessman generally avoids the litigation which are indeed time-consuming and expensive affair besides the damage of the goodwill. The assessee has also explained the reason why the other party did nothonour the agreement. The other party got the approval for the construction and FSI of one floor which was more remunerative than the cost of damage paid to the assessee. This submission of the assessee was nowhere disputed by the ld. CIT-A. 8.10 A question also arises whether the compensation received by the assessee represents the business income or capital gain. As regards the issue whether the impugned compensation represents the business income of the assessee, we note that there is no single test or criteria to decide whether a receipt represents the capital or the business receipt. It depends upon the facts and circumstances of each case. It was contended by the assessee that it was acqu....
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....essee was intending to acquire the impugned project as stock in trade. These indications have been highlighted by the learned CIT (A) which have been reproduced in the preceding paragraph. Thus it appears that, the assessee was intending to acquire the impugned project as stock in trade. But to our understanding, based on the indications as discussed above, we find difficult to hold that the assessee was acquiring the impugned project for its business activities. It is for the reason that the revenue cannot sit on the armchair of the assessee to decide the decisions of the assessee. Therefore, nothing adverse can be drawn against the assessee on presumption and assumptions based on indications until and unless the documentary evidence or other materials are available on record. 8.12 Furthermore, the assessee on records engaged in the activity of share trading. There is no activity of the assessee for the real estate activity carried out by it in the earlier years. Thus, the activity which has not commenced cannot be decided as in the nature of business. Likewise, the agreement says that the assessee will get the share in the property in saleable condition. To our understanding, ....
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....very. (iii) The principle agreement contained specific clause that. JRPL shall execute all requisite deeds within 7 days of MOU. (iv) The supplier having failed to deliver the machinery within the stipulated time, the company received Rs. 8,50,000/- as liquidated damages. (iv) The vendor failed to handover documents/possession of the subject property, the appellant received Rs. 4,89,05,000/- as liquidated damages. (v) The company claimed it as capital receipts, however, the A,O, sought to treat it as income in its hands. (v) The company claimed it as capital receipts, however, the A.O. sought to treat it as income in its hands. (vi) As held by the Hon'ble Court that the compensation paid amounted to sterilization of the capital asset of the assessee, as the supplier failed to supply plant as stipulated in the agreement and clause 6 thereof came into play. The aforesaid amount received by . the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, was a capital receipt not liable to tax in the hands of the company. (vi) The appellant has been consistently claiming that the compensation pai....
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....ived in the year under consideration through cheque dated 30th March 2011. The balances amount was received in the subsequent year in the form of cheque of Rs. 2 crores dated 9th September 2011 and allotment of 3.55 lakh shares for Rs. 35.5 crore dated 9th September 2011. The allotted share were finally sold for Rs. 39,05,000/- only as on 26th September 2011. However in the books of account prepared for year ending 31st March 2011 on the basis of mercantile system which was approved and singed on 25th August 2011, the assessee recorded an amount of Rs. 4.83 crores as capital receipt on account of compensation receivable as per relinquishment deed. Thus the question arise how assessee determined the amount receivable only at Rs. 4.83 crores whereas as per deed it was to receive Rs. 40 crores only and loss on sale of share occurred after the finalization of books of account. Thus it is transpired that the assessee along with M/s JRPL arranged all the transaction in dubious manner which is nothing but a colourable devise. 8.17 Besides the above, we also note that the assessee before the authorities below has submitted time and again to have received a sum of E4.89 crores as mutuall....