TaxTMI 
TaxTMI 
2026 (7) TMI 795
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....elf constitutes a capital receipt not chargeable to tax. Since both the appeals arise out of the same appellate order, involve common facts and interconnected issues, they were heard together and are being disposed of by this consolidated order. 2. The effective grounds raised by the Revenue substantially assail the finding of the learned CIT(A) that the gains arising from the transfer of the subject property are liable to be assessed under the head "Capital Gains". The original grounds raised by the assessee relate principally to the disallowance under section 40(a)(ia), the disallowance of provision towards compensation for removal of encroachments and settlement of boundary disputes, and the disallowance of health and education cess. By way of additional grounds, the assessee has further contended that the appreciation in the value of the asset during the period of its alleged sterilisation and the receipt arising upon termination of the Joint Development Agreement constitute capital receipts not chargeable to tax. As all these grounds emanate from a common set of facts, they are being considered together in the succeeding paragraphs. The respective grounds of appeal are repr....
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....rcumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of Rs. 7,50,00,000 under section 40(a)(ia) of the Act without appreciating the fact that section 40(a)(ia) of the Act is not applicable as the expenditure in relation to hand over of plot to MCGM is an expense in relation to transfer of a capital asset which is allowed under the head Capital Gain. 3. Without prejudice to Ground No. 2, the Ld. CIT(A) erred in upholding the disallowance of Rs. 7,50,00,000 under section 40(a)(ia) of the Act on the ground that no tax has been deducted at source in relation to the plot to be handed over to MCGM without appreciating the fact that the appellant has only made the provision for expense, therefore, the provisions of Section 40(a)(ia) of the Act would not be applicable on the provision for expenses. 4. Without prejudice to Ground No. 2, the Ld. CIT(A) erred in upholding the disallowance of Rs. 7,50,00,000 under section 40(a)(ia) of the Act on the wrong fact that the appellant has created the provision and the amount is credited to the account of the sellers. In the year under consideration, only the provision was created but the amount was....
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...., under an agreement dated 29.07.1971, granted leasehold rights in favour of Shri C.C. Sharma. Subsequently, the reversionary rights in the property came to be transferred to Manav Dharam Mission Trust, which, in turn, conveyed those rights on 20.01.1996 to M/s Bahupriya Properties Pvt. Ltd., subsequently known as M/s Skyline Mansions Pvt. Ltd. ("SMPL"). Consequently, while SMPL became the holder of the reversionary ownership rights in the property, Shri C.C. Sharma continued as the lessee under the original lease arrangement. 4. On 04.04.2006, the assessee acquired leasehold rights together with the corresponding development rights over an area admeasuring 32,262.79 square metres from Shri C.C. Sharma. With a view to commercially exploiting the property by undertaking a residential development, the assessee and SMPL entered into a Joint Development Agreement ("JDA") dated 04.04.2008, whereby the responsibility for development of the project was undertaken by SMPL at its own cost, while the assessee became entitled to receive constructed area aggregating to 16,500 square metres as its consideration under the development arrangement. Simultaneously, under a Supplementary Joint De....
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.... the assessee declared the surplus arising from the aforesaid transaction under the head "Profits and Gains of Business or Profession" and claimed various deductions while computing the business income. During the course of the assessment proceedings, however, the assessee raised an alternative legal contention that, by reason of the prolonged and involuntary inability to commercially exploit the development rights embedded in the Joint Development Agreement for almost a decade, the commercial character of the asset had undergone a material transformation and, therefore, the gains arising upon its subsequent transfer were liable to be assessed under the head "Capital Gains". Reliance in support of the said contention was placed upon various judicial precedents including Canara Bank Ltd., Universal Radiators and Aeren R Infrastructure. The Assessing Officer did not accept the said contention and proceeded to assess the entire surplus as business income while also making, inter alia, the disallowances under section 40(a)(ia), disallowance of provision towards compensation for removal of encroachments and settlement of boundary disputes, disallowance of education cess and certain othe....
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....was its contractual entitlement to receive the agreed constructed area under the Joint Development Agreement. According to him, owing to prolonged legal and regulatory impediments, environmental issues, encroachments, third-party disputes and other supervening circumstances beyond the control of the assessee, the project remained incapable of implementation for almost a decade. During this entire period, the assessee had no contractual right to terminate the Joint Development Agreement or to commercially exploit the rights which had already become embedded therein. It was, therefore, argued that the assessee's commercial rights remained completely blocked and involuntarily sterilised and that the appreciation accruing during such period could not be regarded as ordinary business profit. Reliance was placed upon the decisions in CIT v. Canara Bank Ltd.,[63 ITR 328)(SC) Universal Radiators v. CIT (201 ITR 800), CIT v. Bombay Burmah Trading Corporation Ltd., (161 ITR 386) CIT v. Saurashtra Cement Ltd.,[2010] 192 Taxman 300 (SC) CIT v. HCL Infosystems Ltd. [2016] 385 ITR 35 (Del) and PCIT v. Aeren R Infrastructure Ltd. MANU/DE/1614/2018 to contend that the receipt should either be trea....
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....proper factual setting before determining whether the assessee's contention that the receipt itself is not chargeable to tax can be accepted. We shall accordingly first analyse the ratio laid down in the aforesaid authorities and thereafter examine their applicability to the peculiar facts of the present case. 13. We shall first advert to the decision of the Hon'ble Supreme Court in CIT v. Canara Bank Ltd. [63 ITR 328 (SC)], upon which considerable reliance has been placed by the learned counsel. In that case, the funds of the assessee-bank, though originally forming part of its trading assets, remained blocked and incapable of being utilised in the ordinary course of its banking business because of circumstances beyond its control. The Hon'ble Supreme Court held that where a trading asset remains completely blocked and sterilised, and no commercial operations can be carried on with such asset during the period of blockage, the appreciation arising solely because of such involuntary sterilisation cannot be regarded as ordinary trading profit in the same manner as profits generated in the course of business operations. 13.1. The relevant observations of the Hon'ble Supreme Cou....
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....account of such intervening circumstances, the receipt arising merely because of the fortuitous appreciation attributable to those circumstances cannot automatically be equated with ordinary business profits. 14.1. The relevant observations of the Hon'ble Supreme Court are reproduced hereunder: "Even assuming it was stock-in-trade, it was held by this Court in Canara Bank Ltd.'s case (supra)that stock-in-trade, if it gets blocked and sterilised and no trading activity could be carried with it, then it ceased to be stock-in-trade, and any devaluation surplus arising on such capital due to exchange rate would be capital and not revenue. Applying the ratio of this case, the copper ingots, which even if assumed to be stock-in-trade, were blocked and sterilised due to hostilities between India and Pakistan, and, therefore, it ceased to be stock-in-trade and any surplus arising due to exchange ratio in the circumstances was capital receipt only. ... The assessee did not carry on business of buying and selling ingots. The compensation paid to the assessee was not for any trading or business activity, but just equivalent in money of the goods lost by the a....
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....h agreement would be a capital receipt." 15.2. The principle emerging from the aforesaid decision is that where compensation is received for destruction, sterilisation or impairment of the very source or framework of the profit-making apparatus, such receipt may assume the character of a capital receipt. However, the applicability of that principle necessarily depends upon whether, on the facts of the particular case, the profit-making apparatus itself has been destroyed or whether what has merely occurred is a temporary or prolonged interruption in its commercial exploitation. It is this distinction which assumes significance while examining the assessee's additional grounds and will be considered after discussing the remaining authorities relied upon by the parties. 16. The learned counsel has next relied upon the decision of the Hon'ble Supreme Court in CIT v. Saurashtra Cement Ltd [2010] 192 Taxman 300 (SC). It was submitted that the said decision recognises the distinction between compensation received in the ordinary course of business and compensation received on account of impairment of the profit-making apparatus. We have carefully considered the ratio of the said ju....
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....ng broad principle, which may be taken into account in reaching a decision on the issue : "Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." 13. We have considered the matter in the light of the afore-noted broad principle. It is clear from clause No. 6 of the agreement dated 1-9-1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery c....
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....vening events beyond its control, the character of the resultant receipt has to be determined having regard to the real nature of the rights affected and not merely by the nomenclature employed by the parties. In that case the assessee, engaged in the manufacture, distribution and sale of computers and services in India, entered into a joint venture agreement with other companies manufacturing computers. Under the agreement the assessee was allowed to use name, license, patents, and trademarks of other company 'HP' During relevant assessment year, the agreement was terminated and assessee received certain amount as compensation for past and future loss of right to use brand name, trademark, etc., of HP and elimination of non-competition obligations. The Assessing Officer held that the extinguishment of these bundle of rights by termination of the joint venture agreement resulted in transfer of an asset in terms of section 2(47)(if) and accordingly, the entire sum received by assessee was brought to tax under section 45 read with section 55 as 'income from capital gain. The Hon'ble Court held that "What stood extinguished as a result of the termination of the joint ventu....
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.... by the assessee undoubtedly recognise the distinction between compensation received for destruction or sterilisation of the profit-making apparatus and receipts arising in the ordinary course of business. They also recognise that prolonged involuntary blockage of commercial rights may, in appropriate circumstances, influence the character of the gains ultimately realised. However, none of the aforesaid decisions lays down that every receipt arising after prolonged blockage or every appreciation occurring during such period automatically becomes a non-taxable capital receipt. The applicability of those principles necessarily depends upon the precise nature of the rights affected, the purpose for which the receipt has arisen and the surrounding commercial circumstances. 20. Applying the aforesaid principles to the facts before us, we are unable to accept the assessee's contention that the receipt in question falls altogether outside the charging provisions of the Act. Admittedly, the assessee did not receive any compensation for destruction or extinction of its profit-making apparatus. On the contrary, upon termination of the Joint Development Agreement, the contractual restricti....
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....ial history of the transaction and not merely with reference to the original intention with which the property had been acquired. 22. The learned Departmental Representative assailed the impugned order by submitting that the learned CIT(A.) had erred in applying the doctrine of prolonged sterilisation to the facts of the present case. According to him, the assessee had at all material times acquired, held and dealt with the subject property as a trading asset in the ordinary course of its business as a real estate developer. The subsequent delay in execution of the project, however prolonged, did not alter the intrinsic character of the asset nor convert a trading asset into a capital asset. It was further submitted that the assessee itself had consistently treated the transaction as part of its business operations, had offered the transfer of development rights under the Joint Development Agreement to tax as business income in Assessment Year 2012-13 and had originally returned the surplus arising during the year under consideration also as business income. It was argued that the acquisition of the reversionary rights on 17.09.2018 resulted in the assessee obtaining complete ow....
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....ely because the assessee had, at an earlier stage, offered the transfer of development rights under the Joint Development Agreement to tax as business income. The issue has to be examined by considering the entire chain of events commencing from the execution of the Joint Development Agreement, the transfer of the development rights thereunder, the prolonged inability to commercially exploit the contractual rights for reasons wholly beyond the control of the assessee, the eventual termination of the Joint Development Agreement, the acquisition of the reversionary rights and the subsequent transfer of the consolidated bundle of rights. It is only upon such cumulative appreciation of the factual matrix, read in the light of the governing legal principles, that the true character of the gains arising from the impugned transaction can be correctly determined. We shall, therefore, first examine the judicial authorities which have weighed with the learned CIT(A.) before dealing individually with the objections raised by the Revenue. 25. We shall first advert to the decision of the co-ordinate Bench of the Tribunal in ACIT v. Neel Siddhi Developers [2022 (10) TMI 1159 (Mumbai - Trib.)]....
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....Para 6.2 from page nos. 7- 22, summarised the arguments of the Assessee and thereafter, allowed the claim of the Assessee as per reasoning provided in para 6.5 of the appeal order being impugned before us which are stated hereunder: ... b. The AO has himself recorded a finding that the said land was classified as "stock in trade" in the books of the Assessee in the earlier years. The question is whether such classification in books is be all and end all of the matter. Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959 35 ITR 594 (SC) held that all attendant facts and circumstances of the case is to be seen to determine whether the income is capital gain or business income No one test or formula can be applied as a thumb rule. The same sentiment has been echoed by the Mumbai High Court in the case of Fort Properties (P) Ltd vs. CIT (1994) 208 ITR 232 (Bom.) wherein the Hon'ble Mumbai High Court treated the loss on sale of property classified as "stock in trade" as "capital loss" instead of "business loss". In the present case, the Department had taken a stand that even if the asset was classified as "stock in trade" yet the loss on its sale is not "b....
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....y the CIT (A) in an elaborate order nor stated as to why the findings and reasoning of CIT(A) is incorrect either on facts or in law. Hence, we uphold the order of CIT(A) on this ground and hold that the Assessee has rightly offered the gain on sale of Nagpur land under the head "Capital Gain". 25.2. In our considered opinion, the significance of the aforesaid decision lies not merely in the conclusion ultimately reached but in the principle adopted by the Tribunal, namely, that the issue has to be examined in the backdrop of the cumulative commercial realities and not by adopting an isolated or mechanical approach founded exclusively upon the original character of the asset. Although the decision is that of a co-ordinate Bench and, therefore, possesses persuasive rather than binding value, the factual similarity between the controversy before the Tribunal and the present case lends considerable assistance in appreciating the legal effect of prolonged involuntary sterilisation of commercial rights. 26. We may now examine the decision relied upon by the learned counsel in CIT Vs. Rama Rani Kalia [2013] 358 ITR 499 (Allahabad), which has been pressed into service to answer the ....
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.... is less than 36 months, the gain arising from such transfer would be of short-term capital gain. [Para 11] In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.3.2004, after the leasehold rights were converted into freehold rights on the same property which was in her possession. The conversion was by way of improvement of title, which would not have any effect on the taxability of profits. [Para 12] In view of above, there is no error of law in the impugned order of the Tribunal. The revenue's appeal is therefore dismissed. 26.1. The principle emerging from the aforesaid decision is that the legal character of a property interest has to be determined having regard to the totality of the rights held by the assessee and not by artificially segregating each constituent interest in isolation. Consequently, where an assessee already possesses substantial proprietary and commercial rights and subsequently acquires another complementary interest which merely perfects or consolidates those existing rights, it cannot invariably be said that a completely new and independent asset has come into existen....
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....Development Agreement, the assessee did not possess any contractual liberty to unilaterally terminate the arrangement or retrieve the commercial rights already transferred thereunder. Thus, the prolonged inability to commercially exploit the rights was neither voluntary nor the consequence of any conscious commercial strategy adopted by the assessee. It is this involuntary and prolonged sterilisation of the commercial rights, viewed cumulatively with the surrounding circumstances, which constitutes the distinguishing feature of the present case and which weighed with the learned CIT(A.) while directing assessment of the gains under the head "Capital Gains." 29. The next objection of the Revenue is that the assessee acquired the reversionary rights from M/s Skyline Mansions Pvt. Ltd. only on 17.09.2018 and, therefore, an altogether fresh asset came into existence immediately before its transfer on 18.09.2018, thereby excluding the possibility of applying the doctrine of prolonged sterilisation. We are unable to persuade ourselves to accept the aforesaid contention. As noticed in the preceding paragraphs, the assessee had acquired the leasehold rights and the corresponding develop....
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....f the gains under the head "Capital Gains". We find ourselves in agreement with the said approach. Our concurrence is founded not upon any abstract proposition that prolonged delay, by itself, changes the character of a trading asset, but upon the cumulative appreciation of the extraordinary facts peculiar to the present case. 31. In the light of the foregoing discussion, we are of the considered opinion that the learned CIT(A.) has correctly appreciated both the factual matrix and the governing legal principles. We have already rejected the assessee's additional grounds seeking to treat the receipt as a non-taxable capital receipt. Equally, for the reasons discussed hereinabove, we find no infirmity in the conclusion of the learned CIT(A.) that, in the peculiar facts and circumstances of the present case, the gains arising from the transfer effected on 18.09.2018 are liable to be assessed under the head "Capital Gains" and not under the head "Profits and Gains of Business or Profession." The Revenue has not been able to demonstrate any factual or legal error in the reasoning adopted by the learned CIT(A.) warranting our interference. We, therefore, uphold the impugned finding o....
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....ead. We, therefore, direct the Assessing Officer to delete the disallowance made under section 40(a)(ia). The corresponding ground raised by the assessee is accordingly allowed. 35. The next issue relates to the disallowance of the provision created towards compensation payable for removal of encroachments and settlement of boundary disputes. The learned counsel submitted that the existence of encroachments and boundary related disputes is not in dispute and that, under the terms governing the transfer, the assessee was required to convey a clear and marketable title to the purchaser. It was submitted that the provision represented a commercial estimate of the liability which had accrued in connection with removal of encroachments and settlement of the boundary disputes and that the expenditure had a direct and proximate nexus with the transfer of the capital asset. The learned Departmental Representative, on the other hand, submitted that the liability had not crystallised during the relevant previous year and that, in any event, the quantum claimed by the assessee had not been substantiated by satisfactory evidence. 36. We have carefully considered the rival submissions. In....