Section 37(1) – Compensation received in lieu of extinction of right to sue is capital receipt not chargeable to tax
JAGDISH D. SHAH | JAGDISH T. PUNJABI Chartered Accountants
Development Corporation vs. Addl. CIT (Mumbai)
Members: G.S. Pannu (V.P.) and Pawan Singh (J.M.)
ITA No.: 86/Mum./2017
Date of order: 29th May, 2019
Counsel for Assessee / Revenue: Dr. K. Shivaram and Rahul K.
Hakkani / H.N. Singh and Rajeev Gubgotra
Section 37(1) – Compensation received in lieu of extinction
of right to sue is capital receipt not chargeable to tax
The assessee, a partnership firm, was engaged in the business
of construction and development of property. During FY 2004-05, the assessee
had entered into a memorandum of understanding (MOU) with one Mr. Merchant, the
landowner, for the development of his land and paid the sum of Rs. 2.5 crores.
In terms of the MOU, the parties had agreed to execute a joint development
agreement and the landowner was to obtain the commencement certificate from the
local authorities. However, the landowner did not provide the certificate.
Besides, the assessee came to know that the landowner had transferred the
development rights of the land to a company owned by his family.
The assessee filed a suit before the Bombay High Court
seeking specific Performance of the MOU and to execute the joint development
agreement. In the alternative, the assessee claimed damages for breach of
contract. A criminal complaint was also filed alleging fraud. Litigation in
various forums continued till 2011 when, through the intervention of a
well-wisher, the parties agreed to a settlement. As per the terms of the
settlement, the assessee agreed to withdraw the criminal complaint and the
civil suit. The assessee also agreed not to create any third party right, title
or interest in respect of the right created under the MOU. On execution of the cancellation deed in
September, 2011, the assessee was paid Rs. 20 crores.
For the year under appeal, the assessee had filed a Nil
return. The AO treated the receipt of Rs. 20 crores as income and taxed the
same as long-term capital gain. The CIT(A), on appeal, confirmed the AO’s
Before the Tribunal, the Revenue justified the orders of the
lower authorities and contended that the right to execute the joint deve