Sections 4, 45 & 56: Compensation received by assessee under settlement for withdrawing criminal complaint for fraud constitutes capital receipt.
Facts:
The assessee was a non-resident domiciled in France. The estate of the assessee’s late father consisted of shares of certain companies which were held in joint name of the assessee’s late father either with the assessee or with the brother of the assessee. In order to transfer such shares in the name of the assessee and to manage the affairs in India the assessee had executed a general power of attorney in favour of her friend ‘R’.
During the previous year relevant to A.Y. 2003-04, ‘R’ sold the shares for Rs. 93,70,135/- and deposited sum of Rs. 60,32,000/- in the bank account of the assessee. These facts were not in the knowledge of the assessee at all.
After realising the foul play and cheating on the part of ‘R’, the assessee sent a legal notice to R and filed criminal complaint against R before the Additional Chief Metropolitan Magistrate. As a result of such complaint, the police conducted enquiry and investigation into whole matter and gave prima facie findings that ‘R’ fraudulently sold these shares and have cheated the assessee. On filing of the findings of the police with the Magistrate, ‘R’ sought to settle the dispute and come forward with settlement agreement dated 31st March 2004, wherein she offered to pay Rs.1,20,00,000/- on the terms that the assessee would withdraw all the complaints filed against ‘R’.
As per the terms of the settlement agreement out of the total compensation, Rs. 33,38,135/- was towards the balance consideration of shares, and the balance lump sum amount of Rs. 86,61,865/- was for other disputes and differences. The above balance consideration was inclusive of the compensation of Rs.15,00,000/- which was on account of fraudulent sale of land situated in Alibaug.
While filing the return, the assessee allocated a substantial portion of compensation received, i.e. Rs. 1,01,97,000/- as compensation attributable to dispute relating to shares being a principal dispute (excluding compensation relating to land and other miscellaneous disputes). The assessee claimed that since she gave up her claim regarding to shares in the previous year relevant to the A.Y. 2005-06, i.e. the year in which settlement took place, the entire capital gain arising on account of initial sum of Rs. 60,32,000/- deposited in her account and allocated compensation of Rs.1,01,97,000/- was taxable in A.Y. 2005-06 but was claimed to be exempt as per Article 14(6) of the Indo-France DTAA .
The AO held that amount of Rs. 60,32,000/- received by the assessee in lieu of transfer of shares is taxable as capital gain in the A.Y. 2003-04 as it was accepted by ‘R’ that shares were actually sold in the A.Y. 2003-04. The compensation of Rs.1,20,00,000/- was taxed under the head ‘Income from Other Sources’ as in the settlement agreement there was no mention regarding agreeing on the compensation for high rise in the market price of the shares and the same cannot be attributed to transfer of shares. The AO held that if at all any capital gain is to be taxed, then same is to be taxed in the A.Y. 2003-04 and compensation received by the assessee will be taxable in the A.Y. 2005-06.
The CIT(A) held that the matter was settled in the year 2004-05 and therefore for the purpose of section 45 the shares transferred in the A.Y. 2005-06 and not in A.Y. 2003- 04. The stand taken by the assessee was accepted by the CIT(A) and a sum of Rs.1,01,97,000/- was considered to be consideration for misappropriation of shares by fraud and unfair means.
Held:
From the records and the impugned order, it is an admitted fact that in this case, no dispute other than the dispute relating to shares and land was involved. Thus, for the purpose of taxability/assessability of sum of Rs. 1.20 crore, the amount of Rs. 33,38,135, and Rs. 15 lakh has to be segregated, because, the sum of Rs. 33,38,135, pertains to transaction of shares which is to be assessed and taxed under the head capital gains, which in the present case is admittedly not taxable by virtue of Article-14(6).
Regarding balance amount of Rs. 71,61,865/-, the said amount cannot be taxed under the head capital gain as it was clearly specified that only Rs. 33,38,135/- was towards sale of shares and there cannot be any inference that the balance amount was also in lieu of shares, for the reason that at the time of settlement of agreement, the market value of these shares was very high. Further, nothing was brought on record to establish that balance amount was towards compensation for change in market value from date of sale and upto the date of settlement.
The balance compensation of Rs. 71,61,865/- was on account of personal damage done by ‘R’. The settlement has been agreed only to withdraw the police complaint and criminal case filed in the Court of Chief Metropolitan Magistrate. Under the given circumstances and facts the compensation is capital receipt and hence it cannot be taxed as it is beyond the purview of charging section.
Further, such compensation cannot be taxed under the head Income From Other Sources as nowhere it was mentioned that it was towards interest on delayed payment of shares sold in the year 2002. It has been received only towards damage for breach of trust or fraud and which has no co-relation with sale of shares and therefore compensation received cannot be taxed under any heads of income.
Thus, the sum of Rs. 71,61,865, cannot be taxed under the charging provision, as the same is compensation in the form of capital receipt.
