Section 271(1)(c) – Taxability of compensation received by the assessee on account of hardship faced due to delay in delivery of flat is a debatable issue and therefore penalty cannot be levied.

11. Shri Laxmankumar R. Daga vs. ITO (Mumbai)

Members : Mahavir Singh (JM) and N. K. Pradhan (AM)

ITA No.: 3326/Mum/2014

A.Y.: 2004-05.     Date
of Order: 15^th March, 2017

Counsel for assessee / revenue: Ms. Nikita Agarwal / Maurya
Pratap

FACTS  

In the course of assessment proceedings, the Assessing
Officer (AO) noticed that the assessee had received compensation of Rs.
16,50,000 on account of hardship faced due to delay in delivery of flat at
Suraj Apartments from the developer.  He
taxed this amount as compensation received on surrender of tenancy rights and
charged it to tax as long term capital gains. He levied a penalty of Rs.
4,80,725 u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where it contended that he had disclosed the receipt on account of compensation
on the face of the balance sheet and the said balance sheet was a part of
return of income and the auditor in Form 3CD had specifically mentioned this
amount as a capital receipt. Reliance was also placed on the decision of Mumbai
Tribunal in the case of Kushal K. Bangia vs. ITO [ITA No. 2349/Mum/2011
dated 31.1.2012 for AY 2007-08], wherein the Tribunal has held that `receipts
during redevelopment are capital receipts and not revenue and such receipts
reduce the cost of assessee and should be taken into account when such
redeveloped properties are sold’. However, the CIT(A) upheld the action of the
AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the amount of compensation was duly
reflected in the balance sheet filed along with the return of income as
compensation / damage received from M/s MR & DR Thacker and was added to
the proprietor’s capital. Having noted the decision of the Tribunal in the case
of Kushal K. Bangia (supra), it held that the taxability of compensation
of Rs. 16,50,000 received by the assessee as long term capital gain by the AO
is a debatable issue. It held that an analogy may be drawn here from the decision
of the Delhi High Court in CIT vs. Mushashi Autoparts India Pvt. Ltd. [330
ITR 545 (Del)] where the court held that penalty cannot be levied in a case
where the assessee, prior to commencement of business had received interest,
which was capitalised as pre-operative expenses. In the assessment, the amount
was regarded as taxable. The Court held that treating the amount as taxable
income cannot by itself justify levy of penalty. The Tribunal deleted the
penalty levied by the AO u/s. 271(1)(c) of the Act.

The appeal filed by the assessee was allowed.