Section 37(1) – Compensation received in lieu of extinction of right to sue is capital receipt not chargeable to tax

10.  Chheda Housing
Development Corporation vs. Addl. CIT (Mumbai)

Members: G.S. Pannu (V.P.) and Pawan Singh (J.M.)

ITA No.: 86/Mum./2017

A.Y.: 2012-13

Date of order: 29^th 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

FACTS

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
order.

Before the Tribunal, the Revenue justified the orders of the
lower authorities and contended that the right to execute the joint development
right of immovable property falls within the expression of ‘property of any
kind’ as used in section 2(24) and consequently was a capital asset. And giving
up a right of specific performance as claimed by the assessee, amounted to
relinquishment of capital asset. Therefore, there was a transfer of capital
asset.

HELD

The Tribunal noted that the assessee received a sum of Rs. 20
crores on execution of the cancellation deed in September, 2011. Referring to
the relevant clause in the deed, the Tribunal observed that as per the deed,
the assessee had not transferred any rights, which was sought to be confirmed
in the MOU. In fact, those rights were already transferred by the landowner in
favour of the company owned by his family before the date of the MOU. The
assessee received compensation which consisted of refund of the amount paid by
way of advance along with interest, towards loss of profit / liquidated damage,
for loss of opportunity to develop the property and sale of flats in the open
market, and towards the cost of litigation.

Therefore, relying on decisions of the Delhi High Court in CIT
vs. J. Dalmia (149 ITR215), the Bombay High Court in CIT vs.
Abbasbhoy A. Dehgamwalla (195 ITR 28), the Supreme Court in CIT
vs. Saurashtra Cement Ltd. (325 ITR 422) and of the
Mumbai Tribunal in ACIT vs. Jackie Shroff (194 TTJ 760), it was
held that the amount received by the assessee in excess of the advance was on
account of compensation for extinction of its right to sue the owner, and so
the receipt is a capital receipt not chargeable to tax. According to the
Tribunal, the case of K.R. Srinath vs. ACIT (268 ITR 436 Madras)
relied on by the Revenue was distinguishable on facts. In the said case the
amount was received as consideration for giving up the right of specific
performance which was acquired under an agreement for sale. However, in the
case of the assessee here, the owner of the land had already transferred such
right to a third party. Rather, the original agreement was cancelled.