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.