BELANI HOUSING DEVELOPMENT LIMITED,KOLKATA vs. DCIT, CENTRAL CIRCLE 1(4),, KOLKATA

Ground Nos. 1 & 2 raised by the assessee is against the order of ld CIT(A) upholding the taxability of the compensation received from M/s Saregama India Ltd [in short ‘SIL’]. 3. The facts in brief are that a search action u/s 132 of the Act was conducted upon the assessee on 28.08.2018. The assessee has filed

According to the ld. AO, the Settlement Agreement resulted in rescindment of the Agreement for Sale dated 30.04.2004 and withdrawal of all suits and litigation for an agreed consideration of Rs.18 crores. The ld. AO observed that, the assessee had claimed the impugned receipt to be in the nature of capital receipt not liable to tax. However, in ld. AO’s view, the impugned receipt resulted in extinguishment of valuable rights which the assessee had acquired under the Agreement for Sale. The ld. AO therefore required the assessee to explain as to why the impugned sum should not be taxed by way of capital gains u/s 45 of the Act. After considering the submissions of the assessee, the ld. AO held that, the terms of settlement made it crystal clear that, what the assessee had parted with was valuable right to specific performance under the Agreement for Sale and therefore there was a clear transfer by extinguishment of rights in the aforesaid property resulting in capital gains. The ld. AO, in support of his conclusion, relied on the decision of Hon’ble Madhya Pradesh High Court in the case of CIT vs Laxmi Devi Ratani (147 Taxman 642) and K.R. Srinath Vs ACIT (141 Taxman 268). The ld. AO accordingly taxed the entire sum of Rs.18 crores by way of capital gains in the hands of the assessee in the assessment framed u/s dated.

In the appellate proceedings, though the ld. CIT(A) partly affirmed the order of the ld. AO, but he observed that, the Arbitrator

Assailing the action of the ld. CIT(A), the ld. AR for the assessee submitted the entire sequence of events, which we shall discuss later and claimed that the impugned settlement receipt was towards withdrawal of pending suits & claims and thus was in the nature of capital receipt not liable to tax. He further contended that, there was no transfer of any right/property involved whatsoever in as much as the settlement agreement resulted only in withdrawal of pending suits

Per contra, the ld. CIT, DR appearing for the Revenue supported the order of the ld. CIT(A). He contended that, the payment was made towards extinguishment of the valuable right which the assessee and the three bodies corporate enjoyed under the Agreement for Sale dated 30.04.2004 and therefore it was rightly taxed by the lower authorities. He thus urged before us not to interfere with the order of the ld. CIT(A).

We have heard both the parties and perused the material placed before us. Before we advert to the issue at hand, it is first imperative to cull out the facts relating to this dispute. As noted above, in FY 2004-05, the assessee had entered into an Agreement dated 07.04.2004 with three bodies corporate, namely, M/s Rixebe Estates & Development Private Limited, M/s Surana Mercantiles Private Limited and M/s Eriabarie Films & Foils Private Limited titled as “Co- Operation Agreement”. A perusal of the agreement, which is placed at Pages 48-58 of Paper Book, reveals that, the assessee and these three bodies corporate had agreed to co-operate with each other for undertaking a real estate project on mutually agreed terms. It was

A perusal of the above terms of Settlement reveals that, SIL had agreed to pay the settlement amount in consideration of the assessee withdrawing all pending cases in all judicial forums, more particularly described in Schedule - I to the said agreement and withdrawing unconditionally all cases, complaints and objection filled against M/s Saregama before different judicial forums. We find that the ld. AO had factually erred in observing that the settlement amount was paid for relinquishment of the valuable rights being enjoyed by the assessee under the AFS dated 30.04.2004. Rather, the terms of settlement

There is merit in the ld. AR’s submission that, the impugned compensation was received by the assessee from SIL towards loss of source of income. It is seen that, the assessee is engaged in the business of real estate and the acquisition of this property would have become a source of recurring income. The assessee however settled the disputes by withdrawing the suits and gave up their claim to the source of income. The ld. AO is found to have disagreed with this contention on the ground that, the assessee had not blocked

The case of the assessee is supported by the decision of the Hon’ble Supreme Court in the case of Oberoi Hotels (P) Ltd vs. CIT (236 ITR 903). In the decided case the assessee was engaged in the business of operating, managing and administering many hotels belonging to others for a fee. Upon the expiry of the agreement, the assessee had option to ask for renewal of the agreement by mutual agreement. However, if the owner decided to sell/dispose the hotel, then the assessee would have the first right to exercise the option of purchasing the hotel. In relation to one particular hotel, a receiver had been appointed on behalf of the owner who had decided to sell the hotel and the assessee was asked give up all its rights, including right to purchase, etc., in relation to the said hotel for which a settlement agreement was executed and compensation of Rs. 29.48 lakhs was received. The assessee claimed that the settlement amount received

The Hon’ble Supreme Court in the case of CIT Vs Saurashtra Cement Ltd (325 ITR 422) was seized with the question as to whether the compensation paid for delay in delivery of the machinery would constitute loss of profit and therefore will be revenue in nature or whether it would tantamount to compensation for sterilization of profit earning source itself and thereby in the nature of capital receipt. Answering the question in favour of the assessee and holding the

A perusal of the above decision shows that, where the damages to the assessee is linked with the procurement of a capital asset, then such damages is to be treated as amount paid for sterilization of the

It is also seen that, the ld. AO had referred to the amendment brought in Section 28 of the Act by the Finance Act, 2019 whereby clause (e) was inserted in Section 28(ii) wherein it was provided that, any compensation which was due to any person in connection with termination or modification of the terms of contract relating to his business shall be taxed as and by way of business income. We observe that, this provision was made effective and applicable by the Legislature from AY 2019-20 onwards. The ld. AR has rightly contended that, this amendment referred to by the ld. AO, supported the assessee’s case that, prior to AY 2019-20, the compensation received by an assessee towards loss of source of income due to breach of contract was in capital field and that the Legislature had brought the same in the ambit of taxation only from AY 2019-20 and onwards.

We rely in this regard on the decision of the Hon’ble Gujarat High Court in the case of Baroda Cement & Chemicals Limited (158 ITR 636). In the decided case, the assessee had entered into a contract with a company for purchase of mill. The vendor however breached the contract. The assessee filed a suit of claim against the vendor who subsequently settled the same for a negotiated compensation. On

We also refer to the decision of the jurisdictional ITAT, Kolkata in the case of Dy.CIT Vs Azimganj Estate Pvt Ltd (ITA No. 735/Kol/2012) dated 05.09.2014. In this case, the assessee had entered into an MOU with a land owner to develop the said premises. However the assessee & the land owner were not able to obtain necessary sanction & approval for development and/or sale of the said premises rendering the MOU un-enforceable. The land owner moved to the Calcutta High Court which permitted it to sell the property by appointing a receiver. Accordingly the land owner sold the property through the receiver. In the meantime, the assessee appealed against the order of the Single Judge Bench of Calcutta High Court before the Division Bench which set aside the order of the Single Judge. The land owner and the purchaser of the property moved before Supreme Court which granted stay on the order of Division Bench and directed the assessee to not press the land owner to cancel the sale agreement. The said petition &

The Ld. AR has also rightly relied on the decision of Hon’ble ITAT, Mumbai in the case of Chheda Housing Development Corpn. v. ACIT (110 taxmann.com 56). In the decided case, the assessee was also engaged in business of construction and development. It had entered into a memorandum of understanding (MOU) with one 'M' for developing saleable right of floor surface index on a plot of land. On execution of MOU, assessee paid certain advance to owner of said land. Subsequently, the assessee came to know that owner of said land had already transferred development right to 'S' Ltd, which was a company consisting of family members of landowners. The assessee thereafter filed a civil suit for seeking relief for specific performance of

We further find that the assessee has also rightly relied on the following decisions wherein the consideration paid for compensation being surrendering the right to sue was held to be capital receipt not liable to tax. - Satyam Food Specialities (P) Ltd (57 taxmann.com 194) (ITAT Jpr.) - ACIT Vs Jackie Shroff (97 taxmann.com 277) (ITAT Mum) - Bhojisan Infrastructure Pvt Ltd vs. ITO (99 taxmann.com 26) (ITAT Ahd) - DCIT Vs Britannia Industries Ltd (ITA No. 1390-92/Kol/17) (ITAT Kol) - Shireen J Dastur Vs ITO (180 taxmann.com 478) (ITAT Mum) 23. For the above reasons and following the decisions (supra), we therefore hold that the settlement amount of Rs.6,58,00,000/- received by the assessee from SIL under the Settlement Agreement dated 27.03.2018 was in the nature of capital receipt not liable to tax. The ld. AO is accordingly directed to delete the same.

In so far as the protective addition of Rs.11,42,00,000/- is concerned, it is not in dispute before us that, the aforesaid sum pertained to and belonged to the three bodies corporate, M/s Rixebe Estates & Development Pvt Ltd, M/s Surana Mercantiles Pvt Ltd and Eriabarie Films and Foils Pvt Ltd, who were also parties to the Settlement Agreement. The material placed before us shows that, these three parties had received their respective shares in the settlement amounts and they had accounted the same in their books of accounts as well. On these admitted facts therefore, we see no

In the result, the appeal of the assessee is allowed.