PAWA INFRASTRUCTURE PVT. LTD.,NEW DELHI vs. PR.CIT- 7 , NEW DELHI

Briefly stated facts for the disposal of this appeal are that the assessee is a company engaged in the business of real estate development. During the financial year 2012-13, assessee received compensation on cancellation of plot at Rajeev Gandhi IT habitat at Goa and while offering the same to tax under the head “Long Term Capital Gain” (LTCG), assessee filed the return of income for the assessment year 2013-14 declaring an income of Rs.56,41,070/-. By order dated 15/02/2016, under section 143(3) of the Income Tax Act, 1961 (for short “the Act”), learned Assessing Officer accepted the same.

Subsequently, by way of notice dated 29/1/2018, the Ld. PCIT, Delhi-7 called upon the assessee as to why an order under section 263 of the Act be not passed to set right the under assessment of the income of the assessee by Rs.9,86,07,762/- basing on the facts and evidence available on record.

It was submitted on behalf of the assessee that they have applied for a plot of land on 10/5/2006, it was allotted on a lease for 30 years, further extendable by 60 years subject to certain conditions, the assessee started project in Assessment Year 2008-09 by opening an office in Goa, and claimed the property as capital asset within the meaning of section 2 (14) of the Act by showing the same under the head “fixed assets”. Further according to the assessee, due to change in the government in Goa, the said project was installed and finally cancelled by paying an amount of Rs. 28,03,68,246/-. According to the assessee against such a receipt, total expenses were claimed to the tune of Rs.19,26,71,561/-including the indexed cost of acquisition at Rs.13,49,54,129/-and the long-term capital loss of Rs. 2,45,85,83/- was claimed. Assessee pleaded that the compensation amount cannot be treated as interest and since such amount was a compensation for cancellation of allotment of land it has to be treated as capital asset.

Ld. PCIT considered the question whether the asset is a capital asset of the assessee in order to give rise to the capital gains. According to the Ld. PCIT, the assessee was never granted full rights over the property thereby making it one of the premises; that the assessee was granted only use of the premises for constructing the floor space to be allotted to IT software/ITES companies only for a limited period of time, initially 30 years, for which the assessee will pay the rent to the lessor; that in case of lease transaction, the ownership of an asset is determined by the terms of agreement between the lessor and lessee; that in terms of the lease agreement in the instant case the lessor had provided only a right to use the asset to the lessee during the period of lease, thereby retaining the rights of ownership; that under clause 6 (o) assessee was never allowed to part with any proportionate land; and therefore, the treatment given by the assessee that the property in question was capital asset of the assessee and the acceptance thereof by the learned Assessing Officer was not correct.

On this premise, Ld. PCIT held that the assessee is not entitled to claim the indexation cost on the property and since the learned Assessing Officer allowed the same, the assessment order is prejudicial to the interest of the Revenue and at the same time it is an erroneous order also. Ld. PCIT accordingly set aside the assessment order and directed the assessing officer to pass a fresh assessment order after allowing an opportunity of being heard to the assessee in line with the reasoning given by the Ld. PCIT.

Aggrieved by such an action of the Ld. PCIT, assessee preferred this appeal contending that the impugned assessment order is neither erroneous nor prejudicial to the interest of Revenue inasmuch as the acquisition of leasehold title in land vide registered lease deed constitutes a capital asset within the meaning of section 2 (14) of the Act and the compensation received on cancellation/extinguishment of such lease amounts to transfer of the profit-making apparatus and therefore the assessee rightly offered the same to tax under the head “capital gains” and the learned Assessing Officer rightly accepted the same under such head. Ld. AR placed reliance on the decisions of the coordinate benches of the Tribunal held in Butterfly Marketing Private Limited vs. DCIT (2019) 179 ITD 0431 (Chennai), CIT vs. Bombay Burmah Trading Corporation Limited (1986) 161 ITR 0386 (SC) and CIT vs. Vardhini & Co (1987) 165 ITR 0342 (Karnataka). It is further argued on behalf of the assessee that the issue as to whether the income has to be assessed under the head “capital gains” was considered in the original assessment and, therefore, the view taken by the learned Assessing Officer was a plausible view and thus there was no error in the order of the learned Assessing Officer to be revised under section 263 of the Act.

Per contra, Ld. DR places reliance on the order passed under section 263 of the Act and submits that inasmuch as the title in the property had not been passed to the assessee, it cannot be said that on the extinguishment of the rights of lease, the assessee receives compensation for transfer of a capital asset.

We have gone through the record in the light of the submissions made on either side. It remains an undisputed fact that the assessee was allotted the plot measuring 40,558.73 m² for setting up their business, possession of the plot was handed over to the assessee and a lease deed was executed for an initial period of 30 years, extendable by another 60 years subject to certain conditions laid down therein, the assessee started the project in the assessment year 2008-09 and opened an office in Goa to effectively manage the business, and the assessee treated the property as capital asset in their books by showing the same under the head “fixed assets”. It is also not in dispute that vide the Goa (Rajeev Gandhi IT habitat-cancellation/abolition and Regulation of Allotments of Plots) Act, 2012, the allotment of plot made in favour of the assessee was also cancelled and a sum of Rs.28,03,68,246/-was paid to the assessee towards compensation. As against this amount, assessee claimed the expenses to the tune of Rs. 19,26,71,567/-which includes indexed cost of acquisition at Rs. 30,49,54,129/-and claimed a long-term capital loss to the tune of Rs. 2,45,85,883/-and declared the same to tax under the head “Long Term Capital Gain (LTCG)”, which the assessing officer accepted.

The 1st question that falls for our consideration is whether the 10. amount received on cancellation of the long-term lease right is capital receipt or not, and precisely the Ld. PCIT also considered the said question. Ld. PCIT however, was of the view that the assessee was not granted full rights over the property thereby making it one of the premises, assessee was granted only use of premises for constructing the floor space to be allotted to IT software/ITES companies only for a period of time, initially 30 years, for which the assessee will pay the rent to the lessor and so long as the ownership has not been transferred the treatment given by the assessee that the property in question was capital asset of the assessee and offering the proceeds therefor under the had capital gains is not acceptable.

Such a question is, however, is no longer res integra and has been dealt with by the various benches of this Tribunal in the cases relied upon by the assessee and referred to supra. In the case of Butterfly Marketing Private Limited (supra) there was a lease for 99 years and on the termination of such lease, compensation was paid to the lessee and the same was held to be capital receipt. In the case of Bombay Burmah Trading Corporation Limited (supra) also it was held that the payment made for cancellation or sterilisation of right under the lease is capital receipt and not taxable under section 10 of the Act. So also in the case of Vardhani & Co (supra) where the assessee entered into long-term lease with the want of the premises and certain payments were made on the surrender of leasehold right without parties, such receipts were considered as capital receipts. The principle on which the decisions were based was that the compensation received for cancellation of rights under the lease agreement, which was the very source of profit-making apparatus of the assessee, would be a capital receipt and not a Revenue receipt assessable to tax as business income.

It is, therefore, clear that when the subject matter of the lease constitutes the source of profit-making to the assessee and any compensation received for cancellation of such rights, it would impact the profit-making capacity of the assessee and therefore, falls in the domain of capital receipt and not a Revenue receipt. Going by such rule it is clear that in this case it cannot be said that the assessee was wrong in offering such proceeds to tax under the head “capital gains” or the learned Assessing Officer accepting the same as something erroneous.

Even in the worst-case, what follows from the discussion in the preceding paragraphs is that it is one of the plausible views possible to be taken in this matter, and by taking a view the learned Assessing Officer cannot be said to have committed any error. It could be seen from the record that in the assessment order the assessing officer had stated that the details filed in respect of various items called for and were examined before accepting the returned income of the assessee. At page No. 3 of the paper book we find the computation of income wherein there is a reference to the long term capital gains claimed by the assessee in respect of the leasehold rights of the plot at Goa. Further to the notice dated 27/7/2015 issued under section 142 (1) of the Act the assessee submitted various information by way of letters dated 30/12/2015, 9/12/2015, 8/1/2016 and 15/02/2016. In the letter dated 30/4/2015 the assessee clearly narrated the events relating to acquisition and extinction of its rights in the relevant plot at Goa. On 9/12/2015 the assessee submitted the working of the capital gains, lease deed and also the enactment under which the rights were extinguished. In the letters dated 8/1/2016 and 15/2/2016 also the assessee dealt with this aspect in great detail and having mentioned, in his order, about the fact of assessee receiving compensation on cancellation of plot at Goa, and offered the same to tax under the head capital gain, learned Assessing Officer accepted the same.

It is therefore clear that the learned Assessing Officer applied his attention to this particular receipt and having called for the details on this aspect and by perusing them he accepted the same. In the preceding paragraphs it is held that the view taken by the learned Assessing Officer is certainly one of the several plausible views. In this context, it is worth the referring to the decision of the Hon’ble Apex Court in the case of CIT vs. Max India Ltd (2007) 295 ITR 282 (SC) wherein it was held that where two views are possible and the learned Assessing Officer had taken one such view, with which the learned CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the learned Assessing Officer is unsustainable in law. The decision of the Hon’ble Apex Court in the case of Malabar Industrial Co Ltd vs. CIT (2000) 243 ITR 83 (SC) was also noticed in this decision.

In these circumstances we are of the considered opinion that the learned Assessing Officer examined the issue, in the light of the facts in detail furnished by the assessee along with documents and took an informed decision on the allowability of the compensation receipt as capital gain. Such view taken by the assessing officer is at least one of the plausible views and cannot be said, by no stretch of imagination, that such a view is unsustainable in law. We, therefore, while respectfully following the decisions of the Hon’ble Apex Court on this aspect are of the opinion that the non-agreement of the Ld. PCIT with the view taken by the learned Assessing Officer, unless such a view of the learned Assessing Officer is unsustainable in law, does not afford any ground to the Ld. PCIT to revise the impugned assessment order. Accordingly, we find it difficult to sustain the order passed by the Ld. PCIT under section 263 of the Act and consequently quash the same.