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Facts
The assessee, a non-resident, received principal damages and pre-award interest from an arbitration relating to a Business Association Agreement (BAA) dispute, along with interest from Fixed Deposits created from a High Court-mandated deposit. The Assessing Officer (AO) taxed these amounts, considering them income, while the assessee claimed they were capital receipts. The CIT(A) partly allowed relief, classifying principal damages as capital receipts but holding the entire interest taxable in AY 2019-20, leading to cross-appeals by both the assessee and the revenue.
Held
The Tribunal noted that the assessee had filed declarations under the Direct Tax Vivad se Vishwas Scheme, 2024 (DTVSV) for all relevant assessment years (AY 2017-18, 2018-19, 2019-20) and had paid the tax on the principal damages and total interest as evidenced by Form-2 certificates. Considering that the time limit for the designated authority to process Form-1 for AY 2017-18 and 2018-19 had expired, and the tax had been paid under DTVSV, the Tribunal concluded that the revenue's appeals for these years were infructuous. Similarly, the assessee's appeal for AY 2019-20 was dismissed as withdrawn, and the revenue's appeal for AY 2019-20 regarding the deletion of principal damages was also dismissed as infructuous.
Key Issues
Whether principal damages and pre-award interest constitute capital receipts or taxable income; Whether interest income from Fixed Deposits is taxable; The impact and legal consequences of filing declarations and paying tax under the Direct Tax Vivad se Vishwas Scheme (DTVSV) on pending appeals.
Sections Cited
Section 91 of Finance (No.2) Act, 2024 (DTVSV), Section 92(1) of Finance (No.2) Act, 2024 (DTVSV)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SMT BEENA PILLAI, JM &
Date of Hearing : 23.01.2025 Date of Pronouncement : 27.01.2025 O R D E R Per Bench: These appeals by the Revenue and the assessee are arising out of the consolidated order of the Commissioner of Income Tax (Appeals)-56, Mumbai, (in short "the CIT(A)") dated 27.04.2023 for Assessment Year (AY) 2017-18, 2018- 19 & 2019-20.
The assessee is a non-resident deriving income majorly from investments made in Indian Portfolio Companies and Mutual Funds in the form of interest, dividend income and Capital Gains on sale of investments. The assessee filed the return of income for the impugned AYs as per details given below:
AY Date of filing of return of income Income returned 2017-18 31.01.2018 Rs. 2,64,46,250/- 2018-19 31.08.2018 Rs. 18,58,49,430/- 2019-20 31.08.2019 Rs. 68,13,970/-
The assessee has entered into a Business Association Agreement (BAA) dated 14.05.2006 with Mr. Niranjan Hiranandani along with Mr. Darshan Hiranandani. The BAA laid down that the parties intent to jointly enter the business of construction, development in the Indian Real Estate Market and set out the structure through which such opportunities could be pursued. Dispute arose between the parties on the terms of BAA and arbitration proceedings were initiated by the assessee against the other two parties to the BAA for breach of relevant clauses of the BAA in February 2010 and the arbitral tribunal in its final award of May 2016 quantified the assessee's economic loss and awarded principal damage and pre-award interest. Aggrieved by the said award Mr. Niranjan Hiranandani and Mr. Darshan Hiranandani, contested the said order before the Hon'ble Bombay High Court. The Hon'ble Bombay High Court vide its interim order dated 14.10.2015 granted interim stay of the award with a direction to deposit a sum of Rs. 370,00,00,000/- with a liberty to the assessee to withdraw the said sum upon furnishing the bank guarantee on returnable basis in case the matter is decided against the assessee. Mr. Niranjan Hiranandani and Mr. Darshan Hiranandani complied with the directions of the Hon'ble High Court and deposited the sum of Rs. 370,00,00,000/-. The assessee withdrew the amount by furnishing a bank guarantee and placed the amount so withdrawn in fixed deposits in Central Bank of India. The dispute was finally decided by the Hon'ble Bombay High Court vide order dated 18.03.2019 in favour of the assessee by virtue of which the assessee is entitled to the following amounts. AY Particulars Interest Income – Rs. 2017-18 Actual interest on FD created with Central Bank 2,61,67,896 of India (13 February 2017 to 31 March 2017) 2018-19 Actual interest on FD created with Central Bank 18,47,51,359 of India (1 April 2017 to 31 March 2018) 2019-20 Actual interest on FD created with Central Bank 18,58,30,161 of India (1 April 2018 to 18 March 2019) 2019-20 Pre-High Court Order Interest (17 August 2016 to 6,46,00,000 17 November 2016) 2019-20 Interest on amount lying with Prothonotary (17 4,10,63,693 November 2016 to 18 March 2019) 2019-20 Principal damages plus pre-award interest, net of 4,40,56,45,664 tax, if any
The assessee did not offer the above tabulated amount to tax for the reason that the amount received are in the nature of capital receipts not chargeable to tax.
The AO made additions as tabulated below while completing the assessments for AY 2017-18, 2018-19 and 2019-20:
Nature of income Amount – Rs. Taxable Year of under the taxability head Principal damages plus pre-award 4,40,56,45,664 Profits and AY 2019-20 interest gains from business and profession Pre-High Court Order Interest 17 6,46,00,000 Income from AY 2019-20 August 2016 to 17 November 2016 other sources Interest on amount lying with 4,10,63,693 Income from AY 2019-20 Prothonotary (17 November 2016 other sources to 18 March 2019) Actual interest on FD created with 2,61,67,896 Income from AY 2017-18 Central Bank of India (13 February other sources 2017 to 31 March 2017) Actual interest on FD created with 18,47,51,359 Income from AY 2018-19 Central Bank of India (1 April 2017 other sources to 31 March 2018) Actual interest on FD created with 18,58,30,161 Income from AY 2019-20 Central Bank of India (1 April 2018 other sources to 18 March 2019)
Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) held that the principal damages plus pre-award interest of Rs. 4,40,56,45,664 as capital receipt not chargeable to tax. The CIT(A) further held that the entire interest totalling to Rs.50,24,13,109 earned by the assessee as tabulated above as taxable in the AY 2019-20 and not as per the additions made by the AO across three AYs i.e. AY 2017-18, 2018-19 and 2019-20. Both the assessee and the revenue are in appeal before the Tribunal against the order of the CIT(A) contending the following issues – i. The appeal filed by the revenue for AY 2017-18 pertains to interest income added by the AO to the tune of Rs. 2,61,67,896/- which the CIT(A) has held as taxable in the year 2019-20. ii. The revenue's appeal for AY 2018-19 pertains to the FD interest of Rs. 18,47,51,359/- added by the AO as income which the CIT(A) has held to be the income of AY 2019-20. iii. The appeal by the revenue for AY 2019-20 is with regard to the CIT(A) holding the principal damages plus pre-award interest to the tune of Rs. 440,56,45,664/- as capital receipt not taxable in the hands of the assessee. iv. The assessee's appeal for AY 2019-20 is towards the total interest of Rs. 50,24,13,109/- which is added as income is not taxable since the interest bears the same character as that of the principal damages which is held as capital receipt not taxable.
At the outset the ld. AR submitted that the assessee has filed the relevant forms under Direct Tax Vivad se Viswas Scheme, 2024 (DTVSV) for all the years under consideration i.e. AY 2017-18, 2018-19 and 2019-20. The ld. AR further submitted that while submitting Form-1 for AY 2019-20 the assessee has considered the amount of principal and pre-award interest of Rs. 440,56,45,664/- and the entire interest of Rs. 50,24,13,109/- (Page No. 25 & 26 of PB) and that Form-2 determining the amount of tax paid/payable by the assessee has also been issued (page 27 of PB). The ld. AR also submitted that the assessee has discharged the tax liabilities to the tune of Rs. 79,03,72,831/- on the principal and pre-award interest (page 28 of PB) and the tax on the total interest amounting to Rs.18,02,65,824/- is discharged via withholding tax and regular assessment tax (page 29 to 46 of PB). Accordingly the ld AR submitted that the appeals of the revenue for AY 2017-18 and 2018-19 do not survive. The ld. AR further submitted since the assessee's application under DTVSV is accepted the appeal filed for AY 2019-20 by the assessee may be treated as withdrawn and the appeal of the revenue for AY 2019-20 would become infructuous.
We heard the parties and perused the material on record. The assessee disputed the addition made by the AO Principal damages plus pre-award interest amounting to Rs. 4,40,56,45,664 and interest totalling to Rs. 50,24,13,109/- across AYs 2017-18, 2018-19 & 2019-20. The CIT(A) deleted the addition made towards Principal damages plus pre-award interest and held that the entire interest is taxable in the year 2019-20. We notice that the assessee has filed Form-1 under DTVSV and Form-2 determining the tax paid / payable by the assessee is already issued for AY 2019-20. The relevant Form 2 towards discharge of taxes on both Principal damages plus pre-award interest of Rs. 4,40,56,45,664 and the interest of Rs. 50,24,13,109 is extracted below –
From the combined perusal of the above forms it is clear that the assessee has paid the tax on the principal and pre-award interest of Rs. 440,56,45,664/- amounting to Rs. 79,03,72,831/- as well as the tax on the total interest of Rs. 50,24,13,109/- amounting to Rs.18,02,65,824/-. Therefore based on the submissions of the ld AR and considering the above facts the appeal filed by the assessee for AY 2019-20 contending the interest addition of Rs. 50,24,13,109/- is dismissed as withdrawn. Further the appeal filed by the revenue contending the deletion of addition made towards principal and pre-award interest of Rs. 440,56,45,664/- is also dismissed in view of the fact that the impugned amount is declared by the assessee under DTVSV and that the assessee has paid the tax on the same.
The revenue preferred appeals for AY 2017-18 and 2018-19 contending the decision of the CIT(A) that the interest amount of Rs.2,61,67,896/- and Rs. 18,47,51,359/- added by the AO in these AYs respectively as taxable in the year 2019-20. The ld AR in this regard submitted that the said amounts are part of the total interest of Rs. 50,24,13,109/- declared under DTVSV and therefore the appeals of the revenue does not survive. The ld DR though did not dispute the said factual position submitted that the assessee has filed Form 1 for these two AYs and Form-2 has not yet been issued. Accordingly the ld DR submitted that the appeals cannot become infructuous since Form-1 filed by the assessee is pending disposal. The ld AR to counter the said arguments submitted that the time line for determining the tax payable by the authorities has expired as per section 92(1) of DTVSV and therefore the Form-1 filed is automatically become not accepted.
We notice that as per the provisions of section 92(1) of DTVSV as extracted below the time line for the designated authority is 15 days for determining the tax payable on the amount declared by the assessee under DTVSV – Time and manner of payment. 92. (1) The designated authority shall, within a period of fifteen days from the 40 date of receipt of the declaration, by order, determine the amount payable by the declarant in accordance with the provisions of this Scheme and grant a certificate to the declarant containing particulars of the tax arrear and the amount payable after such determination, in such form as may be prescribed.
In assessee's case, it is an undisputed fact that the interest additions made by the AO in AYs 2017-18 and 2018-19 are already included in the interest amount declared under Form 1 for AY 2019-20 and that the assessee has also paid the tax on the said amount as evidenced by the Form-2 as extracted in the earlier part of this order. Further the facts that Form-1 filed by the assessee for AYs 2017-18 & 2018-19 have not been processed by the designated authority within the time limit and that the tax on the amount declared is already paid in AY 2019-20 have not been controverted by the revenue before us. Therefore in our considered view, there is merit in the submission of the ld AR that the appeal filed by the revenue for AYs 2017-18 and 2018-19 do not survive and have become ifructuous. Accordingly the said appeals are dismissed accordingly.
In result, the appeals by the Revenue for AYs 2017-18, 2018-19 & 2019-20 are dismissed as infructuous and the appeal of the assessee for AY 2019-20 is dismissed as withdrawn.