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Facts
The assessee entered into an agreement to purchase land and paid consideration. Due to court cases, registration was delayed. Subsequently, the agreement was cancelled, and the assessee received compensation for relinquishing the right to acquire the property. The assessee offered this as Long Term Capital Gain, but the AO treated it as business income.
Held
The Tribunal held that the compensation received on relinquishment of a right to acquire a property is a capital receipt, not business income. The taxability of income depends on its real nature, not its entry in books of account. Therefore, the compensation is taxable as Long Term Capital Gain.
Key Issues
Whether compensation received for relinquishment of the right to acquire a property is to be treated as capital gain or business income.
Sections Cited
143(3), 153A, 153C, 2(47), 2(14), 28(ii)(e)
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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid appeal filed by the assessee for Assessment Year (AY) 2016-17 arises out of the order of Learned Commissioner of Income Tax (Appeals)-18, Chennai [hereinafter “CIT(A)”] dated 29.01.2019 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 153C r.w.s 153A r.w.s 143(3) of the Income-tax Act, 1961 (hereinafter “the Act”) on 31.12.2018.
The effective ground of appeal of assessee is against confirming the compensation received on relinquishment of right to acquire the property by cancelling the earlier purchase agreement as business income against the capital gain shown by the assessee.
1. 3. The brief facts of the case are that the assessee has entered into agreement for purchase of a land admeasuring 1 acre and 14 guntas at Yashwanthapura, Bangalore with M/s. Hind Mercantile Corporation Ltd., on 23.02.2006 and paid entire agreed consideration of Rs.1,87,50,000/-. There were some court cases in the said property and hence, registration was kept pending. Subsequently, the assessee entered into cancellation agreement with M/s. Hind Mercantile Corporation Ltd., on 24.11.2015 and received compensation of Rs.7,24,00,000/- towards the relinquishment of right to acquire the property in addition to the original advance amount of Rs.1,87,50,000/.
The assessee in the return of income, offered the compensation as a Long Term Capital Gain (LTCG) as the compensation was received on relinquishment of right, which is considered as transfer of capital asset as per section 2(47) of the Act. The A.O in the assessment order held the compensation as business income as assessee company is in the business of buy and sell of lands and it has shown advance paid of Rs.1,87,50,000/- in 2006 as trade receivable under the head current asset in the company’s balance sheet and the expenditure was classified as differed revenue expenditure. The Ld. CIT(A) has upheld the stand of A.O observing that there is no transfer of capital asset either from seller to the assessee or from the assessee to the seller back as the property being a land is under acquisition proceeding and the right to sell vested with the seller subject to the outcome of the proceedings. The Ld. CIT(A) further observed that that the assessee cannot seek specific performance of conveying the property as the assessee itself had agreed, in the sale agreement that it will undertake to denotify the acquisition proceedings. The Ld. CIT(A) therefore, held that compensation received is not capital gain in nature but business income. He alternatively held that compensation amount is also assessable as interest which is income under other sources.
The Ld. Authorized Representative (A.R) of the assessee has argued that the assessee-company has entered in sale agreement on 23.02.2006 for purchase of property at Yashwanthapura, Bangalore and subsequently requested vendor to cancel the agreement on 24.11.2015 for having waited for 10 years without deriving any benefit due to acquisition proceedings and the legal dispute. The Ld. AR has argued that compensation received is on account of relinquishment of right in the property, which is specifically defined as transfer under section 2(47) of the Act. The Ld. AR argued that compensation has been brought under the business income subsequently in A.Y 2019-20 by introducing new Section 28(ii)(e) of the Act.
The Ld. Departmental Representative (DR), on the other hand, has argued that the assessee-company has shown the advance given for the land as the trade receivable in the balance sheet for Financial Year 2012-13 to 2014-15 and the land was intended to be used for business purpose therefore, the A.O has correctly computed compensation as business receipt. The Ld. DR further argued that there was no transfer of assets from the landlord to the assessee and back therefore, the excess amount received cannot be considered as a capital receipt.
We have heard the rival submissions, and perused the materials available on record. The assessee has entered into sale agreement on 23.02.2006 for purchase of land and paid full consideration of Rs.1,87,50,000. Thus, the assessee has acquired right to obtain the property. Subsequently, after almost 10 years, as the sale agreement was not registered for pending court cases and other reasons, assessee entered into cancellation deed on 24.11.2015, cancelling the sale agreement and received compensation of Rs.7,24,00,000/-. It is evident from the cancellation deed that compensation received is for relinquishment of right to obtain the property, which is included in the definition of transfer in relation to capital assets as per section 2(47) of the Act. The Hon’ble Supreme Court in the case of A. Gasper v. CIT [1991] 192 ITR 382 (SC) has held that compensation for relinquishment of right in a property amounts to a capital receipt as the rights constitute a capital asset u/s. 2(14) of the Act. Similar view has been held by Hon’ble Bombay High Court in the case of CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bom). The Hon’ble Kerala High Court in the case of CIT v. Ashoka Marketing Ltd. [1976] 103 ITR 543 has held that compensation for the cancellation of a contractual right to buy a capital asset is a capital gain even if the taxpayer is engaged in a business related to the assets clause. As regard to the arguments of Ld. DR on the entry in the books of account, the Hon’ble Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co.
[1962] 46 ITR 144 (SC) has held that taxability of income does not depend on its entry in the books of account, but on its real nature and accrual. The Hon’ble Supreme court in the case of Keshav Mills Ltd., v. CIT [1953] 23 ITR 230 (SC) has clarified that a mere book entry is not decisive for income tax purpose. The nature of compensation depends on the context in which it was received and, if the compensation is linked to the termination of rights related to a capital asset it cannot be considered revenue receipt even if the assessee is in the land business. We therefore do not agree with the finding of Ld. CIT(A) and hold that compensation received is a capital receipt and taxable as Long Term Capital Gain. In view of the above, the appeal filed by the assessee is allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on 22nd January, 2025.