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Income Tax Appellate Tribunal, ‘C’ BENCH : CHENNAI
Before: SHRI GEORGE MATHAN & SHRI INTURI RAMA RAO
आदेश / O R D E R
PER INTURI RAMA RAO, ACCOUNTANT MEMBER:
This is an appeal filed by the Assessee directed against the order of the Commissioner of Income Tax (Appeals)-1, Chennai
ITA No. 3079/2016 :- 2 -: (‘CIT(A)’ for short) dated 07.09.2016 for the Assessment Year (AY) 2012-2013.
2. The Assessee raised the following grounds of appeal:
‘’1. The Order of the Commissioner of Income Tax (Appeals)-1, Chennai dated 07-09-2016 insofar as it confirms the order of the Assessing Officer in bringing to tax the sum of Rs.4,65,30,500/- being compensation received from Butterfly Gandhimathi Appliances Limited for loss on account of non-exercise of commercial exploitation/development rights on account of 99 years lease to run the said Butterfly Gandhimathi Appliances Limited is erroneous, against the provisions of law and contrary to the facts and circumstances of the case.
The Commissioner of Income Tax (Appeals) should have found that the Memorandum of Understanding dated 29-03-2012 provides for compensation to the appellant on account of its inability to go for commercial exploitation/development rights of the property under consideration sold by it and hence, the compensation received on that account is not income but only capital receipt, not liable to tax.
3. The Commissioner of Income Tax (Appeals) should have found that as per the Lease Agreement, there is no provision for payment of compensation for termination of lease between the parties and lessor is not entitled for compensation for loss of rent when the lease is terminated by the lessor itself, and not by the lessee.
The Commissioner should have found that in the Memorandum of Understanding dated 2gth March 2012, it has clearly been stated that the compensation is for giving up any claim by the appellant for the loss arising on account of nonexercise of commercial exploitation/development rights and consequently, the Commissioner should have found that the compensation under question is not for the loss of rent but for the loss of source of income namely, exploitation of the subject asset. For these reasons and for any other reasons that may be adduced at the time of hearing, it is prayed that the Hon’ble Tribunal may be pleased to set aside the order of the Commissioner of Income Tax (Appeals)-1, Chennai dated 07-09-
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2016 insofar as it confirms the addition of compensation of Rs.4,65,30,500/- which being a ‘capital receipt’ which is assessable to tax is erroneous, against the provisions of law and contrary to the facts and circumstances of the case and passed with total lack of application of mind to the facts and circumstances of the case and render justice’’.
The brief facts of the case are as under:
The appellant namely M/s. Butterfly Marketing Private Ltd is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing household appliances. The return of income for the AY 2012-13 was filed on 02.05.2013 disclosing total income of Rs.2.72,34,320/-. Against the said return of income, the assessment was completed by the Dy. CIT, Corporate Circle-I(2), Chennai (hereinafter called “AO”) vide order dated 13.02.2015 passed u/s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) at total income of Rs. 7,46,42,470/- after making several disallowances. While doing so, the Assessing Officer made addition of �4,65,30,500/- towards compensation received from M/s.
Butterfly Gandhimathi Appliances Ltd claimed to be capital receipt by the appellant.
Brief factual matrix of the issue are as under:- 4.
Assessee company owning property measuring 26,265 Sq.ft with super structure situated at Pudupakkam Village, Vandalur-
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Kelambakkam Road, Kelambakkam 603 103 used as godown and this building was under long term lease of 99 years with M/s. Butterfly Gandhimathi Appliances Ltd and this property was sold to same company namely M/s. Butterfly Gandhimathi Appliances Ltd for a consideration of �3,75,69,500/- on 29.03.2012. On the same day assessee company had entered into Memorandum of Understanding with M/s. Butterfly Gandhimathi Appliances Ltd in terms of which assessee company was paid compensation of �4,65,30,500/- stated to be on account of consideration towards mitigating the capital loss on account of sale of property. Compensation was stated to have been paid to compensate the losses which assessee company could have earned if the godown was rented out or rent it would have saved as the building was used for its own business purpose and the same was claimed to be capital receipt. However the Assessing Officer held that compensation was received in lieu of loss of profit and therefore held as Revenue receipt, placing reliance on the decisions of Hon'ble Supreme Court in the cases of CIT vs. M/s. Gangathar Baggnath (1972) 86 ITR 19 and CIT vs. Manna Ramji (1972) 86 ITR 29. Further, the Assessing Officer taking note of the fact that property was sold by the assessee company to the same party i.e. M/s. Butterfly Gandhimathi Appliances Ltd to whom the property was leased for 99 years, inferred that it is a part of sale consideration.
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Being aggrieved, an appeal was preferred before the 5.
Ld.CIT(A) who vide impugned order confirmed the action of the Assessing Officer (AO).
Being aggrieved by the order of the ld. CIT(A), the appellant 6. is in appeal before us in the present appeal. It is contended that the Assessing Officer ought not have inferred that compensation paid is part of the sale consideration, in as much as, the stated sale consideration is not below guideline value for stamp duty purpose and in absence of any evidence to the contrary, it cannot be assumed that consideration was paid over the above stated consideration. The ld. Authorised Representative placed reliance on the judgment of Hon'ble Supreme Court in the case of K.P. Varghese vs. ITO,( 1981) 131 ITR
The ld. Authorised Representative further submitted that compensation was received towards termination of long term lease of 99 years, which is capital receipt not liable to be taxed.
On the other hand, the ld. Sr. Departmental Representative 7. placed reliance on the orders of lower authorities.
We heard the rival submissions and perused the material on 8. record. Admittedly, in the present case property was sold to the same party who was enjoying the property as lessee on long term lease of ITA No. 3079/2016 :- 6 -:
99 years and the property was sold for a consideration not below the guideline value prescribed for stamp duty purpose. Therefore the provisions of Section 50C of the Act have no application. It is settled proposition of law that there cannot be any presumption of receipt of consideration over and above apparent consideration stated in registered sale deed. What is apparent should be believed to be real in the absence of any material to contrary on record. Apparently, the compensation was paid towards termination of long term lessee, in terms of MOU entered between parties on 29.03.2012. The Assessing Officer doubted the genuineness of the term of MOU. He should have examined the other parties to find out the purpose of the impugned payment, which the Assessing Officer had chosen not to do so.
Therefore the MOU has to be believed and the amount received should be held to be compensation towards termination of long term lease.
Then the question boils down to whatever compensation received on account of termination of long term lease of 99 years can be treated as revenue receipts and liable to tax. Any compensation received towards loss of source of income cannot be treated as Revenue receipts but capital receipts which is not liable to be taxed. The Hon’ble Supreme Court in the case of Karam Chand Thapar Bros (P)
Ltd vs. CIT (1971) 80 ITR 167, wherein it was held as follows.
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‘’9.In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for these questions between capital and income, trading profit or non-trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts (see Commissioner of Income-tax v. Rai Bahadur Jairam Valji (1955) 35 ITR 148 P. H. Divecha v. Commissioner of Income-tax 48 ITR 222, Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax, 53 ITR 261, Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax, 53 ITR 283 and Commissioner of Income-tax v. Best & Co. (P.) Ltd. (1966) 60 ITR 11 (SC)
The question whether a particular income arising from the termination of one of the agencies of a multi-agency concerned is a capital receipt or a revenue receipt is undoubtedly a difficult question to be answered. The difficulty is inherent in the problem itself. Decisions on this question are numerous. But none of them have laid down a precise principle of universal application, but various workable rules have been evolved for guidance. One of us, speaking for the court in Kettlewell Bullen & Co.'s case (supra) has laid down the following guidelines for finding out the true nature of such a receipt. The relevant observations read thus : " Where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue : where by the cancellation of an agency the ITA No. 3079/2016 :- 8 -:
trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. "
In the light of the above decision, we allow the appeal filed by the assessee In the result, the appeal of the assessee stands allowed. 9. Order pronounced on 19th day of September 2019, at Chennai.