KABIR SUDHIR MULJI,MUMBAI vs. DIT (IT) II, MUMBAI

The present appeal has been preferred by the assessee against the order dated 25.03.2014 of the Director of Income Tax (International Taxation) [hereinafter referred to as the DIT(IT)] relevant to assessment year 2009-10.

The assessee, Shri Kabir Sudhir Mulji, is the owner and holder of 105,000 shares of Great Offshore Ltd. having face value of Rs.10/- per share and purchased at a cost of Rs.34,58,108.03 as 2 Shri Kabir Sudhir Mulji shown in the balance sheet. The shares of Great Offshore Ltd. are listed on the recognized stock exchange. The aforesaid shares are held as long term capital asset in conformity with section 2(29A) read with section 2(42A) of the Act. During the assessment year 2009-10, the assessee along with the other shareholders entered into an agreement dated 21/10/2008 with Eleventh Land Developers Pvt. Ltd. for the sale of their respective shareholding in Great Offshore Ltd. together constituting 7.5% of paid-up equity share capital of the company at a fixed rate of Rs.540/- per share on a spot delivery basis on the terms and conditions mentioned in the agreement. In the agreement dated 21/10/2008 clause 7 provided that if the purchaser, namely, Eleventh Land Developers Pvt. Ltd. fails to pay the purchase consideration to the aforesaid mentioned seller group including the assessee on or before 18/11/21008. The purchaser was to pay liquidated damages of Rs.25 crores @ 82.32 per share. The purchaser failed to make the payment. The parties’ agreement dated 21.10.08 around at compromise and as per the agreement the assessee has received liquidate damages of Rs.25 crores being the full and final settlement towards all sums due to the seller group under the agreement. The assessee finally received a sum of Rs.34,57,318/- as liquidated damages from Eleventh Land Developers Pvt. Ltd. by cheque dated 18/03/3009 drawn on ICICI Bank Ltd. As the assessee had received the liquidated damages the assessee was of an opinion that it is neither taxable at capital gain nor as revenue income. Assessee filed the return of income in A.Y. 2009-10 and in the said return assessee did not offer this amount of 3 Shri Kabir Sudhir Mulji Rs.34,57,318/- for taxation as either capital gain or revenue receipt. However, assessee has filed the income tax return form No.ITR-2, note on capital receipt, copy of Demat statement, copy of the agreement and letter showing the compromise arrived at between the purchaser and the seller group. The return of income was processed u/s.143(1) of the Act. Subsequently, the assessment was completed under section 143(3) of the Act. The AO did not discuss the issue of liquidated damages received by the assessee in the assessment order. He accepted the view of the assessee that the liquidated damages received during the year by the assessee from M/s. Eleventh Land Developers Pvt. Ltd. is not taxable either as capital gains or as revenue receipt. The Ld. DIT(IT) issued notice to the assessee under section 263(1) of the Act wherein it was stated that the AO omitted to add back the amount of Rs.34,57,318/- received as liquidated damages which is taxable u/s.56(2)(vi). Therefore, the assessment order was prejudicial to the interest of the revenue in terms of section 263(1) of the Act. The show cause notice was given and the assessee has filed the return and submitted before the Ld. DIT(IT) and the Ld. DIT(IT) without discussing anything about the claim of the assessee directed the AO to tax the sum received of Rs.34,57,318/- by way of liquidated damages under section 56(2)(vi) of the Act.

The Ld. A.R. orally argued and also filed the written submission. Assessee’s main contention is that liquidated damages are neither taxable at capital gain nor as revenue income. She further submitted that the Ld. DIT(IT), in a non-speaking order, without

On the other hand, the Ld. D.R. relied upon the decision of Kolkata Bench in the case of Stewarts & Lloyds of India Ltd. 67 taxmann.com 41 (Kolkata-Trib.) and also relied upon the decision of Hon’ble Supreme Court in the case of Malabar Industries which has been relied by the assessee.

We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that in the case of Stewarts & Lloyds of India Ltd. (supra) it has been held that 263 proposal can be made by AO if the other conditions of sections are satisfied and the Tribunal has relied upon the various decisions of High Courts and held that section 263 can be invoked by the instance of the AO. We find that in the said decision the Tribunal has also held that section 263 can be initiated on the basis of the proposal of the AO, if the other conditions are satisfied. Therefore, now we will examine if the other conditions are satisfied or not.

Now coming to the facts of this case. We have gone through the assessment order which is placed on record. The AO has not 6 Shri Kabir Sudhir Mulji discussed anything regarding liquidated damages received by the assessee is taxable as capital gain or revenue income or does not taxable as capital gain or revenue income. We have also inquired from the Ld. A.R. that beyond assessment proceedings whether the AO has asked for any details regarding liquidated damages. The Ld. A.R. admitted that no notice regarding liquidated damages was issued by the AO. We also found from the order of Ld. DIT(IT) that Ld. DIT(IT) has passed the order without discussing the written submission which was filed before Ld. DIT(IT). The assessee has taken the contention that assessee has made full disclosure along with document and details and all the details were before the AO. Therefore, it is not taxable either as revenue receipt or capital receipt. The Ld. A.R. also relied upon the decision of Tribunal but the facts of this case are not similar to the facts cited before us. Therefore, we are of the opinion that this case is squarely covered by the decision of Kolkata Tribunal. Therefore, we do not discuss the judgment relied by the assessee. The Ld. A.R. relied on many judgments and argued that the liquidated damages received from the bridge of contract. Therefore, it is not liable. The Ld. A.R. also relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs. Abbasbhoy Dehgamwalla [195 ITR 28 (Bom)] and submitted that liquidated damages are not liable.

We have also gone through the order of AO and Ld. DIT(IT). We find that AO has not examined regarding liquidated damages and AO failed to make enquiry. Secondly, the Ld. DIT(IT) has also not 7 Shri Kabir Sudhir Mulji made enquiry whether liquidated damages are taxable as capital gain or revenue receipt. The Ld. DIT(IT) has come to a conclusion that it is liable for tax under the provisions of section 56(2)(vi). The Ld. DIT(IT) has also not applied his mind properly. Therefore, we are of the opinion that whether the liquidated damages received by the assessee are as per the document filed by the assessee is liable for taxation or not. We find that the AO and the Ld. DIT(IT) has not applied their mind at all. Therefore, in the interest of justice and fairplay, we are of the opinion that it requires verification at the end of the AO. Therefore, relying upon the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83, SC), we find that AO failed to apply his mind in perspective order passed by him and hence erroneous. It also appears that AO has not applied his mind. The AO has also not verified any supporting material and without making any enquiry. Therefore, we are of the opinion that Ld. DIT(IT) has rightly exercised the jurisdiction under section 263(1). But when all the details were filed before the Ld. DIT(IT) the Ld. DIT(IT) has without making enquiry has come to a conclusion that this amount is taxable under section 56(2)(vi) of the Act. Therefore, we modify the order of Ld. DIT(IT) and restore this issue back to the file of AO to verify the claim of the assessee that the sum of Rs.34,57,318/- is liable to tax being a capital income or revenue receipt or whether not taxable as capital gain or revenue receipt. Therefore, we restore this issue back to the file of the AO to pass a denovo assessment order.