THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1),, VISAKHAPATNAM vs. DATLA SHANTI, VISAKHAPATNAM

PER S. BALAKRISHNAN, Accountant Member :

2 2. Brief facts of the case are that the assessee is an individual filed her return of income admitting a total income of Rs. 24,88,980/- for the AY 2017-18 on 29/10/2017. The case was subsequently selected for scrutiny under CASS and notice u/s. 143(2) dated 14/8/2018 was issued to the assessee through ITBA. Subsequent to change in the incumbent a fresh notice u/s. 129 was issued to the assessee vide letter dated 11/11/2019 and accordingly notice U/s. 142(1) of the Act was issued through ITBA on different dates. The scrutiny under CASS was selected for the reason “large deduction / exemption claimed from capital gains” by the assessee during the relevant assessment year. It was noticed by the Ld. AO that the assessee has claimed a deduction U/s. 54F of the Act for Rs. 2,90,30,172/ and the Ld. AO issued a notice U/s. 142(1) of the Act calling for the details of the residential properties owned by the assessee. In response, the assessee filed its reply through ITBA on 20/11/2019. The assessee also submitted the detailed calculation of the capital gains and deduction claimed U/s. 54F of the Act. Considering the above submissions, the Ld. AO issued a notice U/s. 142(1) of the Act on 5/12/2019 requesting the assessee to substantiate the claim of deduction U/s. 54F of the Act as the assessee was in possession of two residential houses.

3 The assessee vide letter dated 6/12/2019 submitted the details called for. The Ld. AO then issued a show cause notice dated 14/12/2019 stating that “countering the claim of the assessee the Ld. AO requested the assessee to show cause the reason for treating one house property as commercial property whereas as

per the GVMC records it is a residential property”. In response to the show cause notice the assessee submitted that it is not a residential property and used only for commercial purposes.

Considering the replies of the assessee, the Ld. AO disallowed the deduction claimed U/s. 54F of the Act for Rs. 2,90,30,172/- and assessed the same as income of the assessee. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the Ld. Authorized Representative of the assessee submitted that the assessee by mistake has claimed the compensation received of Rs. 3 Crs in a suit for damages for breach in performance of the contract as long term capital gains whereas it is a compensation received which is considered to be a capital receipt not exigible to tax. Considering the submissions of the Ld. AR, the Ld. CIT(A) concluded that right to sue for damages is not a transferrable asset and hence allowed the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.

“1. The order of the Ld. CIT(A) is erroneous both on facts and in law.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition fo Rs. 2,90,30,172/- under section 54F of the Income Tax Act, 1961.

4. The Ld. CIT(A) has erred in not remanding the matter to the AO when additional ground was admitted in the appellate proceedings.

5. The appellant craves leave to add or delete or amend or substitute any ground or appeal before and / or at the time of hearing of the appeal.”

5 The same property was sold to another five vendees during 2017 by the legatee. The Ld. DR further submitted that the assessee has sought specific performance of the contract or damages for breach of contract from the legatee. The Ld. DR further submitted that the assessee initially treated the compensation received as capital gains and accordingly claimed deduction U/s. 54F of the Act. The Ld. DR further submitted that subsequently, before the Ld. CIT (A), the assessee changed its stand and argued that the receipt of Rs. 3 Crs was in accordance with compromise settlement for breach of contract and hence it is a capital receipt.

The Ld. DR further submitted that the Ld. CIT(A) has erred in treating the capital gains as capital receipt. He therefore pleaded that the order of the Ld. AO be upheld. The Ld. DR placed heavy reliance on the following case laws:

(i) CIT vs. Balbir Singh Maini [2017] 86 Taxmann.com 94 (SC) (ii) CIT vs. H. Anil Kumar [2012] 20 taxmann.com 430 (Karnataka) (iii) Decision of the ITAT, Delhi “F” Bench in the case of ACIT vs. Shri Ramit Vohra in dated 19/09/2019.

Per contra, the Ld. AR argued that the assessee filed a suit either for the specific performance of the contract or in the alternative compensation shall be provided to the assessee for the

6 breach of contract. The Ld. AR further submitted that since it is a compensation for the damages for breach of contract through a compromise decree on 20/03/2017, the assessee received a sum of Rs. 3 Crs and hence it is a capital receipt. The Ld. AR further argued that the assessee has merely extinguished his right to sue and has not sold any capital asset which will constitute a ‘transfer’ as defined under section 2(47) of the Act. The Ld. AR further submitted that a mere right to sue cannot be transferred as per section 6(e) of the Transfer of Property Act and hence it cannot be considered as a capital asset. The Ld. AR placed reliance on the following case laws:

(i) CIT vs. V.MR.P. Firm (1964) 32 CCH 0290 ISCC (ii) Balmukund Acharya vs. DCIT & Ors (2009) 310 ITR 0310 (iii) Smt. Gitaben Chandulal Prajapati vs. ACIT, ITAT, Ahmedabad. (iv) Gujarat Gas Co. Ltd vs. CIT (2000) 245 ITR 0084 (Guj.) (v) Baroda Cement & Chemicals Ltd vs. CIT (1986) 158 ITR 0636 (Guj.) (vi) CIT vs. Ashoka Marketing Ltd (1987) 164 ITR 0664 (Kolkata) (vii) CIT vs. J. Dalmia (1984) 149 ITR 0215 (Delhi) (viii) Bhojison Infrastructure Pvt Ltd vs. ITO (2018) 173 ITD 0439 (Ahmedabad Tribunal). (ix) CIT vs. Balbir Sing Maini (2017) 398 ITR 0531 (SC) (x) CIT vs. Tata Services Ltd (1980) 122 ITR 0594 (Bom.) (xi) CIT vs. Vijay Flexible Containers (1990) 186 ITR 0693 (Bom.)

7 (xii) CIT & Anr vs. H. Anil Kumar (2011) 242 CTR 0537 (Karnataka) (xiii) Pradip J. Mehta vs. CIT (2008) 300 ITR 0231 (SC) (xiv) CIT vs. Vegetable Products Ltd (1973) 88 ITR 0192 (SC) (xv) Girish Bansal & Anr vs. Union of India & Ors (2016) 384 ITR 0161 (Delhi) (xvi) Cadell Weaving Mill Co. (P) Ltd Vs. CIT (2001) 249 ITR 0265 (Bombay)

The Ld. AR heavily relied on the decision of the Hon’ble Gujarat High Court in the case of Gujarat Gas Co. Ltd vs. CIT (2000) 245 ITR 0084 (Guj.). The Ld. AR therefore pleaded that the order of the Ld. CIT(A) be upheld.

8 for specific performance of the contract which was already sold to the third parties. Alternatively, the assessee also sought for damages for breach of contract. Consequently, a compromise settlement was entered into between Mr. RSRK Raju and the assessee by filing a compromise petition on 14/2/2017 where both the parties agree to pay and receive Rs. 3 Crs in lieu of the property. It is the contention of the assessee that since the amount received by her is in the kind of compensation / damages and hence shall be treated as a capital receipt. It was argued by the Ld. AR that there is no transfer of capital asset and the receipt is purely arising out of the damages for breach of contract which is not a transferable right. We also find from the argument of the Ld. AR that the assessee has wrongly claimed exemption U/s. 54F of the Act. The main issue before us is whether the receipt of amount of Rs. 3 Crs received by the assessee is a capital receipt or an income to be taxed under ‘capital gains’. We find from the submissions of the Ld. AR, initially the assessee has claimed it as a capital gains while filing the return of income and during the assessment proceedings. Later, the assessee claimed it as a capital receipt before the Ld. CIT(A) which was allowed by the Ld. CIT(A). In this context, it is relevant to 9 understand the definition of ‘capital asset’ as defined U/s. 2(14) of the Act.

Sec. 2(14)(a): Capital Asset means “Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.”

"Transfer”, in relation to a capital asset, includes: (i) Sale, exchange or relinquishment of the asset; (ii) Extinguishment of any rights in relation to a capital asset; ……. ……..”

10 Karnataka High Court has held that “giving a right to claim specific performance by conveyance in respect of one immovable property amounts to relinquishment of the capital asset and held that therefore there is a transfer of capital asset within the meaning of the provisions of the Act”. A payment made by the assessee under the sale agreement for transfer of capital asset is the cost of acquisition of the capital asset. The Hon’ble Karnataka High Court further held that in lieu of giving up of the said right any amount received constitutes capital gains and it is exigible to tax subject to the deductions as set out in section 48 of the Act. Further, in the above case, the Hon’ble Karnataka High court held that since the word “transfer” in relation to capital asset is defined under the IT Act, 1961 it is not necessary to import the meaning assigned to them under the provisions of the Transfer of Property Act. The word “Capital Asset” as defined in the IT Act, 1961 means any kind of property held by the assessee which is not necessarily be confined to the immovable property.

Similarly, the definition of word “transfer” in relation to ‘capital asset’ includes ‘sale, exchange or relinquishment of the asset’. The said asset need not necessarily be an immovable property.

11 “23. From the aforesaid judgments it is clear that the right to obtain a conveyance of immovable property falls within the expression 'property of any kind' used in s. 2(14) of the Act and consequently it is a capital asset. It is because the expression 'property of any kind' is of wide import. When this expression is read along with the expression defined in s. 2(47)(ii) i.e., 'extinguishment of any rights therein', the giving up of a right of specific performance by the assessee to get conveyance of immovable property in lieu of receiving consideration, results in the extinguishment of the right in property, thereby attracting the rigor of s. 2(14) r/w s. 2(47). Giving up of a right to claim specific performance by conveyance in respect to an immovable property, amounts to relinquishment of the capital asset. Therefore, there was a transfer of capital asset within the meaning of the Act. The payment of consideration under the agreement of sale, for transfer of a capital asset is the cost of acquisition of the capital asset. Therefore, in lieu of giving up the said right, any amount received, constitutes capital gain and it is exigible to tax. However, as is clear from s. 48, before the income chargeable under the head capital gains is computed, the deductions set out in s. 48 has to be given to the assessee. It is only the amount thus arrived at, after such deductions under s. 48, would be the income chargeable under the heading capital gains.”

The case law relied on by the Ld. AR in Baroda Cement & 10. Chemicals Ltd vs. CIT (1986) 158 ITR 0636 (Guj.) is not of any support to the assessee as the facts are distinguishable in that case where there is no cost acquisition. In the instant case, the assessee has paid an amount of Rs. 3,50,000/- during 2001 while entering into an agreement with the seller. We are therefore of the considered view that the compensation received

12 by the assessee arises out of the transfer of capital asset in the nature of relinquishment of the specific performance of the contract shall be treated as transfer of capital asset within the meaning of section 2(47) of the Act, and hence it is a capital gains under the Income Tax Act, 1961 and exigible to tax. Accordingly, this ground raised by the Revenue is allowed.

Pronounced in the open Court on the 16th February, 2023.