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

PER S. BALAKRISHNAN, Accountant Member :

This appeal filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-1, Visakhapatnam [CIT(A)] in ITA No. 10454/2017-18/CIT(A)-1/VSP/2020-21, dated 15/09/2020 arising out of the order passed U/s. 143(3) of the Income Tax Act, 1961 [the Act] for the AY 2017-18.

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.

adjudicated.

capital receipt and held not taxable by the Ld. CIT(A). In this

regard, the Ld. DR submitted that the assessee has entered into

an agreement for purchase of a property admeasuring 2000 sq

yds with Mr. R.B.V. Narasimha Raju by paying an amount of Rs.

3,50,000/-. The Ld. DR submitted that subsequently the seller

expired in 2007 by executing a Will in favour of his son and

registered the will with SRO, Dwarakanagar, Visakhapatnam.

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 ITA No. 4373/Del/2012, 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, ITA No.2379/Ahd/2013, 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.

available on record and the orders of the Ld. Revenue

Authorities. It is the case of the Ld. AO that the assessee has

entered into an agreement which is unregistered on 25/2/2001

by paying the amount of Rs. 3,50,000/- for the purchase of

property admeasuring 2000 sq. yds. Since the seller Sri

Narasimha Raju expired in 2007 who left a Will in favour of his

son Mr. RSRK Raju which was registered in 2004 with SRO

Dwarakanagar, Visakhapatnam. It was contended that Sri RSRK

Raju was not aware of the agreement of his Father with the

assessee and hence sold the property to various parties. In this

regard, the assessee filed a suit against Mr. RSRK Raju in 2017

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.”

to a capital asset, which is an inclusive definition. Section 2(47) of the

Act is extracted herein below for reference:

"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; ……. ……..”

extinguishment of a right of specific performance of a contract shall be

covered under the definition of ‘capital asset’ as defined U/s. 2(14)(a) of

the Act. In the instant case, the assessee has relinquished her right on

the specific performance of the contract by agreeing to the compromise

settlement for receiving a compensation of Rs. 3 Crs. The argument of

the Ld. AR that there is no transfer of any capital asset for receiving the

compensation and it is merely a right to sue for damages cannot be

considered as a capital asset could not be accepted. In the case of CIT

vs. H. Anil Kumar [2012] 20 taxmann.com 430 (Karnataka), the Hon’ble

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.

Court in the case of CIT vs. H. Anil Kumar (supra) is as follows:

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.

Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

Dated : 16.02.2023

13 OKK - SPS

आदेश क� ��त�ल�प अ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee – Smt. Datla Shanti, Flat No. 112, C-Block, 1. Vaisakhi Residency, Facor Layout, Waltair, Visakhapatnam, Andhra Pradesh – 530002. राज�व/The Revenue – Dy. Commissioner of Income Tax, Income Tax 2. Office, Infinity tower, Shankaramatham Road, Santhipuram, Visakhapatnam, Andhra Pradesh – 530016. 3. The Principal Commissioner of Income Tax-1, Visakhapatnam. आयकर आयु�त (अपील)/ The Commissioner of Income Tax (Appeals)-1, 4. Visakhapatnam. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �वशाखापटणम/ DR, ITAT, 5. Visakhapatnam गाड� फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam