Compensation Received by Way of Award Due to Non-Supply of Land Under the Agreement is Capital Receipt: Delhi HC [Read Judgment]

In Principal Commissioner of Income Tax vs. M/s Aeren R Infrastructure Ltd. Delhi High Court held that the compensation received by way of the award due to non-supply of land under the agreement is the capital receipt.

In the instant case, the assessee engaged in the business of real estate. It entered into a consortium with its associates. The Consortium agreed to sell 10 acres of land to JMA Builcom for a consideration of Rs.15 Crores. However, the buyer defaulted its commitment within the prescribed an extended time. The parties approached the Dispute Settlement Arbitration and a settlement was arrived at. The amount received by the assessee as a part of its entitlement (as consortium) was credited in its books of accounts as a capital stream. The Assessing Officer (A.O.)  and the Commissioner of Income Tax (Appeals) held that the amounts were revenue in nature as the land would have been part of the stock-in-trade.

Aggrieved the appellant approached before the Tribunal. The Tribunal relying on the decision of the Supreme Court in the case of Universal Radiators Vs. Commissioner of Income Tax, held that the amount which was intended to be ultimately used as stock-in-trade purposes were immobile and sterilized, hence rendered non-offerable and therefore when received, as part of the arbitration award, fell into the capital stream. Revenue appealed before the High Court against the order of the Tribunal.

The bench comprising of Justice S. Ravindra Bhat and Justice Vinod Goel relied on the decisions of the Supreme Court in Commissioner of Income Tax vs. Bombay Burmah Trading Corpn & Universal Radiators Vs. Commissioner of Income Tax and observed “In the present case too, the purpose of the ultimate use of the assessee’s land when acquired was rendered irrelevant on account of the seller/JMA Buildcom Private Ltd defaulting in its commitment. This rendered the amount expanded by the assessee immobile. The eventual receipt of the amounts determined as compensation/damages, therefore, clearly fell into the capital stream and not revenue as was contended by the Revenue/appellant in this case.”