Amount received on Cancellation of Auction is not subject to Income Tax: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal constituting of Shri Sudhanshu Srivastava as the judicial member and Shri Prashant Maharishi as the accountant member held that an amount refunded to the assessee for consideration paid in an auction after its cancellation is a capital receipt.

According to the case of the assessee company, engaged in the business of finance and investment, it originally acquired the right for purchase of property because of auction carried out by the Punjab National Bank where the assessee was the highest bidder. It paid the purchase price in entirety. Later the auction was disputed and cancelled leading to restoration of the property to the bank. The assessee was hence refunded this purchase price and damages.

It was found by the AO at the very first instance that the amount shall be liable to be added since the sum received by the assessee on cancellation of auction holding is in the nature of a revenue receipt. The CIT (A) on an appeal confirmed the addition and hence the present appeal. The issue before the Tribunal was that whether the CIT (A) has properly appreciated and adjudicated the nature of receipt.

According to the submissions of the revenue, the damages recovered from the bank were in the nature of interest. It was contended by the revenue before the present Tribunal that sale proceeds received as consideration for premature surrender of its leasehold interest is an interest in land. Also, surplus arising on account of compensation received by the assessee cannot be assessed under the head “capital gain” because no asset came into existence with the assessee.

It was contended by the assessee company relying on a number of cases that a sum which received as a refund in respect of the capital asset in the nature of damages is a capital receipt. Furthermore:-

An interest is a sum received in relation to a debt incurred by the assessee and hence no debt was incurred by the assessee in the present case since the dispute between the borrower and the bank had never reached its finality.

That the Debt Recovery Tribunal has not awarded any interest to the appellant but it has just refunded the money deposited by the assessee in auction.

That the sum received by the assessee had direct nexus to the cancellation of acquisition of the immoveable property obtained by him in auction and hence it is a capital receipt.

When the sale is set aside by the Hon’ble Supreme Court then the sale was not valid in the eyes of law and such asset cannot be said to have been transferred leading to the consequences of capital gain.

The Tribunal after hearing both the parties went on to hold in favor of the assessee that the amount is not interest but compensation and hence is to be treated as ‘capital receipt’ for which no tax is payable under the Income Tax Act.

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