The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the damage on account of the right to sue is a capital receipt and not chargeable to tax.
The assessee is an individual, who had entered into a Memorandum of Understanding (MOU) with Aadi Properties LLP with the intention to book commercial space to be developed and constructed in a proposed project by M/s. Aadi Properties LLP on a plot of land for a consideration of Rs.10,75,00,000/-. Accordingly, a payment of Rs.25,00,000/- by cheque was paid by the assessee.
The amount of Rs.25,00,000/- was nearly 2.33% of the total consideration payable by the assessee. Later on, the said project did not materialize and was aborted and accordingly, the builder cancelled the allotment returning the advance of Rs.25,00,000/- vide cheque which amount was not deposited in the bank by the assessee.
The assessee filed suit before the Bombay High Court, claiming damages, that an agreement sale under Section 4 of the Maharashtra Ownership Flats Act was entered for the suit premises and prayed for perpetual injunction restraining the Defendant from selling or dealing with, disposing of, alienating, encumbering, parting with possession or creating third party rights of any nature whatsoever in respect of the suit area or part thereof.
The return of income was filed declaring income of Rs.7,48,63,770/-. In the said return of income, the assessee claimed that compensation of Rs.7,65,26,000/- was received for not suing the M/s. Aadi Properties LLP was a capital receipt not liable to be taxed.
The Assessing Officer after considering the details and the judgments furnished by the assessee, completed the assessment u/s.143(3) vide order dated 24/02/2021 accepting the return of income and confirmed that capital receipt received of Rs.7,65,26,000/- was not taxable.
After the completion of the assessment of Section 143(3) of the Income Tax Act in the aforesaid manner the issuance of notice under Section 148A of the Income Tax Act and the dropping of such proceedings, the Principal Commissioner of Income Tax (PCIT) in his revisionary jurisdiction issued a notice under Section 263 of the Income Tax Act, again on the same issue of taxability of receipt of compensation of Rs.7,65,26,000/-.
The PCIT held that the Assessing Officer accepting the claim of the assessee in his order passed under Section 143(3) of the Income Tax Act was passed ignoring the decision of the Bombay High Court in the case of CIT vs. Vijay Flexi Containers (Bom) reported in (1990) 186 ITR 693.
In the case of C.I.T. Vs. Dalmia (1984) [149 ITR 215] (Del.), the High Court held that a mere contract for the sale of immovable property does not create by itself any interest in or charge on the property under TOPA. In breach of the contract, the taxpayer had a mere right to sue for damages which is not transferrable.
Damages received cannot be said to be on account of the relinquishment of any asset or extinguishment of the right of specific performance under the contract of sale. Hence, damages are not liable to capital gains.
The Two-member bench comprising of Amit S ukla (Judicial member) and Amarjit Singh (Accountant member) held that the impugned order of the PCIT cancelling the assessment order solely relied on the judgment of M/s. Vijay Flexible Containers which is not applicable on the facts of the assessee’s case cannot be sustained and was thereby set aside and the order of the Assessing Officer accepting the claim was upheld. Thus, the appeal of the assessee was allowed.
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