A division bench of the High Court has held that the leasehold rights shall be treated as “capital asset” and the compensation received on leasehold rights over a plot shall not be subject to income tax under the provisions of the Income Tax Act, 1961.
TheAssessee, M/s Pawa Infrastructure (P) Ltd, applied forallotment of a plot of land and was allotted Plot No. 9 in the Rajiv Gandhi I.T. Habitat by Infotech Corporation of Goa Ltd., a Company of the Government of Goa, which was incorporated for setting up ‘Rajiv Gandhi I.T. Habitat’. The possession of the said plot was handed-over to the Assessee on 26th September, 2006 and the lease deed was executed and registered in favour of the Assessee for an initial period of 30 years which may be further extended by 60 years, subject to the conditions laid down therein.
The Assessee herein had started the Project in AY 2008-09 and opened an office in Goa to effectively manage the Project. The Assessee had shown the property under the head ‘Fixed Assets’ in its Books of Accounts and claimed it as a Capital Asset within the meaning of Section 2(14) of the Income Tax Act, 1961. However, due to a subsequent change of policy by the Government of Goa, the said Project was initially stalled and finally cancelled. The Government passed a legislation and cancelled the allotment of the said plot in the FY 2012-13.
The Assessee was awarded as compensation a sum of Rs.9,86,07,762/- under the Act of 2012, towards cancellation of allotted plot. The same was subject to revision under section 263 of the Income Tax Act, 1961.
The Assesseecontended that the transaction in the present case is on account of a registered lease deed executed in favour of the Assessee and the PCIT fell in error in treating the compensation received by the Assessee as simple interest @10% per annum, as ‘Interest’ income. The Assessee therefore contended that it has rightly treated the plot and its leasehold rights therein as its Capital Asset.
Holding in favour of the assessee, a bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora observed that the terms of lease deed evidence that the Assessee was entitled to construct on the plot and offer the built-up space for IT Software and IT enabled Services Industries.
“Further, the Assessee was also permitted to sub-lease, assign, transfer, alienate and part with the compensation of the constructed building along with proportionate land thereunder for setting up IT Software and IT enabled Services Industries only,” the Court said.
“A reading of the aforesaid Sections of the Act of 2012, evidences that the payment calculated @ 10% per annum over and above the premium by Government of Goa was not by way of interest but was statutorily in the nature of compensation and therefore, the said receipt cannot be treated as Assessee’s ‘Income from other sources’,” the Court added.
Concluding the order, the Court held that “the leasehold rights held by the Assessee in the plot was a Capital Asset and that the compensation received by the Assessee from the Government of Goa on the cancellation of the plot was a capital receipt and not a revenue receipt. It is trite law that if an agreement for transfer of rights in an immovable property is not performed by the transferor, the transferee is entitled for compensation as he/she is deprived of the price of escalation. Therefore, the character of payment received as compensation by the transferee bears the character of capital receipt. The payment of interest in the facts of the present case is compensatory in nature and therefore, does not bear the character of revenue receipt. Thus, we hold that the AO’s order dated 15th February, 2016, was correct and it did not suffer from any error, justifying the invocation of the PCIT’s powers under Section 263 of the Act.”
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