Compensation for sterilisation of profit earning source is a capital receipt not taxable: ITAT Ahmedabad 

Here is an important judgement on the capital receipt by Ahmedabad ITAT on the taxation of compensation received for relinquishment of the rights.

The citation of the case is as under:

Khevana Securities and Finstock Ltd

(ITA No.1427/AHD/2017)

Short Overview of the case:

The facts of the case in dispute are as under:

1. M/s Jasani Reality Pvt. Ltd and M/s Emgeen Holding Pvt. Ltd entered into agreement dated 28-10-2005 to develop a property located in Goregaon, Mumbai.

2. In the year 2010 M/s Jasani Reality Pvt. Ltd decided to sell its part of share of property to the assessee. Accordingly there was entered an agreement dated 23-08-2010 with assessee company for Rs. 63 crore and assessee company made down payment of Rs. 6,30,000/-

3. Subsequently the assessee and M/s Jasani Reality entered into a relinquishment agreement dated 16-12-2010. It was decided that the M/s Jasani Reality will pay Rs. 40 crore to assessee and also return the down payment to assessee in lieu of relinquishment of right in property.

4. As per relinquishment agreement all payment dues were to be paid before 15-01-2011

5. The assessee got payment in following manner

(a) Cheque of Rs, 2.5 cr durung the year i.e. F.Y. 2010-11

(b) Cheque of Rs. 2 crore in F.Y. 2011-12

(c) 3,55,000 share of M/s Jasani Reality @ 1000 having Face value of Rs. 10 and premium of Rs. 990 on 09-09-2011

Subsequently the assessee sold share of M/s Jasani to M/s Corora Investment Pvt. Ltd. @ Rs. 11 i.e for Rs. 39,05,000/-.

6. Accordingly the assessee claimed that actual benefit derived by it in the transaction is of Rs. 4,89,05,000 (2.5 cr + 2 cr + 39.05 lakh) only but mistakenly shown 4,83,05,000/-

7. So the moot point was whether Rs 40 Cr compensation was a capital receipt which was not taxable?

The Ahmedabad ITAT held as under:

1. The Hon SC in CIT vs. Saurastra Cement Ltd reported in 325 ITR 422 has held that “amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, was a capital receipt not liable to tax in the hands of the company.”

2. Assessee was engaged in share trading business and not real estate business. So this agreement was not in the ordinary course of business and thus applying the principles laid down in the above SC judgement, the compensation was not taxable in the hands of the assessee.