Compensation received from developer pursuant to consumer court order is a capital receipt – Not liable for taxation




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Compensation received from developer pursuant to consumer court order is a capital receipt – Not liable for taxation

 

 

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH

Before: Shri Waseem Ahmed, Accountant Member

And

Shri T.R. Senthil Kumar, Judicial Member

 

ITA No. 119/Ahd/2021

Assessment Year 2015-16

 

Raghav Maheshchandra Trivedi

Plot 70-71, Green Park, Daskroi Ambli Bopal

Ahmedabad-380058 Gujarat

  

Vs

 The CIT, (IT & TP),

Ahmedabad

(Respondent)
PAN: AGBPT7624E

(Appellant)

 

Assessee Represented :             Shri Ajay Singh, A. R.

Revenue Represented :                  Shri A. P. Singh, CIT

 

Date of hearing                              :      23-01-2023

Date of pronouncement               :      24-02-2023

ORDER

 

PER : T.R. SENTHIL KUMAR, JUDICIAL  MEMBER:-

 

  1. This appeal is filed by the Assessee  as  against  the  Revision order dated 30.03.2021 passed by the CIT (IT  &  TP),  Ahmedabad under section 263 of  the Income  Tax  Act,  1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2015-16.
  1. The brief facts of the case is that the assessee is an individual and Non For the Assessment Year 2015-16, the assessee filed his Return of Income admitting  total  income  of  Rs. 37,66,640/- under “Income from House Property”, “Income from Capital Gain” and “Income from other  sources”.  The  assessment was completed passing an assessment order dated 07.08.2017 admitting the returned income which resulting in a refund of Rs.32,95,970/- which is inclusive of interest of Rs. 4,29,915/- u/s. 244A of the Act.

2.1.  On verification of the above assessment order, the Ld. PCIT found that the assesse received a  compensation  of  Rs. 1,92,18,157/- from M/s. Adarsh Developers  and  Others  on purchase of a villa at Bangalore. Since the developer failed  to execute the contract and defaulted in completing  the  project thereby the assessee got this compensation through litigation at National Consumer Disputes Redressal Commission (NCDRC), New Delhi.

2.2.  The Ld. PCIT issued a show cause notice that  the compensation received by the assessee is required to be assessed as “Income from Other Sources” rather than “Income from Capital Gains” as per Section 2(14) of the Act. Since the assessee was not in a possession of capital asset, against the booking amount  of  a villa, the assessee got the compensation as there is no capital asset involved no question of invoking capital gains as per the provisions of section 45 of the Act. Therefore the assessment order passed by the Assessing Officer without making any enquiry is an erroneous order and prejudicial to the interest of Revenue and why the assessment order not be set aside and to do afresh.

2.3.  The assessee replied as follows:

2.1 It has been submitted by the assessee that there is an Underlying asset allotted by “Adarsh Developers”. Adarsh Developers issued letter, letter of allotment  on  05.08.2005 which was attached as Annexure-2 of the submission. This allotment letter indicates the allotment of Villa 208 at Palm Retreat, having plot area of 4250  sq.ft with  built up  area of 2230 sq.ft.  at  a  total  consideration of  Rs. 1,38,01 ,000/-  subject to the approval  of  plans  by  the  concerned authorities As  per the arrangement the assessee has remitted Rs.76,13,444/- comprising as under:

  • Aug 02.2005 INR                                        Rs. 2,00,000
  • Aug 22,2005 $70,000                               Rs.30,38,084
  • Sep 06 ,2005 $22 ,000                             Rs. 9,59,860
  • Nov 09,2005 $75,000                                Rs.34,15,500

The qualification provision of Section 2(14)  as  capital  asset is very much in existence in the current case of purchase of the intended asset.

2.2 The assessee having waited for the delivery and due possession  of  the  said allotted   property,   by Adarsh Developers, who did not honor their commitment, took to legal redressal for the due possession/compensation of the underlying asset the property the subject  matter  of  the discussion. The  Assessee  after  taking  necessary  steps  with other in similar problem in this scheme took to approaching the legal   redressal.   All   the   aggrieved   parties   approached   the ” National  Consumer  Disputes  Redressal  Commission,  New Delhi” in redressing the Failed Contract by Adarsh Developers.

2.3 National Consumer Disputes Redressal Commission, New Delhi pronounced its judgment on 28.11.2014 awarding the Assessee a compensation of Rs.1,92 ,18,157 ( TDS     Rs 35 ,85,856)   including   the  2.1   above    the    principal Rs.76,13 ,444/-

2.4 The whole compensation is the resultant of failure of the underlying contract the Property under  dispute  which was handed over to the Assessee, failure of the contract by Adarsh Developers. Further the Assessee has  also  incurred huge  loss due to the Dollar to Rupee depreciation and meeting the Legal expenses of  about Rs.1,53,000/- not claimed as  a  set off  from the said compensation.

2.5 Based on the above facts the Assessee is entitled for full Exemption of the  Compensation  Rs. 1,16 ,04,713  as  this  is  in the Nature of Capital Receipt and not liable for Tax. However taking cognizance of the underlying  asset  the  Villa,  the Assessee took all precautions in declaring the Income under Capital gains an per the  provisions  of  the  Income  Tax  Act, 1961. In so doing the eligible Indexation  were  applied  in arriving at the Long Term Capital Gain through the income received is exempt as in nature of Capital receipt.

2.6 Further the Assessee relies on  the  ITAT case ” Chheda Housing  Development  Corporation  Vs  ACIT  ( ITAT  Mumbai)  ( 29- 05 -2019 )”. The decision in this “Where amount received by the Assessee  in  excess  of Advance  was  on  account   of compensation for extinction of its right to sue  the  owner,  the rceipt was Capital receipt not chargeable to tax”.

2.7  The Assessee also relies on the decision of the ITAT Ahmedabad in ” Bhojison Infrastructure Pvt. Ltd.  Vs  ITO  Ward- 1(1 ) (2), Ahmedabad ( 17.09.2018 )”, which has  delivered judgment on the Compensation as in the  Nature  of  Capital receipt, no l iable for tax.

2.8  In the Assessee case it was a clear case of Cheating by the Developers  and  had  failed  to  honour  the  commitment  to  the said property and consequently the Assessee aggrieved had no other option other than to take to legal redressal and in  the ultimate  course.  The  Judgment  was  pronounced  by   the Tribunal  granting  some   relief  to   the   Assessee.  The  Assessee did loose considerably in the process,  but adhered  to  the principal of declaring the considering the  compensation  as Capital gain  in  his  declaration, which  once again  to  be  specific “is in the nature of Capital receipt and not l iable to Tax”.

2.9  The Assessee alternatively desired to consider  in  this response an application under  section  264,  to  your  kind  self, that  the   Assessment  in   treating  as   Capital  gain  be  Altered  to ” the  Consideration  as  Compensation  in  whole”  and  want  it  to be treated as Capital Receipt not l iable  to  tax  and  pleads  to amend the Assessment by giving this relief, and appropriately, grant him additional refund as  there  would  no  tax  l iability  at all, if the all the consideration  are  considered  as  ” Capital receipt”, as stated in the pronouncement in above 2.6 and 27.

2.4 The  Ld.  PCIT held that the income from  Capital Gain can only be  arisen  if  there  is  transfer of  capital  asset  in the case of the assessee, there is neither capital asset in assessee’s hand as far as booking of  the Villa is  concerned nor transferred of  the  said asset. Therefore the  provisions of Section 45  of  the  Act  will  not  be  applicable in assessee’s case. The A.O.  has allowed benefit of  indexation to the assessee without discussion findings in  the assessment order as well as  without  making  any verification of the claim by the assessee. The Assessing Officer failed to verify  high  ratio  of  refund  by  TDS  u/s. 195. Thus the order passed by the Assessing Officer is an erroneous order and prejudicial to the interest of Revenue thereby the same is set aside and the Assessing Officer is directed to make fresh assessment keeping in  mind,  the issue discussed in the 263 order.

  1. Aggrieved against the same, the assessee is in appeal before us raising the following Grounds of Appeal:
  1. The learned CIT erred in  passing the  revision under us 263  of  the  Act holding the  assessment order dated  7/08/2017 is erroneous as well prejudicial  to  the  interest  of  revenue  on the alleged  ground  that the  amount  of  Rs.1, 92,18,157 /- received from the builder pursuant to the order passed by the National Consumer Disputes Redressal Commission, New Delhi ( hereinafter referred as NCDRC) dated  28 /11/2014,  was  in nature of compensation/damages for breach of contract with builder l iable  to  be  assessed  as  Income from other sources and not under the head Capital Gains as claimed  by  assessee, without appreciating that assessee had acquired a  valuable right in an immovable property pursuant to the allotment letter dated 5/8/2005 and subsequent payment made to  the builder and this fact has been upheld by NCDRC, and therefore the same was r ightly offered to tax under the head Capital Gains; therefore the Pr. CIT under revisionary  jurisdiction  u/s,  263 ought not to have interfered with the assessment order dated 7/8/2017.
  1. The learned CIT failed to appreciate that, assessee had acquired a  valuable right in  the  property pursuant to  the  letter of allotment and subsequent payment, therefore to hold that assessee didn’ t had any r ights in the underlying  asset  is incorrect and contrary to order  of  the  National  Consumer Disputes Redressal Commission,  therefore  to  treat  the assessment  order  as  erroneous  and  prejudicial  to   the  interest of revenue on the alleged grounds of  non  discussion  of  issue, failed to conduct proper  inquiries,  investigation  and examination  is  not  justified,  therefore  the  order  issued  u/s. 263 of the Act is bad in law.
  1. Without Prejudice to above learned CIT  erred in concluding the issue and giving a final verdict  on  the  same without appreciating the order of National Consumer Disputes Redressal Commission, New  Delhi  and  thereafter  also  holding the explanation of assessee wrong and directing the Assessing officer  to  complete  the   assessment  on   basis  of  his  discussion in the revision order, thereby denying the assessee a fair, reasonable and adequate opportunity to present its case before Assessing officer.
  1. Without prejudice the learned CIT failed  to  address  the issue  raised  by   the   assessee   that  compensation  received  was in nature of capital receipt not l iable  to  be  taxed.  Further, learned Pr.CIT failed to appreciate that where two views are possible revision u/s. 263 of the Act is not justified.
  • 3.1 The Ld. Counsel submitted that during the original assessment proceedings pursuant to 142(1) notice dated 18.04.2017, the assessee filed the details to the Assessing Officer vide letter dated 01.06.2017 namely Return of Income for the  Assessment Year 2015-16 assessee’s status as Non-Resident as per the  Performa  along  with  the  copy of the Passport, copies of the NRO Bank and NRE Bank Account with proper explanation and other properties details held by the assessee which are  placed in  page  Nos. 31 to 44  of  the  Paper Book. After considering the  details, the Ld. Assessing officer passed the assessment order accepting the  claim of  the assessee. Thus the  order passed by the Assessing Officer is neither an erroneous order nor prejudicial to the interest of Revenue. The assessee also placed before us the reason for the present reopening is Revenue Audit Objection  by  the  Department.  In  fact  the Ld. Assessing Officer vide his reply dated 01.07.2019 replied to the Revenue Audit Party as follows:
  • 3.2.3. According to the aforementioned  definition  of  Section 2(14), capital asset means a property of any kind held by an assessee whether or not connected with the business or profession and it excludes certain items  which  while considering the facts of the present case are not relevant. Therefore, it has to be seen that whether by entering into an agreement vide which the assessee was allotted  a  particular villa by allotment letter whether the assessee  has  held  any asset or not? By entering into an agreement to allot a villa, the assessee has identified a particular property which he is intended to buy from the builder and  the  builder is  also  bound to provide the applicant with that property by accepting certain advance amount and making  agreement for  balance  payment as  scheduled in  the  agreement. Thus, going into the provisions, it is not necessary that to constitute  a  capital  asset,  the assessee must be the owner by way of a conveyance deed in respect of that asset for the purpose of computing capital gain. The assessee had acquired a right to get a particular villa from the builder and that right of the  assessee  itself  is  a  capital asset. The word ‘ held’ used in Section 2(14 ) as well as Explanation to Section 48 clearly depicts that  assessee must have some right in the capital asset  which  is subject  to transfer. By making the payment to  the  builder, the  assessee will be holding capital asset and thus,  the  compensation received by virtue of the order of the NCDRC is nothing but a capital receipt.
  • 3.3 The similar issue  has  been  decided  in  the  following judgment holding it a Long  Term  Capital  Asset.  The  same  is given hereunder:

( I) ACIT VS  Ashwin S.  Bhalekar ( ITAT Mumbai) Appeal Number: ITA      No.      6822/Mum/2016      Date      of       Judgment/ Order: 21 /05/2019 AY 2012-13 :

——————-

“…..Claim of the assessee that extinguishment of rights in the capital asset is a transfer  of  capital  asset and  capital  gains and consequent allowance of  claim of  deduction under section 54  of  the  Act.  The facts clearly show that  the  extinguishment of assessee’ s right in Flat No. 1703, 1704 and 1705 proposed building known as ” Shubh Residency” allotted  vide  allotment letter  dated  20 /06/2008  is  actually  extinguishment  of   any right in relation to capital asset in view of the provisions of section 47 of the Act and falls in the definition of transfer and hence, result in capital gain chargeable under section 45 of the Act. It is a fact that assessee  held  this  r ight  for  more  than  3 years for a reason that this flats were subject to allotment vide allotment letter dated 20.06 .2008 and assessee received compensation of rightly deleted addition made by the AO in regard to  disallowance of  the  claim  of  the  assessee disallowing deduction of  long term capital  gain  under section 54 of the Act on the premise that the compensation received in income from other sources. We noted that the CIT( A) has rightly allowed the claim of the assessee and we confirm the same.”

4.0 Thus in view of the above, the  objection  of  the  revenue audit is not acceptable. The reliance is placed on the following:

( a) CBDT Circular No. 471 dated 15.10. 1986

( b) CIT  vs  Ram Gopal [ 2015] 55  taxguru.in 536  (Delhi)

4.1 The revenue audit may thus, please be requested to withdraw the same.”

3.2  However overlooking the above reply of the A.O. and decision of the Mumbai Tribunal in the case of Ashwin S. Bhalekar, Ld. CIT initiated the present Revision proceedings.

3.3  The Ld. Counsel further relied on the judgment of the Hon’ ble Supreme Court in the case of PCIT Vs. Shreeji Prints (P.) Ltd. (282 taxmann.com 464) wherein it is  held that when Assessing Officer had made  inquiries  in  detail and accepted genuineness of the same, such view  of Assessing Officer being a plausible  view,  the  same  could not be  considered erroneous or  prejudicial to  the  interest of Revenue. Thus  the  Hon’ble  Supreme  Court  dismissed the  SLP  filed by  the  Revenue.  The  Ld.  A.R. further relied on Co-ordinate Bench judgment of the  Tribunal  in  Smt. Abha Bansal vs. PCIT, (Central), Gurgaon [2021] 132 taxmann.com 231 on identical issue.

3.4  The Ld. Counsel further relied upon  Bombay  High Court judgment in ITA  No.  707  of  2015  dated  02.08.2017 in the case of CIT vs. Vinod Kumar Goel HUF as follows:

  1. It is a  settled position of  law that  the  Commissioner of  Income Tax can exercise his power under Section 263 of the Act only on satisfaction of  twin  conditions  e.  the  order  being  erroneous  and also prejudicial to the interest of the  Revenue.  In  the  present facts, the  view taken  by  the  Assessing Officer on  detailed examination of the issues, as is evident f rom the  questionnaire  posed  to the respondent assessee and the  response  thereto  during  the assessment proceedings, on facts is a  possible view.  The  view  taken by the Assessing Officer does not  became  erroneous merely because the view of the  Commissioner  of  Income  Tax  is  different  f rom  the view taken by the Assessing Officer. This Court in Commissioner of Income Tax Vs. Gabriel India Ltd.  203  ITR  108  while discussing the meaning of the word ” erroneous” for the purposes of exercising powers under Section 263 of the Act inter alia observed as under:-

 

” From the aforesaid definitions i t  is  clear that an  order cannot be  termed  as  erroneous  unless  i t  is  not  in  accordance  with law. If an Income tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been  written  more  elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner  for  that  of  the  Income- tax Officer,  who  passed the  order,  unless the  decision is  held  to be erroneous. Cases may be visualised where the Income- tax Officer while making an assessment examines the accounts, makes enquiries,  applies  his mind  to  the  fact  and circumstances  of   the   case  and  determines  the  income  either by accepting the accounts or  by  making some  estimate himself The Commissioner, on perusal of the records, may  be  of  the opinion that the estimate made by the officer concerned was

on the lower side and left to the Commissioner he would have estimated the income at a f igure higher  than  the  one determined by the Income- tax Officer. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at  a  higher f igure.  It  is  because the Income- tax Officer has exercised the quasi- judicial power vested in him in accordance with  law  and  arrived  at a conclusion and such a conclusion cannot be termed to  be erroneous simply because the Commissioner does not  feel satisfied with  the  conclusion.  It  may  be  said  in  such  a  case that in  the  opinion  of  the  Commissioner  the  order in  question is prejudicial  to  the  interests  of   the  Revenue.  But  that  by itself will not be enough to  vest  the  Commissioner  with  the power of sou motu revision because  the  f irst  requirement viz, that the order is erroneous, is absent……….

  1. In this case, moreover it is evident f rom  the  order  dated  28″ August, 2011 of  the Commissioner of  Income Tax that enquiry into both the issues were conducted by the Assessing  Officer  before passing the assessment order dated  28  October,    Thus,  i t  is not a case of no enquiry which could make the order erroneous. An inadequate enquiry would not  make  the assessment order vulnerable as being erroneous. The view taken by  the  Assessing Officer is a possible view and nothing has been shown to us which would even remotely suggest that the conclusion reached by the Assessing Officer was perverse and/or arbitrary on the basis of the evidence available before him.

 

  1. In the above view, the  impugned  order  of  the  Tribunal  does  not give r ise to any substantial question of Thus, not entertained.
  • 3.5  Thus the Ld. A.R. pleaded that the invocation of Revision proceedings u/s. 263 is bad in  law  and  liable  to be quashed.
  1. Per contra, the D.R. appearing for the Revenue supported the order of the Ld. PCIT and submitted the Assessing Officer has not made proper enquiries on  the claim of the assessee and simply granted the relief which is no doubt an erroneous order and prejudicial  to  the interest of Revenue, since huge refund is granted to the assessee. Therefore the  Revision  proceedings  is  required to be upheld.
  1. We have given our thoughtful consideration and perused the materials available on During the assessment proceedings, the ld. AO. vide his notice u/s. 142(1) called for various details which were submitted by the assessee. The A.O. passed the assessment order after taking into consideration the submissions of  the assessee and by verifying the documentary evidences  produced before him.

5.1  Further it is seen from record as against the Revenue Audit Objection raised by the Department, the Assessing Officer himself replied to the Revenue Audit Objection by relying upon  decision  of  the  Mumbai  Tribunal  in  Ashwin S. Bhalekar case on identical facts namely compensation received by the assessee was treated as Long Term Capital Gain. Thus the Ld. A.O. requested the Audit Party to withdraw/drop the Revenue Audit Objection.

5.2  Further the  Co-ordinate  Bench  of  the  Tribunal  in Smt. Abha Bansal (cited supra) held as follows:

“…Section 45. read with sections, 2( 47)  and  263,  of  the  Income- tax Act, 1961 Capital gains Chargeable as ( Revision) – Assessment  year 2017- 18    Assessee   had    entered   into  a    Builder- Buyer   Agreement ( BBA) for allotment of a villa – On builder’ s failure to give possession of villa to assessee within stipulated t ime, BBA was cancelled – Assessee received compensation for same  and  showed  it as capital receipt chargeable to  tax  as  capital  gain  under  section 45- Assessing Officer accepted same – Commissioner  invoked revisionary powers under section 263 on ground that such compensation received by assessee was revenue in nature and Assessing Officer had passed impugned assessment order without making sufficient enquiry- It was noted that  copies  of  show  cause notice, order- sheets, replies submitted by assessee along with documentary evidences during original proceedings showed that Assessing Officer had examined issue in detail after conducting detailed enquiry- Whether since entire material on record clearly showed that Assessing Officer had applied his mind before passing impugned assessment  order  and  accepting  claim  of  assessee,  even if details of enquiry were not mentioned in assessment order, same would not make  assessment  order  cryptic  or  l iable  for  revision under section 263- Held, yes [ Para 22. 2] [ in favour of assessee]”

 

  1. The Co-ordinate Bench judgment in the  case  of  Indu Fine Lands (P.) vs. CIT (Central), Hyderabad [2014] 45 taxmann.com 307 where it has been held as follows:
  • Section 28( 1), read with sections 263, of the Income- tax Act, 1961- Business income- Chargeable as  ( Compensation)  Assessment  year 2007- 08- Assessee company, engaged in real estate business, had advanced a sum of Rs. 20 crores  to a  company  ( LECC)  with  an intention to buy piece of land- Further, it entered into development agreement with its group company However, deal could not get materialized and group company paid a sum of Rs.20 crores  to assessee as compensation- Assessing Officer  held  that  amount  paid to LECC was capital expenditure and  sum  received  was  capital receipt in  hands of  assessee Commissioner held that since assessee had not offered said compensation to tax, assessment order was erroneous inasmuch  as  it  was  prejudicial  to  interests  of  revenue and directed for further inquiry- It was found that Assessing  Officer made enquiries, elicited replies and thereafter passed assessment order Whether assumption of jurisdiction under section 263 by Commissioner itself was not proper since view taken by Assessing Officer was one of possible views and there was no material before Commissioner  to  vary  with  opinion  of   Assessing  Officer  and- Held, yes [ Para 27] [ In favour of assessee]

 

  1. Respectfully following the above decisions, we have no hesitation in holding that the assessment order passed by the  Assessing  Officer is  neither erroneous nor  prejudicial to the interest of It is been held by the Co- ordinate Benches of the Tribunal that compensation received by the assessee from  the  proposed  building  by way of allotment is actually extinguishment of a right in relation to capital asset, in view  of  the  provisions  of section 2(47)(vi) of the Act. This clearly falls within the definition of transfer and hence provisions of section 45 is applicable. Therefore the Revision proceedings initiated by the Ld. CIT (IT &TP) is liable to be quashed.  Thus,  the grounds raised by the assessee are hereby allowed.
  1. In the result, the appeal filed by  the  Assessee is

Order pronounced in the open court on 24 -02-2023

Sd/-                                                                                   Sd/-

(WASEEM AHMED)                                                                           (T.R. SENTHIL KUMAR)

ACCOUNTANT MEMBER                          True Copy                         JUDICIAL MEMBER

 

Ahmedabad : Dated 24/02/2023

Copy of Order Forwarded to:–

  1. Assessee
  2. Revenue
  3. Concerned CIT
  4. CIT (A)
  5. DR, ITAT, Ahmedabad
  6. Guard

By order




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