Income Tax Appellate Tribunal - Ahmedabad
Ito, Ward-2(1)(1),, Ahmedabad vs M/S. Ganeshsagar Infrastructure Pvt. ... on 22 November, 2021
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'A' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, AHMEDABAD (Convened through Virtual Court) BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER आयकर अपील सं. / I.T.A. Nos. 1535/Ahd/2018 WITH CROSS OBJECTION No. 102/Ahd/2019 ( नधा रण वष / Assessment Year : 2012-13) Income Tax Officer बनाम/ M/s. Ganeshsagar Ward 2(1)(1), Ahmedabad Vs. Infrastructure Pvt. Ltd.
Ganesh Corporate House, थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCG7466L (Appellant / Respondent) .. (Respondent / Cross Objector) राज व क ओर से/Revenue by : Shri Virendra Ojha, CIT.D.R. अपीलाथ ओर से /Assessee by : Shri Dhiren Shah with Ms. Nupur Shah, A.Rs.
सन ु वाई क तार ख / Date of 10/06/2021 & 15/09/2021 Hearing घोषणा क तार ख /Date of 22/11/2021 Pronouncement आदे श/O R D E R PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue . The assessee has filed cross objection in the appeal of the Revenue against the order of the Commissioner of Income Tax (Appeals)-2, Ahmedabad ('CIT(A)' in short) dated 28.03.2018 arising in the assessment order dated 26.12.2014 passed by the Assessing I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 2 -
Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2012-13.
2. The appeal of Revenue and cross objection of assessee emanates from common issue and thus disposed off together.
3. To begin with, we shall take up Revenue appeal for adjudication purposes.
ITA No.1535/Ahd/2018 - Revenue's appeal- AY 2012-134. Grounds of appeal raised by the Revenue read as under:
"1. The Ld.CIT(A) had er red in law and on facts in not treating the Consideration received to release the right to sue as capital gain.
1.1 The Ld CIT(A) failed to appreciate that the impugned transaction is resultant to the sale of land which is a capital asset u/s 2(14) of IT Act.
1.2 The Ld CIT(A) failed to consider the fact that the consideration in ques tion had been treated as a revenue receipt in the books of account of the assessee and has been reduced in the computation without any justification.
2. Without prejudice to the above, alternatively the Ld CIT(A) could have treated the receipts as Income fr om Other Sources
3. The Ld CIT(A) has er red in law in not adjudicating the issue of addition of the Consideration received to rel ease the right to sue to Book Profits u/s 115JB of the IT Act"
Assessee's C. O. No. 102/Ahd/2019
5. Grounds of Cross Objection raised by Assessee read as under:
"1. The Ld.CIT(A) after carefully considering the facts of the case, submission of the Respondent as well as the various judicial pronouncements relied upon by the Respondent has rightly held that the compensation received on relinquishment of rights to sue in consequence of acceptance of Arbitration Award is a capital receipts not on account of any transfer of capital assets u/s. I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 3 -
2(14) of the Income Tax Act and it is not subject to tax as capital gain or under any other provisions of the Income Tax Act.
2. The Ld CIT(A) has correctly treated the compensation received for relinquishment of rights to sue is a capital receipt not subject to tax as per the Provisions of the Income Tax Act and correctly not treated as a revenue receipts .
3. Once the Ld. CIT(A) has held that the compensation received for relinquishment of right to sue is a capital receipts not subject to tax as per provisions of the Income-tax Act, the alternate ground taken by the department that the Ld. CIT(A) could have treated the receipts as income from other s ources is not justified.
4. That the Ld. CIT(A) has correctly held that the compensation received for relinquishment of right to s ue being a capital receipts not subject to tax as per provisions of the Income Tax Act and therefore, it cannot be form part of Book Profit for tax liability u/s.115JB of the I.T. Act, 1961 whi le relying on various judicial pronouncements."
6. Ground Nos. 1 & 2 of Revenue's appeal concerns taxability of compensation receipts under normal provisions of the Act.
7. Briefly stated, the assessee entered into registered agreements dated 29.10.1991 to purchase certain agricultural land parcels at Thaltej, Gujarat (disputed land) with original land owners. In consideration thereof, the assessee paid various amounts aggregating to Rs.15,01,994/- to the original land owners as agreed. A conveyance deed dated 27.01.1992 was executed with the original land owners in pursuance of the aforesaid transaction. However, it was learnt by the assessee thereafter that the original land owners had also sold land parcels in question to one Gopiram famil y members vide sale deed of 1986. The names of the original land purchasers i.e. Gopiram family members were entered into land revenue records vide mutation entries dated 15.02.1993 i.e. after the execution of conveyance deed with assessee. After execution of the sale deed with original land purchasers (Gopiram family), one of the original land owners instituted a case for violation of Agricultural Act before mamlatdar taking a plea that the transaction for purchase I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 4 -
of land in 1986 with the original land purchasers is in breach of Agricultural Act on the ground that these purchasers were not agriculturists. However, mutation entries were entered into revenue records dated 15.02.1993. To assert its title on land, the assessee filed an objection before the competent authority that the original land owners had sold the land parcels in question to the erstwhile co-operative society i.e. assessee in year 1992 & its name was entered vide mutation entries dated 30.01.1992. In consequence of dispute arising towards rightful ownership of land parcels, the original land owners, original purchasers and assessee compan y went through various levels of litigations such as filing of objections, review application revision petition, disputes before Gujarat Revenue Tribunals. All these authorities however upheld the claim of the original purchasers to title and ownership with rightful possession of the disputed land. Assessee further carried the dispute by filing Special Civil Application seeking its claim on land parcels. Thereafter on intervention of the Hon'ble Gujarat High Court, all the disputes were consolidated before Rural Court, Ahmedabad. Pending settlement of ongoing dispute in the court of law, both the original purchasers and assessee company agreed to refer the matter for arbitration to resolve the disputes regarding rightful ownership outside the Court. The arbitrator eventuall y passed an arbitration award dated 30.04.2007 whereby certain directions were given to the original purchaser for sale of the disputed land to third party and distribution of amount realized in certain proportions between the assessee company and the original purchasers. A simultaneous direction was given to the parties to withdraw the civil suit. The arbitral award was adhered to by the parties. In pursuance of the arbitration award, the original purchasers sold the disputed land to Maheshwari (Thaltej) Complex Pvt. Ltd. (MCPL) out of such sale proceeds, a sum of Rs.70 Crores I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 5 -
were apportioned to the assessee herein in consonance with arbitration award. The assessee received their shares of consideration spread over the period from F.Y. 2009 & 2010. The land was eventually transferred to MCPL vide sale deed dated 27.07.2011 to which assessee was also a signatory as a confirming party. In this background, the assessee received a sum of Rs.70 Crores on release of its right to sue.
8. The AO in the course of the assessment proceedings observed that the assessee has not offered the impugned amount of Rs.70 Crores so received towards apportionment on sale of disputed land by the original purchasers to MCPL for taxation. Show cause notices in this regard were issued to the assessee on chargeability of such income as capital gains. Eventually, the AO vide para 7.7 of its order took a stance that amount of Rs.70 Crores received by the assessee as compensation for relinquishment of the right to sue is in the nature of 'capital gain' chargeable to income tax. The AO accordingly treated an amount of Rs.69,54,95,396/- as chargeable long term capital gain after giving deduction towards cost of acquisition and indexation benefits under the normal provisions of Act. Simultaneously, the AO also enhanced the book profits towards the aforesaid receipt arising from the disputed land for the purposes of determination of tax liability under s.115JB of the Act.
9. Aggrieved by the action of the AO in bringing the compensation for relinquishment for right to sue as long term capital gains chargeable to tax under the normal provisions of the Act and also for increase in the book profit for the purposes of deeming provision of Section 115JB of the Act, the assessee preferred appeal before the CIT(A).
I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 6 -
10. The CIT(A) after taking note of the various observations of the AO, the written submissions made by the assessee in its defense and documentary evidences placed before him, came to the conclusion that the compensation so received is neither chargeable under the normal provision of the Act nor includible for the purposes of determination of book profit under s.115JB of the Act.
11. The relevant operative para of the order of the CIT(A) for reversal of action of AO under normal provisions of Act is quoted hereunder for easy reference:
"2.3. 1 have car efully considered the fact s of the case, assess ment order, and submission filed by the appellant. The appellant company (erstwhile Ganesh Sagar Co-op. Society Limited) has purchased the agriculture land at Survey No.103/1 to 103/6, 104/1 to 104/ 3 ad measuring 42733 Sq. Mtr. at Thaltej vide conveyance deed dated 27/01/1992. Subsequently, appellant came t o know that the above land were already sold by the land owner (refer red as original owner s) to Shri Satyanarayan Gopiram, Shri Shankarlal Gopiram and Shri Gopiram Dedraj (referred as original purchasers] vide sale deed of 1986 and their names were entered into the land revenue records vide mutation entries dated 15/02/1993. Meanwhi le one of the original land owner made an application to the Mamlatdar by instituting the case No. 106 of 1991 for violation of provisions of section 84C of Agriculture Land Act, that the original purchaser namel y; Shri Gopiram group were not agriculturist at the time of entering into the trans action for purchase of the said land in 1986, and therefore, the sale deed was breach of section 63 of the Act. The Mamlatdar dropped the proceedings initiated u/s. 84C of the Act against original purchaser vide order dated 26/12/1991, The aforesaid order was taken up for revision by the Deput y Collector who upheld the order of Maml atdar and name of original purchaser were entered into the revenue records. The appellant company filed objection before the Mamlatdar not to certify the mutation entries as the original owner had sold the land in question to the appell ant, in 1992 and ther e was conveyance deed in favour of appellant. The name of Ganesh Sagar Co.op Society Li mited was entered vide mut ation entry No.7006 to 7010 dated 30/01/1992. Subsequent to above, the original land owners, original purchaser and appellant company went through various levels of filing of objection, review applications, dispute before Collector, Ahmedabad, Special Secretary, Revenue Department and Gujarat Revenue Tribunals and it was finally held that original purchaser has duly purchased land in 1986 and the appellant, the subsequent purchaser has no locus stand! in the land. Against the said order, the original owner filed Special Civil Application No. 3212 of 2001 before Honourable Gujarat High Court which was disposed off on 04/05/2001 as withdrawn. Subsequently, the ori ginal purchasers filed four suits being regular I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 7 -
Civil Suit no. 429 of 1995 to 432 if 1995 in the Court of Civil Judge (SD) Ahmedabad Rur al seeking a perpetual injunction and praying for various reliefs as original owner made an attempt to interfere with the possession of disputed land. The ld. Trial Judge allowed the application seeking ad-interim rel ief during the pendency of the suits. Aggrieved by this, the original owner preferred Civil Miscellaneous Appeal No.210 of 1997 in District Court, Ahmedabad who dismissed the appeal vide order dated 19/04/1999. Against the above order , original owner filed civil revision application No.1206 of 1999 lo 1208 of 1999 before Honourable High Court. The appellant company also filed regular civil suit No. 458 of 1995 against the original purchaser. The learned trial judge granted the application seeking ad-interim injunction in favour of appellant. Against t he said order, original purchaser filed civil miscellaneous appeal No. 77 of 1995 in the District Court. The Honourable District Court set aside the order passed by trial court for deciding the appeal on merit. The appellant company also filed regular civil suit No. 432 of 1995 for joining as a necessary party between original owner and original purchaser. Meanwhile, the Honourable High Court has also directed to place all the five suits before one court i.e. Civil Judge (SD), Ahmedabad Rur al and directed to conclude hearing of suit latest by 31/12/2006 without fail. But even otherwise, the above suits were not disposed off, ther eby the original purchaser and the appellant agreed to refer the matter for arbitration to resolve the disputes regarding the ownership of the disputed land. Accordi ngly, Shri G. C. Gandhi was appointed as a sole arbitrator who after having several meetings pr onounced award for the claimant (or iginal purchaser ) and respondent (appellant company) as under:-
"Awar d:
Since the parties have agreed to settle the dispute as per compromised deed, I pass the following direction.
It is directed to the claimant to sale the said land within 60 months from the dat e of this Award to the Third party at prevailing market rat e with the consent and knowledge of the respondent and on realisation of the price of the sale of the said land be distributed within a fortnight in accordance with the formula i.e. the clai mant shall have to pay 68 % of the amount realisation of the price to the respondent for relinquishing their right to sue regardi ng the ownership of the said land. The respondent is directed to execute all necessary writings, deeds for relinquishing their rights and to confirm the title of the purchaser of the s aid l and.
According to law, once the disputes involved in a Civil Suit are referred to the Arbitral tribunal for settlement thereof through arbitration, the sai d civil suit would obviously become infructuous. So, it is directed to both the parties to withdraw the Civil Suit, in any manner."
Accordingly, the land was sold for a consideration of Rs.103.5 crores to Shri Maheshwari (Thaltej) Complex Pvt. Ltd. The sales agreement has been executed on 26/07/2011 between original purchaser and Shri I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 8 -
Maheshwari (Thaltej) Complex Pvt. Ltd. i n which appellant company has been taken as a confirming party. In the sale agreement, entire chronology of dispute has been narrated and the appellant company has accepted to release its right to sue regarding the ownership of the said land for Rs.70 crores. The relevant part of sales agreement in which original purchasers are the first party, M/s. Maheshwari (Thaltej) Complex Pvt. Ltd., the second party and the appellant company is confirming third party as under:-
".... But even other wi se the above said sui t are not disposed, thereby the party of the first part and the party of the third part agreed to refer the matter for arbitration t o resolve the disputes agreed to refer the matter for arbitration t o resolve the disputes regarding the owners hip of the disputed l and. Hence both the parties have agreed to appoint sole arbitrator to resolve their dispute outside of the court and both the parties have appointed Mr. Gautambhai C. Gandhi Sole Arbitrator and Mr. Gautambhni C. Gandhi accepted the same. Ultimately Sole Arbitrator has passed an award and according to the award the party of the first part shall have to sale the said land to the third party at the prevailing market rat e and from the consi deration amount 68 % (appr ox) of the consi deration amount shall have to paid to the party of the third part for releasing their rights to sue of the above said land and r emaining consideration amount shall have to be retained with the party of the first part i.e. claimant of the arbitrations proceedings and according to the above said award party of the first part have agreed to sold the said land to the party of the second party for a consideration of Rs. 103,50,00,000/- say r upees One hundred and three crores fifty lacs only. Out of the said total consideration amount the party of the third part agreed to release its right to sue regarding the ownership of the sai d land for Rs .70,00,00,000/- (say rupees Seventy Crores only)) and accept the remaining consideration amount of Rs.33,50,00,000/- say r upees Thir ty three crores fifty lacs only......"
2.4. The perusal of arbitration award and sale agreement clearly reveals the fact that appellant company has received Rs.70 cror es for release of its right to sue. It is also evident that property dispute has run for 15 long years from 1991 to 2006 and the authorities from Mamlatdar to Gujar at Revenue Tribunal have held that original purchaser has duly purchased the land and the appellant company has no locus standi in t he land. Therefore i t is undisputed fact that appellant did not have any right in the disputed land and sum received of Rs.70 cr ore was for release of its right to sue. It has been held by the Honourable Gujar at High Court in the case of Bar oda Cement and Chemicals Ltd. [ 158 I TR 636] , CIT Vs. Hir alal Manilal Modi [ 131 ITR 421] , Honourable Kolkata High Court's or der in the case of CIT Vs. Ashoka Marketing Ltd. [ 164 ITR 664] , Honourable Delhi High Court in the case of CIT Vs . J. Dalmia [ 149 ITR 215] , Honourable ITAT 'D' Bench, Ahmedabad in the case of Shri Shekar G. Patel, L/ H of Lat e Shri Govindbhai C. Patel [ ITA No.l997/Ahd/ 2010] A. Y. 2007-08 & Honourable ITAT, Ahmedabad order in the case of Popular Estate Management Ltd. [ ITA No.212/Ahd/2014] A. Y. 2009-10, that in view of section 6(e) of Trans fer of Property Act, the right to sue cannot be I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 9 -
transferred. Since it cannot be transferred, the amount received to release the right to s ue is not assessable as capital gain within the meaning of section 45 read with section 2(47) of the Income Tax Act, 1961.
2.5. However, the AO has not accepted the appellant's contention t hat it did not have any right in the properly except its right to sue on the ground that capital asset as defined in section 2(14) of the Act means property of any kind and as per Explanation Io Section 2(14) included any right whatsoever . The AO has further emphasized that appellant's reliance on the definition of Transfer of Pr operty Act is not permi ssible where the property has been defined in the Act. The AO has relied on the various decisions to conclude that capit al asset defined u/s. 2(14} of the I. T. Act, 1961 includes right of a specific performance and the amount received by appellant for giving up the right of a specific performance constitut ed capital gain. The AO has also emphasized that appellant has shown lands in the books of account as a fixed asset against which it has received damage f or breach of contract in consequence to the acceptance of arbitration award.
2.6. Appellant has submitted rebuttal of all the points raised by AO during the course of appellate proceedings. The appellant company has stated that it was not having the right of a specific perfor mance of contract to acquire the property by getting execution of the conveyance deed from the land owners. The right of property arises once there is ownership, title and possession to the property, and her e the appellant's right to property does not aris e as the land owner himself had no right to the property because the property was already transferred to the first purchaser which was not br ought t o the knowledge of the appellant company. Appell ant submitted that when the landlord had already transferred the right in favour of first purchaser by entering into sale deed, then the appellant company cannot enjoy any right as the land owner hi mself who has transferred the right was not having any right t o transfer pr operty to the appellant company. The appellant submitted t hat despite the definition of expression capital asset in the widest possible terms, the right to capita asset must fall within the expression property of any kind and must not fall within the exception of section 6 of the Transfer of Property Act which uses the same expression property of any kind in the context of transfer ability makes and exception i n the case of a mere right to sue. The appellant has relied upon the case of jurisdictional High Court in the case of Baroda Cement & Chemicals Limited, Honourable Delhi High Court in the case of J. Dalmia Honourable Kolkata High Court in the case of Ashoka Marketing Limited and Honourable Jurisdictional ITAT order in the case of Popular Estate Management Ltd- The appellant company has submitted that AOs observation to include property of any kind and specifically held that capital asset as defined u/s. 2(14) of the I. T. Act included the light of specific performance and the amount received by assessee for giving up right of specific performance constituted capital gain is incorrect appreciation of the fact Appellant submitted that, the appellant company executed the purchase deed / conveyance deed with the original land owner in good faith and not knowing the fact that the land owner has already sold the land to first purchaser and thus the appellant company could not get the possession of the said land as well as title and ownership of the said land. Therefore, the appellant I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 10 -
company was not having right of the specif ic performance of contract against the original l and owners and only r ight which was available to the appellant company was to file a suit in the court of law, and therefore, it is only a right to sue by the appellant company by initiating litigation with the original land owner as well as wit h the first purchaser, arises in favour of appell ant. The appellant company thus distinguished from the case laws relied upon by the AO in the case of CIT Vs. H. Anil Kumar and K. R. Sreenath Vs. ACIT, where the assessee's were having right of specific performance. The appellant submitted that in the case relied by AO, assessee's have entered into agreement to purchas e a property and pai d an advance to the owner and the assessee was paid sum as consideration for termination of earlier agreement. The amount so received was for relinquishment of right to a specific per formance and therefor e was liable to be taxed as a capital gain. In the present case, the-appellant company does not have right of specific performance and only right available to the appellant was right to sue which under no circumstances can be considered as rights in the immovable property falling into the definition of section 2(14) of the I. T. Act, 1961 as light to sue is not a property being not an actionable claim. The appellant agains t the observation of AO that land has been shown in the appellant's books of account has submitted that merely book keeping entry cannot be termed as income unless income has actually result ed. In the present cas e, the disputed land never carne into the possessi on of the appellant company as well as no title, possession of ownershi p of the said disputed land with the appellant company, and therefore, the consideration paid in respect of conveyance deed executed with original land owner which was already s old by t he original land owner to the first purchas er by merely showing in the balance sheet does not create fixed asset i n the hands of the appell ant company. The appellant submitted t hat it initiated litigation before the Mamlatdar , Land Revenue Tribunal and before lower court only to get alive the appellant company's right to sue in court of law. The appellant has relied upon the following case laws in support of its contention:-
(i ) SB1 Vs . C1T [ 157 ITR 67] (SC)
(ii) C1T Vs. India Discount Co. Ltd. [ 75 ITR 191] (SC}
[ iii) CIT Vs . M/s. Shoorji Vallabhdas & Co. [ 46 ITR 144] [ SC]
(iv) Sutlaj Cotton Mills Vs . CIT [ 116 ITR 1 ] [ SC]
2.7. The appellant company has purchased a land which was al ready sold to Shri Satyanar ayan Gopiram, Shri Shankarlal Gopiram and Shri Gopiram Dedraj. It has been held by Gujarat Revenue Tribunal that original purchaser were the real owner of the land and the appellant company did not have any locus standi in the land. The appellant has received Rs. 70 Crore for release of its right to sue which is evi dent from arbitration award and the sale agreement. It has been held by various courts that al l receipts are not taxable under the Income Tax Act, the Honourable Mumbai Tribunal in the case of Dhruv N. Shah Vs. Dy. CIT [ 2004] 88 ITD 118 (Mumbai ) has noted that -
"Further, all receipt are not taxable under the Income Tax Act. Section 2(24) defines income, it is no doubt that this is an inclusive definition, however, a capital receipt is not income u/s. 2(24) unless it is char geable to tax as capit al gain u/s. 45. It is I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 11 -
for that reason that u/s. 2(24)(vi ) the legislature has expressly stated that income shall include capital gain chargeable u/s, 45. Under section 2(24)(vi), the legislature has not included all capital gains as income. It is only capital gain chargeable u/s. 45 which has been tr eated as income u/s. 2(24). Further u/s. 2(24)(vi ) the legislat ure has not stopped with the wor ds any capital gains. On contrary, it is obviously stated that only capital gain which are taxable u/s. 45 could be treated as income. In other wor ds, capital gain not chargeable to tax u/s. 45 fall outside the definition of income in section 24. Therefore, the word chargeable u/s. 45 are very important. So whenever an amount which is other wise a capital receipt is to be char ged u/s. 2(24) and when specifically so provides for not charging to capital gain for any r eason u/s. 45, the same cannot be br ought to tax as income by applying the general connation u/s. 2(24)."
2.8. A capital gain is chargeable to tax u/s. 45 of the Income tax, which lays down that any profit or gain arising from the transfer of a capital asset shall be chargeable to income tax under the head capital gains and shall be deemed t o be the income of the previous year in which the transfer took place. The dissection of this section requires that (i) ther e should be a capital asset (ii1. there should be a transfer of capital asset (ill) as a result of transfer, there should be profit or gain which is chargeable to tax. The term capital asset has been defined in section 2(14} of the Income tax Act which lays down that capital asset means property of any kind held by an assessee whether or not connected with its business or profes sion. The transfer has been defined inclusively in section 2(47) of Income Tax Act. The ter m tr ansfer of property has been defined in section 5 of Transfer at Properly Act as -
'transfer of property means an act by whi ch a living pers on conveys property in present or in future to one or in future to one or more other living persons and to t ransfer property is to perform such act'.
Section 6 of "Transfer of Property Act prescribes as to what may be transferred. It lays down that property of any kind may be transferred except as-otherwise provided by this act or by any other law for file time being in force. However , section 6 also carves out certain exception as to what may not be transferred. One of the exceptions carved out is in sub clause (e) which lays down that a mere right t o sue cannot be transferred.
2.9. The Honourable Bombay High Court in the case of CIT Vs. Abbas Bhoy A. Dehgamwalla [ 1992] 195 1TR 28 has held that it is the trite law that income can be held to accr ue when the assessee acqui res a right to receive the income. Despite the definition of expr ession, capital asset in the wi dest expression u/s. 2(14), a right to capital asset must fall within the expression 'property of any kind' and must not fall with the exceptions. Section 6 of Transfer Properly Act which uses the same expression 'Property of any kind' in the context of transferability makes an exception in the case of a mere right to sue. It is evident that the right to use for damage is not an acti onable claim. It cannot be assigned. Transfer of such right is as much opposed to public poli cy as is gambling in litigation. Therefore, it will not be quite correct to say that such right consti tuted a capital asset which in turn has to be an I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 12 -
interest in property of any kind. The right to sue for damages for breach of contract no doubt is capable of maturing into a right to receive damage for br each of contract. But t hat happens only wher e the damages clai med for breach of contract are either admitted or decreed and not before. Accor dingly, the Honourabl e Court held that mere right to sue does not constitute a capital asset.
2.10. The Honour able Gujarat High Court in the case of Baroda Cement Chemicals Limited has held that right to sue is not a property in view of the provisions of section 6(e) of the Properly Act and as per the provision of section 2(14) of the I. T. Act .
"6. When a contract is broken after one party to the contract has wholly or partly performed his part thereof without counter- performance by the ot her party, the relief of restitution may be granted so. that the defaulter does not reap an unjust benefit from his own wrong, e.g., money paid in advance towards the price of the goods contracted to be purchased. And lastly, the Court may grant an injunction to restrain a party from committing an apprehended breach or from disposing of the subject-mailer of the contract with a view to defeating specific performance thereof. All said and done, these are different remedies which an inj ured party has on breach of contrite!. But once there is a breach of contract and the defaulting party not only refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. The amendment of clause (y) of .section 6 by the deletion of the italicised words has brought into sharp focus the distinction between properly and a mere right to sue. Before the amendment, only the right to sue for damages arising out of a tortuous act fell within the ambit of the said clause. The right to sue arising ex-contractual, therefore, did not fall within the mischief of the clause even if it were a mere right to sue. After the amendment a mere right to sue, whether arising out of tortuous act or ex-contractual is not transferable. In Mulla's Transfer of Propert y Act, Seventh edn., we find the following s tatement:
"But a debt or actionable claim must be distinguished from a right to sue for damages. After breach of a contract for the s ale of goods nothing is l eft but a right to sue for damages which cannot be transferred. But before breach the benefit of an executory contract for the sale of goods may generally be transferred and the buyer has the right to sue for the goods ."
2.11. The Honourabl e Delhi High Court in the case of CIT Vs. J. Dalmiya [ 149 ITR 215] where the issue arose as to whether compensation received on arbitrator award as a damage is a property of any kind and thus a capital asset u/s. 2(14) of the Act has held -
"10. Under section 5 of the Transfer of Properly Act, 'transfer of property' means an act by which a person conveys property to another and 'to transf er properly' is to perform such act. A mere right to sue may or may not be property but it certainly cannot be transferred. There cannot be any dispute with the proposition that in order that a receipt or accrual of income may attract the I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 13 -
charge of tax on capital gains, the sine qua non is that the receipt or accrual mus t have originated in a 'transfer' within the meaning of s ection 45, read with section 2(47) , of the Act . Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by the assesses as damages was not asses sable as capital gains .
11. It was also argued cm behalf of the ass esses that the cost to the assessee of the acquisition of his aforesaid right under the contract for sale was nil and as such, the transfer would be outside the scope of section 48 of the Act and in this context, reliance was placed on a decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [ 1981] 128 ITR 294. But, the view which we have taken makes it unnecessary to go into this question."
The SLP tiled agains t the above has been dismissed by the Supreme Court in 1991 [ 181 ITR 122 (SC)] .
2.12. The Honourabl e ITAT, Ahmedabad 'A' bench in the cas e of Popular Estate Management Ltd. ITA No. 212/Ahd/2014 dated 29/08/2017 has held that compensation received against right to sue is not taxable income.
"16. We have given our thoughtful consideration to rival submissions. We have also perused the relevant case record with able to assistance of both the learned counsel. The dispute between the parties is qua treatment of compensation receipt in question amounting to Rs.3.87crores. The assesses's case is that it is a capital receipt not taxable as business income or capital gains. The Revenue on the other hand draws support from both the lower authorities ' action assessing the same as business income. The assessee admittedly is in real estate development business.
It entered into the above identical verdict three development agreements with as many vendor parties followed by the latter paying it variable amounts in question totaling to Rs.3.87 crores in lieu of getting for mer's right to preemptive purchase or right to sue for specific performance sur render ed in their favour . There is no evidence in the case file indicating the assessee to have undertaken even a single activity of development is all three parcels of land. We notice in this tactual backdrop that hon'ble jurisdictional high court's decision in Baroda Cement and Chemical case (supra) holds that the amount received in lieu of such a right to sue available after a vendor breaching the relevant agreement is not an actionable claim so as to be transferred u/s.6(e) of the Transfer and Property Act giving rise to assessable capital gains. Their lor dshi ps of Calcutta High Court (supra) further reiterate the same view."
2.13. There is no change in the definition of transfer of property as per Transfer of Property Act or change in the definition of transfer in section 2(47) of the 1. T. Act, 1961 si nce the pronouncement of judgment by the various High Courts on the issue that amount received in lieu of right to sue is not an actionable claim so as to be transferred u/s. 6(e) of the Transfer of Property Act giving rise to assessable I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 14 -
capital gain u/s. 45 of the Income Tax Act, 1961. Explanation 2 has been added in section 2(47) of I. T. Act, 1961 by Finance Act, 2012 to clarify that transfer i ncluded disposing off or parting with an as set or any interest therein or creating any interes t in any manner whatsoever directly or indirectly absolutely or conditionally, voluntarily or involuntarily by way of an agreement (whether entered into Indi a or outside India) or otherwise notwithstanding that such transfer of right has been characterized as being affected or dependent upon or fl owing from the transfer of share or shares of a company register ed or incorporated outside I ndia. Here again, the word transfer of right has been used, an 3 as ri ght to sue is not transferable, the explanat ion no way affects the judgment of Honourable High Courts. The courts have clarified that an expl anation to a statutor y provision is attempted to explain its content and cannot be constituted to over ride it.
2.14. The Authority of Advance Ruling in the case of Lead Couns el of Qualified Settlement Fund, 2016 [ 381 ITR 1] decided on January 12, 2016 has also considered taxability of amount received on release of right to sue. The Honourable Authority has noted that the charging section and the computation provisions u/s. 48 must go together and even if right to sue is considered as a capital asset covered under definition of transfer within the meaning of section 2(47) of the 1. T. Act, its cost of acquisition cannot be determi ned. In the absence of such cost of acquisition, the computation provi sions fail and capital gains cannot be calculated. Therefore, right to sue cannot be subject ed to income tax under the head capital gain.
2.15. In view of the above, the addition made by the AO of long term capital gain on relinquishment of right to sue in consequence to the acceptance of arbitration award cannot be s ustained in the eyes of low and is accordingly deleted. The ground of appeal is accor dingly allowed."
12. Aggrieved by the relief granted in first appellate order, the Revenue preferred appeal before the Tribunal. The assessee has also filed cross objection to defend the action of CIT(A).
13. When the matter was called for hearing, the learned CITDR for the Revenue relied upon the order of the AO and submitted that the CIT(A) misdirected himself in law and on facts and has arrived at a grossly wrongful conclusion in holding the receipt from the disputed land as capital receipt falling outside the chargeability of income under s.45 of the Act r.w.s. 2(24) of the Act. I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 15 -
14. To support the order of the AO, the learned CITDR reiterated the observations of the AO to rebut the findings of the CIT(A). The learned CITDR referred to various events, such as, the original land owners made application of Mamalatdar for violation of provisions of Agricultural Act, dropping of proceedings by Mamalatdar under s.84C of the Agricultural Land Act, the parties to the litigation going through various levels of litigation before the Court of law and ultimately referring the matter to arbitration and contended that assessee has already exercised its right to issue by entering in long drawn litigation with the original land purchasers from 1999 till December 2006 and thus the amount in question was not, in reality, received for relinquishment on its right to sue. The amount was received as a confirming party to the conveyance deed dated 26.07.2011 between the original purchasers and the ultimate buyer of land parcels, namely, Maheshwari (Thaltej) Complex Pvt. Ltd. It was thus submitted that the amount in question was received by the assessee against its right to receive damages which arose from the arbitration ward and not formed the right to sue as erroneousl y contended by the assessee. It was further strongly contended that the amount received was in the nature of compensation and would squarely fall within the definition of 'capital asset' under s.2(14) of the Act which is defined in widest possible terms and seeks to an encompass property of any kind and includes any right whatsoever arising from such transactions. The learned CITDR thus submitted that any amount received in lieu of giving up the said right constitutes capital gains liable to tax under s.45 r.w.s. 48 of the Act. It was further submitted that amount received on account of extinguishment of right in the capital asset need not necessarily arise because of transfer of the capital asset in view of the deeming fiction contained in Section 2(47)(e) of the Act defining the 'transfer' in relation to a capital asset in an inclusive manner. The I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 16 -
learned CITDR further submitted that there is no justification whatsoever for excluding the applicability of Section 115JB of the Act on such compensation received which is the alternative measure for collection of tax based on book profit irrespective of its exclusion under normal provisions. The learned CITDR accordingl y urged for reversal of the action of the CIT(A) and restoration of the action of the AO.
15. The learned counsel for the assessee, on the other hand, strongly defended the first appellate order and submitted that the CIT(A) has rightly applied the law applicable to such capital receipts and the action of the CIT(A) was guided by the sound principles enunciated in plethora of judicial precedents. The learned counsel for the assessee referred to para 7.7 of the assessment order and contended that the allegation of the AO that compensation received for relinquishment of right to sue is liable to be taxed as capital gain is totally unfounded having regard to the long line of judicial precedents. It was contended that the compensation received for release of right to sue is neither capital asset within the meaning of Section 2(14) of the Act nor such gain is capable of taxability having regard to Nil cost of right to sue as held in the case of CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294(SC). The learned counsel relied upon the submissions made before the CIT(A) both on facts and on law as recorded in para 5 of the appellate order and contended that the conclusion drawn by the CIT(A) has a sound foundation and thus ought not to be disturbed.
16. We have carefully considered the rival submissions and assessment order as well as the first appellate order and also taken note of documents referred to and relied upon in terms of Rule 18(6) of the ITAT Rules, 1963.
I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 17 -
16.1 The assessee company during F.Y. 2011-12 relevant to A.Y. 2012-13 in question received compensation amounting to Rs.70 Crore for relinquishment of right to sue as stated and admitted in para 7.7 of the assessment order. The advance paid to the original owners at the time of agreement to sale amounting to Rs.31,61,830/- was treated as cost of acquisition of such right and eventually the capital gains amounting to Rs.69,54,95,396/- was brought to tax by the AO after granting indexation benefit. While doing so, the AO has denied the claim of assessee that compensation received towards release of its rights to sue is in the nature of a capital receipt not included within the ambit of expression 'capital assets' defined under s.2(14) of the Act and thus not chargeable to tax at all. The assessee has disputed the chargeability of such receipt both under normal provisions of the Act as well as under the alternative tax scheme provided under s.115JB of the Act.
16.2 The substantive question that arises for consideration thus is whether damages received by the assessee for relinquishment of right to sue in the context of the facts of the case are capital receipt excludible from the definition of Section 2(14) of the Act or not and consequently, such receipts arising from release of right to sue is taxable under the scheme of the Act or not. It is the case of the respondent-assessee that the compensation / damages received b y the assessee on transfer of the land parcels against release of its right to sue is capital in nature outside the scope and ambit of Section 2(14) of the Act and consequently, do not fall outside the sweep of chargeability under s.45 of the Act. It is the case of the assessee that the only right that accrues to the assessee who complains of the breach is right to file a suit for recovery of damages from the defaulting party. The breach of contract does not I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 18 -
give rise to any debt of pre-existing nature and therefore right to recover damage is not assignable.
16.3 In the instant case, the rights of the assessee arising under the sale agreement with the original land owners were frustrated in view of another sale agreement of the same land parcels in favour of other party. The assessee received certain consideration by way of damages as a culmination of ongoing vexatious dispute towards rightful ownership of land parcels in question. The amount arose to the assessee by virtue of arbitral award adhered to by the parties to the dispute. The assessee has received consideration for its release of right to sue. Despite the definition of expression 'capital asset' in the widest possible term of Section 2(14) of the Act, a right to a capital asset must fall within the expression 'property of any kind' and must not fall within the exceptions. Section 6 of Transfer of property Act which uses the same expression 'property of any kind' in the context of transferability makes an exception in the case of a mere right to sue.
16.4 The issue is no longer res integra. There are long line of judicial precedents which echoes the view that the right to receive the compensation for release of right to sue on account of breach of contract for sale of land is not a capital asset and thus not chargeable to tax as capital gains. Support is drawn from CIT vs. J. Dalmiya (1984) 149 ITR 215 (Del); Baroda Cements & Chemicals Ltd. vs. CIT (1986) 158 ITR 636 (Guj); CIT vs. A. A. Dehgamwalla & Ors. 195 ITR 28 (Bom.).
16.5 We also straightway notice that identical issue arose for consideration of the co-ordinate bench in Bhojison Infrastructure Pvt. Ltd. vs. ITO (2018) 99 Taxmann.com 26 (Ahd.) concerning A.Y. I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 19 -
2008-09 order dated 17.09.2018, which is referred to and relied upon on behalf of the assessee. The co-ordinate bench, after a detailed analysis, opined that mere 'right to sue', while a capital receipt, is not a capital asset under s.2(14) of the Act and thus compensation received on release of right to sue is not a taxable receipt. The relevant operative para of the order is reproduced hereunder for the sake of easy reference:
"10. We have carefully considered the rival submissions and perused the orders of the authorities below as well as the material referred to in terms of Rule 18(6) of the ITAT Rules, 1963 and also the case laws cited. The substantive question that arises for consideration is whether damages received by the assessee for breach of development agreement are capital in nature or otherwise chargeable to tax. It is the case of the assessee that the compens ation/damages received by the as sessee from the purchaser on transfer of land under development agreement is capital in nature. It is the case of the assessee that the only right that accrues to the assessee who complains of the breach is right to file a suit for recovery of damages from the defaulting party. The breach of contract does not give rise to any debt and therefore a right to recover damages is not assignable because it is not a chose-in-action. For actionable claim to be assigned, there must be a debt in the sense of an existing obligation to consider it to be an actionable claim. It is the case of assessee that the assessee had a mere 'right to sue' whi ch is neither a capital asset within the meaning of Section 2(14) of the Act nor is capable to being transferred and ther efore not chargeable under s.45 of the Act.
10.1 The essence of long list of judicial pronouncements cited on behalf of assessee is that Section 6 of the Transfer of Propert y Act which uses the same expression 'property of any kind' in the cont ext of transferability makes an exception in the case of a mere right to sue. The decisions thereunder make it abundantly clear that the 'right to sue' for damages is not an actionable claim. It cannot be assigned. Transfer of such a right is opposed to publi c policy as it tantamounts to gambling in litigation. Hence, s uch a 'right to sue' does not cons titute a 'capital asset' which in turn has to be 'an interest in property of any kind'. Despite the definition of expression 'capital asset' in the widest possible terms in Section 2(14) of the Act, a right to a capital asset must fall with the expression 'property of any kind' subject to certain exclusions. Notwithst anding widest import assigned to the term 'property' which signifies every possible interest which a person can hold and enjoy, the 'r ight to sue' is a right in personam and such right cannot certainly be tr ansferred. In order t o attract the charge of tax on capital gains, the sin qua non is that the receipt must have originated in a 'transfer' within the meaning of Section 45 r.w.s. 2(47) of the Act. In the absence of its transferability, the compensation/damages received by assessee is not assessable as capital gains.
I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 20 -
10.2 The co-ordinate bench of ITAT, Ahmedabad i n the case of Deputy CIT(A) vs. Shekhar G. Patel ITA No.1997/Ahd/2010 order dated 19.03.2014 relied upon on behalf of the ass essee has made reference to host of judicial pronouncements including t he decision of the Hon'ble Gujarat High Court i n the case of Baroda Cement and Chemicals Ltd. (supra) and concluded the issue in faovur of assessee. The Co-ordinate bench highlighted the relevant part of the decision of the Hon'ble Gujarat High Court which is reproduced her eunder:
"18. The assessee had undoubtedly a right to sue M/s K.C.P. Ltd. for damages for breach of contract. Instead of litigating in a Court of law, the parties arrived at a settlement whereunder compensation in the s um of Rs .1,40,000 came to be paid in full and final satisfaction to the assessee. Counsel for the Revenue contends that the compromise/arrangement resulted in extinguishment of the assessee's right to sue for damages within the meaning of s. 2(47) of the Act. While accepting this contention the Tribunal has placed reliance on the decision of this Court in CIT vs. R.M. Amin (1971) 82 ITR 194 (Guj). In that case this Court observed that the use of the word 'include' in the definition of the word 'transfer' in s. 2(47) was intended to enlarge the meaning of 'transfer' beyond its natural import so as to include extinguishment/relinquishment of rights in the capital asset for the purpos e of s. 45 of the Act . Since the transfer contemplated by s. 45 is one as a result whereof consideration has passed to the assessee or has accrued to him, extinguishment of the right must rel ate to that 'capital asset', corporeal or incorporeal. It is, therefore obvious that a transfer of a capital asset in order to attr act liability to tax under the head 'Capital gains' must be a 'transfer' as a r esult whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by s. 48 of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, t here must be receipt of consideration for such extinguishment to attract liability to tax. Now, in legal parlance, the terms 'consideration' and 'compensation' or 'damages' have distinct connotations. The f ormer in the context of ss. 45 and 48 would connote payment of a sum of money to secure transfer of a capital asset; the latter would suggest payment to make amends for loss or injur y occasioned on the breach of contract or tort. Both ss. 45 and 48 postulate the existence of a capital asset and the consideration received on transfer thereof. But, as discussed earlier, once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor , the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee's rights t herein since such a t ransfer would be hit by s. 6(e) of the Tr ansfer of Property Act . In any view of the matter, it is difficult to hold that the sum of Rs.1,40,000 received I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 21 -
by way of compensati on by the assessee was consideration for the transfer of a capital asset."
10.3 The Hon'ble Gujarat High Court in Baroda Cement (supra), in turn, referred to the concept of breach of contract as discuss ed by the Hon'ble Bombay High Court in the case of Iron and Hardware (I ndia) Co. vs. Shamlal & Br os. AIR 1954 Bom 423 as under (p. 645 of 158 ITR):
"10. Chagla, C.J., had an occasion to consider this aspect of the law in Iron and Hardware (India) Co. vs. Shamlal & Br os. AIR 1954 Bom 423. The learned Chief Justice observed as under(p. 425) :
'It is well settled that when there is a breach of contract, the only right that accrues to the person who complains of the breach is the right to file a suit for recovering damages . The breach of contract does not give rise to any debt and, therefore, it has been held t hat a right to recover assignable because it is not a chos e-in-action. An actionable claim can be assigned, but in or der that there should be an actionable claim there must be a debt in the sense of an existing obligation. But inasmuch as a breach of contract does not result in any existing obligation on the part of the person who commits the breach, the right to recover damages is not an actionable claim and cannot be assigned.' Proceeding further, the learned Chief Justice stated (p. 425) :
'In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true t o say that the other party to the contract who complains of the breach has any amount due to him from the other party.
As already stated, the only right which he has the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reas on of any existing obl igation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court , Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages . Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already exists. The Court in the first place must decide that the defendant is liable is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant.' I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 22 -
It would appear from the above observations that on breach of contract the defaulter does not incur any pecuniary liability nor does the injured party becomes entitled to any specific amount, but he only has a right to sue and claim damages which may or may not be decreed in his favour. He will have to prove (i) that the opposite party had committed breach of contract and (ii) that he had suffered pecuniar y loss on account ther eof.
11. The above observations of Chagla, CJ., were quoted with approval by the Supreme Court in Union of India vs . Raman Iron Foundr y AIR 1974 SC 1265. In para 9 of the judgment, the Supreme Court considered the claim for liquidated damages for breach of contract between the parties. Pointing out t hat so far as the law i n India is concerned, there is no qualitative difference in the nature of the claim, whether it be for liquidated damages or unliquidated damages, the Supreme Court proceeded to state the law as under (p. 1273):
'' When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in s . 6(e) of the Transfer of Property Act, which provi des that a mere right t o sue for damages cannot be transferred.' Quoting the statement of law enunciated by Chagla C.J., whi ch is extracted earlier, the Supreme Court stated (p. 1273) : 'This statement in our view represents the correct legal position and has our full concurrence'.
12. It would seem well-settled from the above discussion that after there is a breach of contract for sale of goods, nothing is left in the injured party save the right to sue for damages or specific perfor mance which cannot be transferred under s . 6(e) of the Transfer of Pr operty Act since it is a mere right to sue and not an actionable claim." 10.4 In view of the above facts and in the light of plethora of case laws relied upon, we are disposed to hold that the receipt towards compensation in lieu of 'right to sue' is of capital nature which i s not chargeable to tax under s.45 of the Act.
11. At this juncture, it may be pertinent to observe that the Revenue has inter alia questioned the basis giving rise to the cause of action for creation of 'right to sue'. We do not see any purport in such aspect. A development agreement was executed which enabled the assessee to utilize the land for construction and for sharing of profits. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner ) percei ved threat of filing suit by developer and consequently paid damages/ compensation to shun the possible legal battle. The intrinsic point with respect to accrual of 'right to sue' has to be seen in the light of overriding circumstances as to how the parties have perceived the pres ence of looming legal battle from their point of vi ew. It is an admitted position that the defaulting I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 23 -
party has made the as sessee a confirming party in the s ale by virtue of such development agr eement and a compensation was paid to avoid litigation. This amply shows the existence of 'right to s ue' i n the perception of the defaulting party. Thus, the existence of 'right to sue' could not be brushed aside.
12. We shall now advert to the claim of the Revenue that amount received towards relinquishment of such right is purely a revenue receipt. In this regard, we notice that the compens ation was not received as a result of termination of advantages associated with development rights but was claimed to be received to relinquish the rights of the assessee to sue against the vendor of the land. The assessee has received the compensation amount on sale of pr operty occasioned due to breach of development agreement. The development agreement was thus frustrated by sale of land by the owner. The observation of the CI T(A) that assessee had obtained the posses sion of the property from sell er is beleaguered one. As pointed out on behalf of the assessee, the possession are typicall y given to a developer for the purposes of development. Such act is in the nature of license to develop the property while the possession of the property continues to remain vested with the vendor. On a plain reading, we observe that consideration received for relinquishment of 'right to sue' does not fall under the pr ovisions of Section 28(va) of t he Act. We further find from the facts of the case that assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share in knowhow, patent , copyri ght, trademark, licens e etc. as specified under s.28(va) of the Act enacted for its taxability under the head of business income. Consequently, we are of the consi dered view that compensation received in lieu of 'right to sue' could not be regarded as revenue r eceipt. Therefore, we find merit in the appeal of the assessee."
16.6 On perusal of the first appellate order, we find that CIT(A) has analysed the fact situation threadbare and applied the law correctly. The action of the CIT(A) is found to be consistent with the law propounded in the judicial decisions as quoted in the first appellate order as well as in earlier paragraphs.
16.7 We thus find little merit in the plea raised on behalf of the Revenue. On facts, as rightly stated on behalf of the assessee, the proceedings on challenge for rightful owner of land before the Court of law were continuing and had not come to an end and as a corollary, the right of the assessee to sue the defaulting party was open and subsisting. Pending proceedings before the Court of law, a I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 24 -
consensus settlement was arrived by the Arbitral Tribunal which was dutifully acted upon. The character of compensation receipts emanating from such award towards divesting of title of the assessee was admittedly capital in nature arising on account of relinquishment of right to sue as per the averments made by the AO in para 7.7 of the assessment order itself. The compensation received was offshoot of right to sue, an untransferrable right in personam of capital nature. The plea on behalf of Revenue that the assessee had nearly exhausted its right to sue has to be seen from the point of view of litigant. Such issues are vexatious and cannot be straight jacketed till the conclusion of Court proceedings. The parties have among themselves agreed to compensate the assessee for release of right to sue which act cannot be substituted by the opinion of Revenue. The short point thus remains is whether such capital receipt on account of release of right to sue can be bracketed under the expression 'property of any kind' used in S. 2(14) defining capital asset. The issue has been answered in favour of the assessee in the earlier paragraphs. As discussed in preceeding paras in length, such capital receipts towards compensation do not fall within the sweep of expression 'property of any kind' notwithstanding its very wide connotations and consequently such capital receipts (not being capital asset) are not susceptible to capital gain tax having regard to provisions of charging section 45 of the Act. Merely because such right towards compensation surfaced as a result of sale of disputed land would not per se govern its taxability unless such right can be termed as a 'capital asset' which it is not.
16.8 As per its grounds of appeal, the Revenue has pitched in the alternate that the CIT(A) ought to have treated the receipts as 'income from other sources'. No substantive argument was placed I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 25 -
before us to address this plea. Furthermore, we see obvious folly in such misconceived plea. To reiterate, the AO himself has treated the compensation to be capital in nature and has brought the same to tax under the head 'capital gains' as per para 7.7 of assessment order. The predominant condition, among others, for chargeability of income under the head 'income from other sources' is that such income must generate on revenue account. The case sought to be built by the revenue, as an alternate, is completely contrary to its stated position. We see no merits.
16.9 Thus, in totality, we see no error in the conclusion drawn by the CIT(A) in favour of the assessee under the normal provisions of the Act for excluding impugned capital receipts from ambit of taxation. Hence, We decline to interfere with the first appellate order on this score.
17. Ground No. 1 & 2 of the revenue appeal is dismissed.
18. Ground no. 3 concerns taxability of compensation on the contours of MAT provisions embodied under section 115JB of the Act.
19.1 We straight away notice that the blame of the Revenue as per its grounds of appeal is very narrow in as much the AO has merel y assailed non-adjudication of issue of addition of compensation by CIT(A) on the touchstone of S. 115JB of the Act. The allegation is far from true. Firstly, the CIT(A) has duly adjudicated the issue in para 3.3 to 3.14 of its appellate order. Thus the grievance of the AO, in effect, ends here. Secondly, alleged non-adjudication of the grievance of the Assessee by CIT(A), if any, does not give any cause for action in the revenue appeal. It is for the aggrieved party I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 26 -
to persuade its cause. The authorisation memo dated 08.06.2018 by Pr.CIT-2, Ahmedabad on such ground is thus undeserving and uncalled for.
19.2 Notwithstanding above, Having regard to the true purport of the claim sought to be advanced, we consider it expedient to advert to such alternate ground on MAT on merits. The Revenue appears to have purportedly challenged the exclusion of capital receipt bestowed upon assessee (by way of compensation) for the purposes of determination of 'book profit' under section 115JB. It appears to be essentially the case of the revenue that regardless of taxability or otherwise of such compensation under the normal provisions, the taxability under the self contained code provided in S. 115JB cannot be ousted as wrongfully done by the CIT(A).
19.3 The assessee, in its return of income, has excluded the compensation receipts on capital account from the ambit of taxation both under normal provisions as well as MAT provisions. The AO, on the other hand, while increasing the assessable income under the normal provisions towards such receipts, has simultaneously increased the book profits under s.115JB of the Act to the extent of compensation amount. The minimum alternate tax was thus sought to be charged on compensation receipts notwithstanding exclusion from its taxability under normal provisions.
19.4 In the first appeal against the increase in book profits for the purposes of levy of alternate tax, the CIT(A) reversed the aforesaid action of the AO after taking note of several judicial precedents governing the law on MAT provisions qua capital receipts. The relevant operative para of the first appellate order in this regard is reproduced hereunder for easy reference:
I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 27 -
"3.3 I have carefully cons idered the facts of t he case, assessment order and submission of the appellant. Appellant has shown book profit U/s. 115JB of t he Act of Rs.1,80,383/- in the return of income. Appellant has filed the chartered accountant certificate in For m No.29B as per Rule 40B along with Annexur e - A and Schedule - I &. II showing details relat ing to the computati on of book profit for the purpose of Section 115JB(4) of the I. T. Act, 1961. The AO has recomputed the book profit at Rs.69,70,18,553/-by not all owing reduction of exempt income of Rs.69,68,38,170/- certified by chartered accountant in Column 9 of Annexure - A of Form 29B as income not chargeable to tax. The AO has noted that the appellant has not given any reason for treating Rs. 69,68,38,170/- as not includible in the book profit. The AO has concluded the net profit as per P & L Account is Rs 69,70.18,553/- and the compens ation recei ved for release of right to sue is not excludible while computing the book profit u/s. 115JB. The AO has relied upon the judgment in the case of Technicarts (P) Lt d. Vs. ITO, Mumbai [ 12 Taxmann.com 1] and N. J. Jose Pvt. Ltd. Vs. ACIT [ 174 Taxman 141] .
3.4. The appellant has submitted that the observation of the AO that amount of Rs.69,67,38,170/- has been reduced while computing the book profit u/s. 11 5.1B without any explanation is erroneous. I t has submitted before AO in its reply dated 26/12/2014 regardi ng not treating the compensation received by the appellant company for relinquishing their right to sue as income chargeable to tax. The appellant has submitt ed computation of book profit in P & L Account, directors report, explanation regardi ng capital receipt of compensation, statutory auditor's report in Form No.29B as per Rule 40B of I. T. Rules, 1V62. The appellant company has submitted that right to sue is not a capital asset as well as it is not a property of any kind as defined in section 2(14) of the I. T. Act, 1961 as well as right to sue is not transferrable as per Section 6[ e) of Transfer of Properl y Act. Therefore, it is not a case of profit arising to the appellant company on transfer of any property and accordingly as per Schedule - VI, Part - I & Part - II of the Company Act, the compens ation / damage received for relinquishing right to sue is not required to be accounted for in the P & L Account. The appellant has further submit ted that as it is not a profit from transfer of a capital asset, and theref ore, the same has not been shown in the P & L Account maintained but t he same has been shown as income from extra or dinary item below the line of P & L Account for the year under consideration and taken directly to the capital reserve account in the balance sheet. The appellant has relied upon the judgment of Apollo Tyres Limited Vs. C1T [ 255 ITR 273] , Honour able Madras High Court's order in the case of CIT - III, Chennai Vs. Metal Chromium Platter Pvt. Ltd. [ 2016] 76 taxmann. com 22 and Honourable 1TAT, Mumbai Bench in the case of Frig Sales (India) Ltd, [ 4 SOT 376] (Mumbai).
3.5. It is seen from t he P & L Account that appellant has shown net profit after taxation and before extra ordinary item at Rs .1.15 lacs and added income from extra ordinary item as compensation received far relinquishment of right to sue of Rs.6968.38 lacs. The appellant i n the computation of book profit u/s. 115JB has reduced the above amount as non taxable. The appellant has furnished a report in From No. 29B as per Section 115JB(4) from accountant J.M. Parikh &. Associates I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 28 -
certifying that the book profit has been computed in accordance with the provisions of section 115JB. The auditor has further certified that the tax payable u/s. 115JB of the Income Tax Act in respect of A. Y. 2012-13 is Rs.38,160/- which has been determined on the bas is of details in Annexure - A to the for m. In Annexure - A, the auditor has noted that the net profit as per P &. L Account refer red is Rs.69,70,18,553/-. However, Rs.69,68,38,170/- was not an income chargeable to tax, hence income offered to tax is Rs.1,59,787/- . The issue to be decided is whether AO was justified in not allowing the compensation received on right to sue which has been held as non taxable receipt reduced from the book profit for the purpose of section 115JB.
3.6. The AO has relied upon the decision of ITAT, Mumbai in the case of Technical Pvt. Ltd. decided on 31/03/2011. In this case, the assessee has claimed that for the purpose of calculat ing book profit u/s. 115JB, capital gain arising from sale of factory, land and building credit ed to P & L Account requir ed to be deducted as i t represented receipt in the nature of income on which 54EC deduction is available. The Honourable Bench relying upon the decis ion of Hyderabad Special Bench in the case of Rain Commodities Limited [ 2010] 40 SOT 265, held that profit on sale of assets credited to P & L Account cannot be excluded while computing the book profit u/s. 115JB even though the capital gain arising f rom the sale of that asset is not subject t o tax under nor mal pr ovisions of the Income Tax Act by virtue of provi sions of section 54EC.
3.7. The Assessing Off icer further relied on the decision of Kerala High Court in the case of N. J. Jose & Company [ 174 Taxman 141] decided on 20/02/2008. In thi s case, the assessee claimed exclusion of capital gains in the computat ion of book pr ofit u/s. 115J because the capital gain was deductible u/s. 54E. The Honourable court relying upon the decision of Bombay High Court in the case of CI T Vs . Veekaylal Investment Co. Pvt. Lt d. has held that long term capital gain is a profit included in the P & L Account prepared under Chapter VI of the Company Act, so it cannot be excluded unless so provided under Explanation to Section 115J(1)(A) of the Act. The Honourable court has held that section 54E has no application i n the computation of book profit u/s. 115J.
3.8. On perusal of the above decisions, it is seen that both the decisions deal with the cases where capital gain was otherwise income u/s. 45 of the Act and exclusion was claimed by the assessee while computing book profit u/s. 115J / 115JB on the ground that income was excluded because of deduction u/s. 54EC / 54E of the I. T. Act, 1961. I n the present case, appellant has excluded the r eceipt of compens ation for release of its right to sue, which is not taxable at all as per the I ncome Tax Act, 1961. The Honourable ITAT, Jaipur in the cas e of Shree Cements Limited [ 2015] 152 ITD 561, Honourable Kolkata Tribunal in the case of Binani Industries Limited [2016] 178 TTJ 658 dated 02/03/2016 and Mumbai Tribunal in the case of JSW Steel Li mited [ 2017] 82 Taxmann.com 210, after considering the decision of M/s. Rain Commodities Li mited has held that a capital receipt which is not taxable to tax at all cannot be held as taxable u/s. 1 I5JB of the Act. The Honourable Madr as High Court in the case of Metal Chromium Pv. I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 29 -
Ltd. [ 2016] 76 Taxmann.corn 229, Mumbai, after considering the decision of Kerala High Court in the case of N. I. Jose & Company Pvt. Ltd. which was on book profit u/s. 115J has held that section 115JB is different from 115J.
3.9. The Honourable Supr eme Court in the land mark case of Apollo Tyre Li mited (supra) which is often relied i n not allowing adjustment of exempt income has held as under-
"The Assessing Officer, while computing the book profits of a company under section 115 J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained, in accordance with the Companies Act. The Assessing Of ficer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the explanation. The use of the words "in accordance with the provisions of part II and III of the Schedule VI of the Companies Act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into accounts of the company, the Assessing Offi cer has to accept the authenticity of the accounts with reference to the provision of the companies Act, which obligate the company to maintain its account in a manner provided by that Act and the same to be scrutinized and certified by statutory audit or and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a stat utory obligation also to examine and be sati sfied that the account s of the company are maintained in accordance with the requirements of the Companies Act. Subsection (1A) of sect ion 115J docs not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company."
The above decision i s on the computation of book profit u/s. 115J. Section 115J which was introduced by Finance Act, 1987 has been withdrawn from A. Y. 1991-92. Subsequently, the concept was reintroduced with few changes imposing M AT u/s. 115JA with effect from 1997. The Finance Act, 2000 has inserted a new section 115JB with effect from A. Y. 2001-02. The new s ection has introduced sub section 4 which was not there either in section 115J or 115JA.
"115JB(4) : (4) Ever y company to which this section applies, shall furnish a report in the prescribed form36 from an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book prof it has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the retur n of income furnished in response to a notice under clause (i ) of sub-section (1) of section 142."
I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 30 -
A combined reading of Honourable Supreme Court decision in Apollo Tyre Limited and newly introduced section 115JB(4) would mean that AO does not have juri sdiction to go beyond the net profit shown in the P & L Account including report of auditor u/s. 115JB(4) except t o the extent provided in the explanation. The Honourable Kolkata Tribunal in the case of Binani Industries Ltd. (supra) has held that adjustment needs to be made to the disclosure made in the notes of account forming part of the P & L Account for the purpose of computation of book profit u/s. 115JB.
3.10. On perusal of P S. L Account, it is seen from the P & L Account for the year ending 31/03/2012 that appell ant has s hown profit before extra ordinary item of Rs.1.15 lacs. Thereafter, it has disclosed extra ordinary item as compensator received for relinquishment of right to sue of Rs.6969.54 lacs. However, while computing the book pr ofit and tax payable u/s. 115JB, the appellant has excluded the said amount for calculating the lax under MAT. The appellant has submitted a detailed note relying upon the of jurisdictional High Court in the case of Baroda Cement & Chemical Lt d. that capital receipt of Rs,69,68,30,170/- i s not subject to tax. The appellant has also s ubmitted For m No. 29B as required u/s. 115JB(4) certifying the book profit of Rs.1,80,383/- and clarifying in Clause - 9 of Annexure - A of Form No. 29B that Rs.69,68,30,170/- was not an income chargeable to tax. 3.11. The Honourable Mumbai Bench 'J' in the case of M/s. JSW steel Limited [ 2017] 82 Taxmann.com 210 [ Mumbai Tribunal ) decided on 13/01/2017 after analysing the accounting standard has held that capital receipt falling within the category of capital surplus which is a non recurring and exceptional item which is 1o be disclosed as per the requirement of the Company Act cannot be reckoned as working result of the company so as t o be treated as a part of book profit.
"16. from our above analysis and discus sion of the various provisions of the Companies Act as well as Accounting Standards it can be ostensibly deduced that an item of ' capital surplus' can never be a part of profit & loss account albeit it is a part of a capital reserve as the waiver of a loan taken for acquisition of a capital asset is a capital receipt falling within the category of capital surplus which is non-recurring and exceptional item which to be disclosed as per the requirement of the Companies Act. Further it is quite pertinent to note that, clause (ii ) of Explanation -1 of section 115JB is also an indicator of the intention of the legislature and also the scheme of the section that the incomes which are treated as exempt under the Income Tax Act are to be excluded from the profit & loss account. The said clause excludes;
(ii) the amount of income to which any of the provision of section 10 or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; When the said clause requires exclusion from the book profit all that amount of income which are exempt and are not in the nature of income, if any such amount i- credit ed to the profit & loss account, then on same logic it would be inconceivable that this provision intends that 'book profit' should include something which is in the nature of a capital surplus on account of waiver of a loan. Even if a I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 31 -
company has credited the amount of remission to its profit & loss account, then such a profit &loss account needs to be adjusted with the amount of remission so as to arrive at the net profit as per the profit & loss account prepared in accordance with provisions of Part II & III of Vim Schedule of the Companies Act and this is what has been envisaged in the operating lines of Explanation-1 to section 115JB, that, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year. Net profit as per profit and loss account can never meant to include capital reserve or capital receipts. The object of enacting of section 115J, 115JA & 115JB was never to fasten any tax liability in respect of something which is not an income at all or even if it was income bat is not taxable under the normal provisions of the Act. The provisions of section 115JB cannot be so interpreted so as to require accounting of what in substance is capital in nature to the credit of the profit & loss account and get indir ectly taxed under book profit. The Special Bench of ITAT, Kolkat a in the case of Sutlej Cotton Mills Ltd. V ACIT (supr a) observed and held as under:
"The pattern of the income-tax Act is that certain receipts are not to be taken as income at all while, i n respect of certain receipts, there is an exemption from lax on fulfilling certain conditions and, in respect of certain other incomes, certain concessions or deduct ions are given. There is a basic dichotomy between receipts which are not taxable at all and receipts which are taxable but subject to exemption on fulfilling certain conditions. In the eas e of capital gains, it is a receipt which is not taxable at all but for a deeming provisi on, liven the deeming provision is subject t o exclusion in respect of certain receipts which fulfill certain conditions such as r einvestment. Section 115J has recognized this mid has provi ded in Explanation, clause (f ), item (ii), t hat the amounts falling under Chapter 111 are to be excluded. When an amount whi ch forms part of the book profit itself cannot be taxed under section 115J when it does not have the income character, it has to be accepted that, when what is routed through the profit and loss account and carried to re-.serve is of a capital nature and does not have an income character, it cannot be added back to the book profits merely because of the enabling provision in the Explanation to section 115J for the purpose of imposing a lax thereon. Apar t from the fact that capital gains is deemed to be income under section 45, it has to be kept in mind that even section 115J deems 30 per cent of the book profit to be total income chargeable to tax. The legislative history shows that the l ax under section 11 5J was with reference to the business profit as it was in replacement of section 80VVA which sought to reduce the deductions available in computing the income from business. When section 80VVA was introduced in 1983-84, the intention was to restrict the various lax incentives and concessions available in computing the income from business in 70 per cent thereof. Significantly, the deduction under section 80T in res pect of capital gains was not one of the items of concession or tax rebate which was to be restricted under that section. This shows that exemption of capital gains was not intended to be restricted. I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 32 -
Subsequently also when that section was replaced by section 115J, the object was to introduce the provision whereby every company will have to pay a minimum corpor ate tax on the profits declared by it in its own accounts. These profits can only be those which are asses sable as income under the Act. It is now well-settled that, in the interpretation of statutes, one has to adopt such a construction as will promote the general legislative purpose underlying the provision. In the present case, as can be seen from the finance Minister's speech and the Memorandum explaining the provisions, the intention was to make the company pay tax on income which would otherwise be reduced by reason of certain deductions available under the Act, Even the adjustments specified in section 115J refer only lo appropriation from the profits of the business. The mandate given by section accordance with the provisions of Part-II and Part -III of the Sixth Schedule to the Companies Act" and the "net profit as shown in the profit and loss account". These two expressions convey an idea of an implied mandate given to the Assessing Officer to verity and satisfy himself that the net profit was as shown in the profit and loss account and the profit and loss account was prepared in accordance with Part II and Part III of the Sixth Schedule to the Income tax Act. A reference to the requirements of the Companies Act shows that it is concerned with the result of the working of the company. Consequently, it cannot be directly concerned with changes in the capital structure. In particular, the profit and loss account is concerned with items of income and expenditure and, therefore, any pr ofit derived by reaction of a capital asset woul d not be an item of income. In a case where the profit and loss account was prepared in accordance with the provisions of Part 11 and Part 111 of Sixth Schedule to the Companies Act, the Assessing Officer will have no power to disturb the book profit except as slated in section 115J. The Assessing Officer is bound 10 proceed with the computation only on the basis of the book profit as shown in the profi t and loss account unless it is discovered that the profit and loss account is not drawn up in accordance with the provisions of the Companies Act. As far as fixed assets and investments are concerned, the valuati on of such assets is not a necessar y part of the process of det ermining the trading result since they do not form part of the stock-intrade. Any revaluation of fixed assets or investments does not indicate the accrual of any profit because profit or loss will arise only on sale or disposal and not on revaluation and such unrealized profit on revaluation cannot be brought to tax. However , it is well recognized that, in case of unrealized appreciation of fixed assets, they are writt en up on revaluation on the assets side of the balance-sheet to give a true and fair view of the company's affairs on a particular date, i.e. balance s heet date and the net surplus is shown as a capital reserve. This is not a regular annual feature but an exercise undertaken at appr opriate junctions in the career of a company. In contrast, in the case of stock-in-trade, if the assessee had been following the method of valuing at cost and changes to the method of valuation at market value, such a valuation has to be made ther eafter every year at market value on the valuation date. But, in the case of fixed I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 33 -
assets, if the invest ments have been shown at cost for some years and the value is written up or written down on revaluation at market rate on a particular dale, there i s no change in the method of accounting so as to require the company to again revalue the investments at market rate on subsequent annual valuation dates. What will be shown in the s ubsequent years will be only the revised book value. The method of accounting is an essential and integral process to ascertain the income or loss alter the end of the previous year within the meaning of section 145 and it does not apply to revaluation of fixed assets or investments. The proceeds by way of sale of an invest ment not being income, they are not liable to tax under section 115J unless there is a clear intendment. It is well recognized that there cannot be a charge by implication. The non obstante clause with which thi s section begins coul d only mean that the other sections which impose tax on book pr ofit alone are to be ignored and not that t he section which deems a capital receipt as income should be taken as part of the book profit for the purpose of the section, more s o when section 45 declares that it cannot be taken as income if section 54E is attracted. Hence a capital gain which is not chargeable even as deemed income because of section 54E, cannot be brought to tax as part of the book profit under the Explanation to section 11 5J..........,..,............."
17. From the above di scussion we are of the opinion that surplus resulting in the books of the assessee company consequent upon waiver of loan amount is not required to be credited to the profit & loss account for the year in which waiver is granted and in any case it cannot be reckoned as working r esult of the company during the period covered by the account, so as to be treated as part of book profit of the company for that year under the Companies Act."
3.12. The honourable Mumbai Bench 'J' in the case of M/s. JSW Steel Limited (supra), after analyzing has considered all the avai lable decisions both in favour of revenue and assessed has concluded that -
"23. From the perusal of aforesaid decisions, at the outset, it may appear that on similar nature of issues there are divergent views of various benches of the Tribunal, however, one common point/ratio permeating through all the decisions, which can be deduced by us is that, if an assessee company is in receipt of a 'capital receipt' which is not chargeable to tax at all, that is, it does not fall within any of the char ging section or can be classified under any heads of income under the income Tax Act, then same cannot be treated as part of net profit as per Profit & Loss account or reckoned as 'working resul t' of the company of the relevant previous year and consequentl y, cannot be held to be taxable as 'book profit' under MAT in terms of section 115JB. Accordingly, our conclusion remains the same that, the capital surplus on account of waiver of dues neither is nether taxable nor can be included in computation of book profit u/s 115JB."
3.13. Reliance is placed on the following decisions:-
a) Shivalik Venture (P) Ltd [2015] 60 Taxm ann. com 314 I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 34 -
"28. In view of the foregoing discussions, we find merit in the contentions of the assessee that the profit arising on transfer of capital asset to its wholly owned Indian s ubsidiary company is liable to be excluded from the Net profit., i.e., the Net profit disclosed in the Profi t and Loss account s hould be reduced by the amount of profit arising on transfer of capital asset and the amount so arrived at shall be taken as "Net profit as shown in the profit and loss account" for the purpos e of computation of book profit under Explanation 1 to sec. 115JB of the Act. Alternatively, since the said profit does not fall under the definition of "income" at all and since it does not enter into the computation provisions at all, there is no question of including the same in the Book Profit as per the scheme of the provisions of sec. 115JB of the Act. Accordingly, we set aside the order passed by Ld CI T(A) on this issue and direct the AO to exclude the above said pr ofit from the computation of "Book Profit" for the reasons discussed above."
[ b] ACIT v. Shree Cem ent Ltd. [ 2015] 152 ITD 561 (Jaipur - Trib.) wherein it was held that:
"13.4. From perusal of the decisions of Rain Commodities (supra) and Growth Avenues (supr a), we notice that both the decision dealt with the issue of taxability of capital gains in computing Book Profit u/s 115JB of the Act. These capital gains were otherwise income u/s 2(24) of the Act arid exclus ion was claimed in computing Book Profi t u/s 115JB on the ground that the said capital gains was exempt either u/s 47(iv) or u/s 54EC of the Act, which the Tribunal did not agree. In the present case, however, we are deal ing not with capital gains but with pure capital receipt, which does not even have anti 'income', 'pr ofits or, gains' embedded t herein. The impugned incentive granted to the Assessee is pure and simple capital receipt, in terms of our decision on ground no. i at Para 10 hereinabove, which in turn is supported by the principles laid down by the Apex Court, various high courts & Special Bench of the Tribunal. That being the case, it does not have any income or profit element embedded in it, since the incentive was granted to encourage industrial growth of industrially non developed ar ea. No one can make profit out of the subsidy or incentive granted to it. Hence, it is not chargeable to tax under the Income Tax Act as held by the Apex Court in the cas e of Padmaraje (supr a) and in the light of our fact finding as above, clearly not includible in P&L account prepared under Part II &. Part III of Schedule VI to the companies Act."
The above decision has been affirmed by Honourable Rajasthan High Court, as the Honourable High Court has admitted the ground.
(C) L H. Sugar Factory Ltd. ITA Nos. 417, 418 & 339/LKW/2013 dated 09/02/1016 wherein tr ibunal held that:--
"From the above paras, we find that the Tribunal has duly considered the judgment of the Hon'ble Apex Court rendered in I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 35 -
the case of Apollo Tyres Ltd. ((Supra) and thereafter, it was noted by the Tribunal in this case that as per the decision of Special Bench of the Tribunal rendered i n the case of Rain Commodities Ltd. v. DOT, 41 DTR 449, if profit and loss account is not in accordance with Part 11 & Part 111 of Schedule VI to the Companies Act, 1956 because it is prer equisite for Section I I5JB of the Act. The Tribunal in this case also considered two another Tribunal's orders rendered in the case of DCIT v. Bombay Diamond Company Ltd-33 DTR 59 and Syndicate Bank v. ACIT, 7 SOT 51 Bangalore where it was held by the Tribunal after considering the decision of Hon'ble Apex Court rendered in the case of Apollo Tyres Ltd. (Supra), and after 28 explaining the same that adjustment to profit and loss account is possible to make it compliant wit h Schedule VI Part II and Part 111 of the Companies Act, 1956 which is prerequisite of Section 115JB of the Act. On this basis , the Tribunal in the case of Shree Cement Ltd. (Supra) decided this issue in favour of the assessee and it was held that capital receipt in the form of sales tax subsidy needs to be excluded from profit as per P&L account for the purpose of computing book profit u/s 115JB of the Act. By respectfully following these Tribunal's orders, we hold that in the present case also, The receipt on account of transfer of carbon credit which i s held to be a capital receipt needs to be excluded from profit as per P&L account for the present year while computing the book profit u/s 115JB of the Act. This issue is decided in favour of the assessee and accordingly Ground Nos.1 to 5 are allowed. The assessee gets relief of Rs.27,70,880/- and consequent inter est being 10 % of amount received by the assessee on sale of carbon credit of Rs .27,70,8,800/-."
(d) Kolkata Tribunal in the case Binani Indus tries Ltd [2016] 178 TTJ 658 dated 02/03/2016 has held that:
"... respectfully following the aforesaid decision of the Mumbai Tribunal, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, - includes notes on accounts thereon and accordingly in order to determine the real pro fit of the assessee as laid down by the Hcn'ble Apex Court i n the case of Indo Rama Synthetics (I ) Ltd v. CIT reported in [ 2011] 30 ITR (SC), adjustment need to be made to the disclosur es made in the notes on accounts for ming part of the profit and loss account of the assessee and the profits arrived after such adjustment, should be considered for the purpose of computation of book profits u/s 115JB of the Act and thereafter, the Learned AO has to make adjustments for additions / deletions contemplated in Explanation to section 115JB of the Act."
In this case Tribunal has discussed the entire issue in detail manner on similar set of facts and relied upon various decisions to come t o the aforesaid conclusion.
I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 36 -
3.14. In view of the above, the AO was not justified to add the capital receipt of Rs.69,68.38,170/- in the book profit u/s. 115JB of the I. T. Act, 1961. The ground of appeal is accordingly allowed."
19.5 Aggrieved by the relief granted by the CIT(A) on the contours of S. 115JB of the Act, the Revenue has challenged the first appellate order before the Tribunal.
20. We have examined the impugned controversy on levy of minimum alternate tax under s.115JB of the Act on the compensation receipt on release of right to sue. The pivotal question is whether capital receipts being not in the nature of income and which are not ordinarily subjected to tax under normal provisions could be taxed by way of an alternate route under S. 115JB? While it is the case of the revenue that even capital receipts, which may otherwise not be subjected to tax under normal provisions of the Act, form part of the book profit and in the absence of any specific adjustment in Explanation 1 to Section 115JB(2), are susceptible to MAT provisions. It is the case of the Revenue that the MAT provisions are a separate code in itself and therefore, one cannot interpret the term 'book profit' in line with the definition of expression 'income'. On the other hand, it is the case of the assessee that the S. 115JB of the Act being a deeming fiction, the provision cannot be stretched too far to override the main charging section of the Act and dehors the object to be achieved behind insertion of such deeming fiction.
21. As discussed in great length, the assessee has claimed the relinquishment of right to sue to be capital in nature which is not a 'property' as per the definition of the capital asset under s.2(14) of the Act read with provisions of Section 6(e) of Transfer of Property Act. The receipt was found to be of capital in nature outside the I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 37 -
ambit of taxability under normal provisions in the Act as discussed in the earlier paragraphs. Contextually, it is observed that the aforesaid compensation has been reflected in the 'statement of profit and loss' of the assessee co. below the line after determination of taxation liability i.e. in the 'profit & Loss appropriation account' as an extraordinary item while drawing accounts as per Part II and Part III of Schedule VI to the Companies Act, 1956.
21.1 It is trite that a capital receipt can be taxed only when the same has been expressly included and deemed as 'income' under s.2(24) of the Act. As a general rule for Income Tax, all revenue receipts unless specifically exempted are taxable under the provisions of Income Tax Act and all capital receipts unless made specifically taxable by the Act do not constitute income chargeable to tax. The compensation received for release of right to sue being a capital receipt is not deemed to be 'income' and hence not chargeable to tax. Significantly, the Constitution itself uses the term 'tax on income' and the term 'income' must be construed in the same manner as the one defined under Income Tax Act. As a corollary, it is impermissible to cover such capital receipts under S. 115JB in an unregulated manner. At this stage, we notice a pertinent plea taken on behalf of the assessee that the receipt being of capital nature does not enter into the computation provision at all and hence, there is no question of including the same in book profits for the purposes of Section 115JB of the Act.
21.2 The view as propounded that the capital receipts unless specifically included as 'income' cannot brought to tax even under alternate provision gains traction from the fact that clause (ii) of I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 38 -
Explanation (1) to Section 115JB which provided for an adjustment to the book profit of the Company, require a company to exclude those income which do not form part of total income under S. 10, 11 and 12 subject to some exceptions. Thus, those items of income which are exempt under S. 10 are specifically excluded from book profit. If that is so, by extension of the innate logic, those items of receipts which are not income at all, requires to be excluded at the threshold and rather in preference to items of Section 10 of the Act. Since capital receipts are not ordinarily construed as income under rudimentary understanding of accounting and tax laws, they do not find a specific mention in Section 10 of the Act and consequentl y Explanation 1 to Section 115JB of the Act is silent on exclusion of capital receipts. In tandem, on facts, the capital receipt has been credited in appropriation of profits account and is not regarded as income per se in the profit & loss account prepared under schedule VI of Companies Act, 1956. Hence, when the factual position and law is read conjointly, it appears that such capital receipts are not susceptible to tax under s.115JB of the Act. The AO cannot bring such capital receipts to tax by including it in book profit artificially.
21.3 To assuage the niceties of law, the CIT(A) has taken note of several judicial precedents on applicability of MAT provisions on capital receipts. The judicial precedents have taken note of the rationale behind the enactment of alternate mechanism as well as scheme of taxation as a whole and echoed an intelligible view that such capital receipts [not specifically included under S. 2(24)] are to excluded from the ambit of book profit. In ACIT vs. Shree Cement Ltd. [ ITA No. 614,615 & 635/JP/2010 order dated 9.9.2011] , the issue of taxability of capital receipts has been analysed threadbare and in length. The decision of special bench in Rain Commodities I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 39 -
was taken note of. The Jaipur bench was dealing with the issue as to whether subsidy received which was admittedly capital in nature can be subject to MAT. The co-ordinate bench held that there was never any intention behind introduction of section 115JB to tax something which is not taxable at all. The decision has also considered the fact that in respect of earlier year, the Hon'ble Rajasthan High Court did not even admit the 'substantial question of law' framed in this regard. Further, it was observed that a capital receipt which is neither profit nor income cannot be part of 'profit' as per Profit & Loss Account prepared in terms of Part II of Schedule VI to Companies Act. Following Shree Cement case, the Lucknow Bench in L H Sugar Factory held that the amount received by way of capital receipt on sale of carbon credits should be excluded while computing book profits. The Kolkata Tribunal in Binani Industries Ltd. held that capital receipts being forfeiture of share warrants which are not chargeable to tax under the normal provisions of the At, cannot be taxed under S. 115JB. It will be unnecessary to deal with many more decisions on similar lines consistently rendered b y different benches in this regard.
21.4 In the light of interpretations rendered by co-ordinate benches, We concur with the view adopted by the CIT(A) in favour of the assessee towards inapplicability of MAT provisions to the impugned capital receipts. In parity with judicial precedents governing the field, we see no error in the conclusion drawn by the CIT(A) in this regard.
22. In the result, appeal filed by the Revenue is dismissed. I T A N o . 1 5 3 5 / Ah d / 1 8 A/ w C O N o . 1 0 2 / Ah d / 1 9 ( M / s . Ga n e s h s a g a r I n f r a s t r u c t u r e P v t . L t d . ) A . Y . 2 0 1 2 - 1 3 - 40 -
23. The cross objection filed by the assessee merely supports the action of the CIT(A) and therefore does not call for separate adjudication. Consequently, the cross objection is also dismissed as infructuous.
24. In the result, appeal of the Revenue as well as cross objection of the assessee stands dismissed.
This Order pronounced on 22/11/2021
Sd/- Sd/-
(RAJPAL YADAV) (PRADIP KUMAR KEDIA)
VICE PRESIDENT ACCOUNTANT MEMBER
Ah med ab ad : Da ted 2 2 /1 1 /2 0 2 1
True Copy
S. K. SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं(धत आयकर आयु*त / Concerned CIT
4. आयकर आयु*त- अपील / CIT (A)
5. .वभागीय 12त2न(ध, आयकर अपील य अ(धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड8 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ(धकरण, अहमदाबाद ।