The Tribunal held that compensation received in lieu of extinction of right to sue is capital receipt not chargeable to tax.
The assessee, a partnership firm, was engaged in the business of construction and development of property. During FY 2004-05, the assessee had entered into a MOU with landowner for the development of his land and paid the sum of Rs. 2.5 crores. In terms of the MOU, the parties had agreed to execute a JDA and the landowner was to obtain the commencement certificate from the local authorities. However, the landowner did not provide the certificate. Besides, the assessee came to know that the landowner had transferred the development rights of the land to a company owned by his family.
The assessee filed a suit before the Bombay HC seeking specific performance of the MOU and to execute the JDA. In the alternative, the assessee claimed damages for breach of contract. The assessee also filed criminal complaint alleging fraud. Litigation in various forums continued till 2011. Through the intervention of a well-wisher, the parties agreed to a settlement. As per the terms of the settlement, the assessee agreed to withdraw the criminal complaint and the civil suit. On execution of the cancellation deed in September 2011, the Assessee was paid Rs.20 crores.
The AO treated the receipt of Rs. 20 crores as income and taxed the same as LTCG, which was confirmed by CIT(A).
Referring to the relevant clauses in the deed, the Tribunal observed that the assessee had not transferred any rights, which was sought to be confirmed in the MOU. In fact, those rights were already transferred by the landowner in favour of the company owned by his family before the date of the MOU. The assessee received compensation which consisted of refund of the amount paid by way of advance along with interest, towards loss of profit / liquidated damage, for loss of opportunity to develop the property and sale of flats in the open market, and towards the cost of litigation. The ITAT held that the amount received by the assessee in excess of the advance was on account of compensation for extinction of its right to sue the owner, and so the receipt is a capital receipt not chargeable to tax. The ITAT relied on the decision of the Delhi High Court in CIT vs. J. Dalmia (149 ITR215), the Bombay High Court in CIT vs. Abbasbhoy A. Dehgamwalla (195 ITR 28), the Supreme Court in CIT vs. Saurashtra Cement Ltd.(325 ITR 422) and of the Mumbai Tribunal in ACIT vs. Jackie Shroff (194 TTJ 760).