AMITA R. SHETH, MUMBAI V. DCIT CEN CIR 46, MUMBAI

ITA 1166/MUM/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8192 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 12-05-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 11-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR KAILASH P GAIKWAD
• Keywords: Capital asset; Capital receipt
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUM BAI , , BEFORE S/SHRI RAJENDRA, A.M. AND SANJAY GARG,J.M. ./ITA NO. 1166/MUM/2013 , / ASSESSMENT YEAR:2009-10 AMITA R. SHETH C/O. KALYANIWALLA & MISTRY ARMY & NAVY BUILDING, 3RD FLOOR 148, M.G. ROAD, ROOM NO.208 FORT,MUMBAI-400 001. PAN: AAQPS 0335 Q VS. ACIT-16(2) 2ND FLOOR, AAYAKAR BHAVAN M.K. MARG, MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT ) R EVENUE BY: DR.KAILASH P. GAIKWAD AS SESSEE BY: S/SHRI M.M. GOLVALA & MR. HORMUZD JAMSHEDJI / DATE OF HEARING: 31.01.2017 / DATE OF PRONOUNCEMENT:15.02.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , -PER RAJENDRA,AM: CHALLENGING THE ORDER DT.24.12.2012 OF CIT(A)-36, M UMBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE,AN INDIVIDUAL FILED THE RETURN OF I NCOME ON 28.07.2009 DECLARING TOTAL INCOME OF RS.2.39 LAKHS.THE ASSESSING OFFICER(AO)C OMPLETED ASSESSMENT U/S. 143(3) OF THE ACT ON 28.12.11,DETERMINING HER INCOME AT RS.61.98 LAKHS. 2. THE EFFECTIVE GROUND OF APPEAL IS ABOUT MAKING ADDI TION OF RS.59.98 LAKHS UNDER THE HEAD LIQUIDATED DAMAGES RECEIVED.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT, DT.21.10.20 08, WITH ELEVENTH LAND DEVELOPERS PVT. LTD.(ELDPL)FOR SALE OF 180952 EQUITY SHARES OF GRE AT OFFSHORE LIMITED (GOL) AT THE AGREED RATE OF RS.540/- PER SHARE ON A SPOT DELIVERY BASIS WITH CERTAIN CONDITIONS, THAT ASSESSEE DID NOT RECEIVE ANY AMOUNT OF ADVANCE OR ANY OTHER MONE Y AT THE TIME OF THE AGREEMENT, THAT THE SALE HAD TO BE COMPLETED ON OR BEFORE 18.11.08, THA T AS PER THE CL.7 OF THE AGREEMENT IN EVENT OF FAILURE BY THE PURCHASER TO PURCHASE THE SHARES HE HAD TO PAY LIQUIDATED DAMAGES NOT IN THE NATURE OF PENALTY TO THE SELLERS, THAT THE PURCHASE RS FAILED TO PAY MONEY TO THE ASSESSEE, THAT THE ASSESSEE RECEIVED RS.59.98 LAKHS AS LIQUIDATED DAMAGES AFTER NEGOTIATIONS,THAT THE ASSESSEE REDUCED THE COST OF EQUITY SHARES FROM THE AMOUNT RECEIVED FROM THE SELLER, THAT IT WAS STATED THAT AMOUNT RECEIVED BY HER WAS CAPITAL RECEIPT AS PER THE PROVISIONS OF SECTION 51 OF THE ACT.AFTER CONSIDERING THESE FACTS, THE AO HE LD THAT THE ASSESSEE HAD NEITHER RECEIVED ADVANCE MONEY NOR ANY OTHER MONEY AT THE TIME OF AG REEMENT, THAT SHE DID NOT RECEIVE/RETAIN 1166/M/13(09-10)- AMITA R. SHETH 2 ANY MONEY FOR THE TRANSACTION TILL 18.11.2008, THAT THE TRANSACTION WOULD NOT FALL WITHIN THE MEANING OF PROVISIONS TO SECTION 51 OF THE ACT.HE R EFERRED TO THE CASE OF TRAVANCORE RUBBER AND TEA CO.(243ITR158)AND HELD THAT PROVISIONS OF S ECTION 51 WERE NOT APPLICABLE TO THE FACTS OF THE CASE,THAT SHE RECEIVED RS.32.93 PER SH ARE AS LIQUIDATED DAMAGES THROUGH NEGOTIATIONS, THAT THE PROLONGED NEGOTIATIONS RESUL TED IN REDUCING THE LIQUIDATED DAMAGES, THAT THE AGREEMENT DATED 21.08.2008 WAS NOT HONOURED, TH AT THE RELEVANCE AND SANCTITY OF THE AGREEMENT WAS LOST.FINALLY, HE HELD THAT LIQUIDATED DAMAGES RECEIVED BY THE ASSESSEE WERE TO BE TAXED AS REVENUE RECEIPTS. 3. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM,IT WAS ARGUED THAT THE LIQUIDATED DAMAGES RECEIVED BY HER WERE A CAPITAL RECEIPT, THAT THEY WERE DIREC TLY LINKED TO THE SALE OF CAPITAL ASSET, THAT THE ONLY REASON THAT THE LIQUIDATED DAMAGES WERE RECEIV ABLE WAS THAT PURCHASERS DID NOT HONOUR THE AGREEMENT, THAT THE ASSESSEE WAS AN INVESTOR I N SHARES, THAT SHE DID NOT TRADE IN SHARES, THAT THE DEPARTMENT HAD ALSO TREATED HER AS AN INV ESTOR IN SHARES, THAT THE RECEIPT WAS REFERABLE TO FIXED CAPITAL AND WAS NOT PART OF CIRCULATING CA PITAL, THAT THE CHARACTER OF LIQUIDATED DAMAGES WOULD BE THE SAME AS OF THE ASSET.THE ASSES SEE RELIED UPON THE CASE OF SAURASHTRA CEMENT LTD.(325 ITR422). AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER,THE FAA CONFIRMED THE ORDER OF THE AO WITHOUT PASSING A SPE AKING ORDER. 4. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)ARGUED THAT LIQUIDATED DAMAGE RECEIVED BY THE ASSESSEE WAS WITH REGARD TO INVESTMENT I.E.CAPITAL ASSET, THAT SUCH DAMAGE WAS TO ASSESSED AS CAPITAL RECEIPT ,THAT IN THE CASE OF HUSBAND AND FATHER IN LAW OF THE ASSESSEE THE FAA HAS ALLOWED THE APPEAL FILED BY THEM ON IDENTICAL FACTS,THAT THE FAA HAD NOT CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE.HE RELIED UPON THE CASE OF SAURASHTRA CEMENT LTD.(SUPRA).THE DEPARTMENTAL REPR ESENTATIVE(DR)SUPPORTED THE ORDER OF THE FAA 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE ALONG WITH MEMBERS OF HER FAMILY,HAD ENTE RED INTO AN AGREEMENT, DT.21.10.2008, WITH ELEVENTH LAND DEVELOPERS PVT. LTD.(ELDPL)FOR S ALE OF EQUITY SHARES OF GREAT OFFSHORE LIMITED (GOL) AT THE AGREED RATE OF RS.540/- PER SH ARE, THAT THERE WAS PROVISION FOR LIQUIDATED DAMAGES IN THE AGREEMENT, THAT THE PURCH ASER FAILED TO HONOUR THE AGREEMENT, THAT 1166/M/13(09-10)- AMITA R. SHETH 3 AFTER A LONG NEGOTIATION SESSION BOTH THE PARTIES A RRIVED AT A SETTLEMENT, THAT IN PURSUANCE OF THE SETTLEMENT THE ASSESSEE RECEIVED A SUM OF RS.59 .98 LAKHS, THAT HER HUSBAND AND FATHER-IN- LAW ALSO RECEIVED LIQUIDATED DAMAGES FOR THE SAME T RANSACTION, THAT IN THEIR CASES THE FAA (NOT THE CIT-36) HAD HELD THAT LIQUIDATED DAMAGES R ECEIVED BY THEM WAS A CAPITAL RECEIPT. BEFORE PROCEEDING FURTHER WE WOULD LIKE TO REFER TH E CASE OF SAURASHTRA CEMENT LTD.(SUPRA). IN THAT MATTER THE ASSESSEE,WHO WAS ENGAGED IN THE MANUFACTURING OF CEMENT,HAD ENTERED INTO AN AGREEMENT WITH THE SUPPLIER FOR THE PURCHASE OF AN ADDITIONAL CEMENT PLANT.THE AGREEMENT CONTAINED A CONDITION THAT IN THE EVENT OF DELAY CA USED IN THE DELIVERY OF THE MACHINERY, THE ASSESSEE WAS TO BE COMPENSATED AT 5% OF THE PRICE O F THE RESPECTIVE PORTION OF THE MACHINERY, WITHOUT PROOF OF ACTUAL LOSS, BUT THE TOTAL AMOUNT OF DAMAGES WAS NOT TO EXCEED 5% OF THE TOTAL PRICE OF THE MACHINERY.THE SUPPLIER FAILED TO SUPPLY THE MACHINERY WITHIN THE STIPULATED TIME AND THE ASSESSEE RECEIVED RS.8,50,000/-FROM TH E SUPPLIER BY WAY OF LIQUIDATED DAMAGES. THE ASSESSED THE AMOUNT IN QUESTION IN THE HANDS OF THE ASSESSEE.IN APPEAL,TRIBUNAL HELD THAT THE AMOUNT WAS A CAPITAL RECEIPT.THE HIGH COURT ANS WERED THE REFERENCE IN FAVOUR OF THE ASSESSEE. AFTER DELIBERATING UPON THE ISSUE,THE HON BLE SUPREME COURT HELD AS UNDER: 11. THE QUESTION WHETHER A PARTICULAR RECEIPT IS CA PITAL OR REVENUE HAS FREQUENTLY ENGAGED THE ATTENTION OF THE COURTS BUT IT HAS NOT BEEN POSSIBL E TO LAY DOWN ANY SINGLE CRITERION AS DECISIVE IN THE DETERMINATION OF THE QUESTION. TIME AND AGAI N, IT HAS BEEN REITERATED THAT ANSWER TO THE QUESTION MUST ULTIMATELY DEPEND ON THE FACTS OF A P ARTICULAR CASE, AND THE AUTHORITIES BEARING ON THE QUESTION ARE VALUABLE ONLY AS INDICATING THE MATTERS THAT HAVE TO BE TAKEN INTO ACCOUNT IN REACHING A CONCLUSION. IN RAI BAHADUR JAIRAM VALJI [1959] 35 ITR 148 (SC), IT WAS OBSERVED THUS (PAGE 152) : 'THE QUESTION WHETHER A RECEIPT IS CAPITAL OR INCOM E HAS FREQUENTLY COME UP FOR DETERMINATION BEFORE THE COURTS. VARIOUS RULES HAVE BEEN ENUNCIATED AS FURNISHING A KEY TO THE SOLUTION OF THE QUESTION, BUT AS OFTEN OBSER VED BY THE HIGHEST AUTHORITIES, IT IS NOT POSSIBLE TO LAY DOWN ANY SINGLE TEST AS INFALLIBLE OR ANY SINGLE CRITERION AS DECISIVE IN THE DETERMINATION OF THE QUESTION, WHICH MUST ULTIMATEL Y DEPEND ON THE FACTS OF THE PARTICULAR CASE, AND THE AUTHORITIES BEARING ON THE QUESTION A RE VALUABLE ONLY AS INDICATING THE MATTERS THAT HAVE TO BE TAKEN INTO ACCOUNT IN REACH ING A DECISION. VIDE VAN DEN BERGHS LTD. V. CLARK [1935] 3 ITR (ENG CAS) 17. THAT, HOWE VER, IS NOT TO SAY THAT THE QUESTION IS ONE OF FACT, FOR, AS OBSERVED IN DAVIES (H. M. INSP ECTOR OF TAXES) V. SHELL COMPANY OF CHINA LTD. [1952] 22 ITR (SUPPL) 1 'THESE QUESTIONS BETWEEN CAPITAL AND INCOME, TRADING PROFIT OR NO TRADING PROFIT, ARE QUESTIONS WHICH, T HOUGH THEY MAY DEPEND NO DOUBT TO A VERY GREAT EXTENT ON THE PARTICULAR FACTS OF EACH C ASE, DO INVOLVE A CONCLUSION OF LAW TO BE DRAWN FROM THOSE FACTS'.' 12. IN KETTLEWELL BULLEN AND CO. LTD. [1964] 53 ITR 261; AIR 1965 SC 65 DEALING WITH THE QUESTION WHETHER COMPENSATION RECEIVED BY AN AGENT FOR PREMATURE DETERMINATION OF THE CONTRACT OF AGENCY IS A CAPITAL OR A REVENUE RECEIP T, ECHOING THE VIEWS EXPRESSED IN RAI BAHADUR JAIRAM VALJI [1959] 35 ITR 148 (SC) AND ANA LYSING NUMEROUS JUDGMENTS ON THE POINT, THIS COURT LAID DOWN THE FOLLOWING BROAD PRINCIPLE, WHICH MAY BE TAKEN INTO ACCOUNT IN REACHING A DECISION ON THE ISSUE (PAGE 282) : 'WHERE ON A CONSIDERATION OF THE CIRCUMSTANCES, PAY MENT IS MADE TO COMPENSATE A PERSON FOR CANCELLATION OF A CONTRACT WHICH DOES NO T AFFECT THE TRADING STRUCTURE OF HIS 1166/M/13(09-10)- AMITA R. SHETH 4 BUSINESS, NOR DEPRIVE HIM OF WHAT IN SUBSTANCE IS H IS SOURCE OF INCOME, TERMINATION OF THE CONTRACT BEING A NORMAL INCIDENT OF THE BUSINESS, A ND SUCH CANCELLATION LEAVES HIM FREE TO CARRY ON HIS TRADE (FREED FROM THE CONTRACT TERMINA TED) THE RECEIPT IS REVENUE : WHERE BY THE CANCELLATION OF AN AGENCY THE TRADING STRUC TUR E OF THE ASSESSEE IS IMPAIRED, OR SUCH CANCELLATION RESULTS IN LOSS OF WHAT MAY BE REGARDE D AS THE SOURCE OF THE ASSESSEE'S INCOME, THE PAYMENT MADE TO COMPENSATE FOR CANCELLA TION OF THE AGENCY AGREE MENT IS NORMALLY A CAPITAL RECEIPT.' 13. WE HAVE CONSIDERED THE MATTER IN THE LIGHT OF T HE AFORENOTED BROAD PRINCIPLE. IT IS CLEAR FROM CLAUSE NO. 6 OF THE AGREEMENT DATED SEPTEMBER 1, 1967, EXTRACTED ABOVE, THAT THE LIQUIDATED DAMAGES WERE TO BE CALCULATED AT 0.5 PER CENT. OF THE PRICE OF THE RESPECTIVE MACHINERY AND EQUIPMENT TO WHICH THE ITEMS WERE DEL IVERED LATE, FOR EACH MONTH OF DELAY IN DELIVERY COMPLETION, WITHOUT PROOF OF THE ACTUAL DA MAGES THE ASSESSEE WOULD HAVE SUFFERED ON ACCOUNT OF THE DELAY. THE DELAY IN SUPPLY COULD BE OF THE WHOLE PLANT OR A PART THEREOF BUT THE DETERMINATION OF DAMAGES WAS NOT BASED UPON THE CAL CULATION MADE IN RESPECT OF LOSS OF PROFIT ON ACCOUNT OF SUPPLY OF A PARTICULAR PART OF THE PL ANT. IT IS EVIDENT THAT THE DAMAGES TO THE ASSESSEE WAS DIRECTLY AND INTIMATELY LINKED WITH TH E PROCUREMENT OF A CAPITAL ASSET, I.E., THE CEMENT PLANT, WHICH WOULD OBVIOUSLY LEAD TO DELAY I N COMING INTO EXISTENCE OF THE PROFIT-MAKING APPARATUS, RATHER THAN A RECEIPT IN THE COURSE OF P ROFIT EARNING PROCESS. COMPENSATION PAID FOR THE DELAY IN PROCUREMENT OF CAPITAL ASSET AMOUNTED TO STERILIZATION OF THE CAPITAL ASSET OF THE ASSESSEE AS SUPPLIER HAD FAILED TO SUPPLY THE PLANT WITHIN TIME AS STIPULATED IN THE AGREEMENT AND CLAUSE NO. 6 THEREOF CAME INTO PLAY. THE AFORES TATED AMOUNT RECEIVED BY THE ASSESSEE TOWARDS COMPENSATION FOR STERILIZATION OF THE PROFI T EARNING SOURCE, NOT IN THE ORDINARY COURSE OF THEIR BUSINESS, IN OUR OPINION, WAS A CAPITAL RE CEIPT IN THE HANDS OF THE ASSESSEE. WE ARE, THEREFORE, IN AGREEMENT WITH THE OPINION RECORDED B Y THE HIGH COURT ON QUESTIONS NOS. (I) AND (II) EXTRACTED IN PARAGRAPH 1 (SUPRA) AND HOLD THAT THE AMOUNT OF RS. 8,50,000 RECEIVED BY THE ASSESSEE FROM THE SUPPLIERS OF THE PLANT WAS IN THE NATURE OF A CAPITAL RECEIPT. 5.1. FROM THE ABOVE,IT IS CLEAR THAT IF AN ASSESSEE IS I N RECEIPT OF LIQUIDATED DAMAGES THAT IS DIRECTLY AND INTIMATELY LINKED WITH A CAPITAL ASSET ,SAME HAS TO BE TREATED AS CAPITAL RECIEPT.BUT,IF THE DAMAGE IS RECEIVED IN THE ORDINA RY COURSE OF THEIR BUSINESS IT HAS TO BE TAXED AS REVENUE RECEIPT.IN THE CASE UNDER CONSIDERATION, THE ASSESSEE WAS HOLDING THE SHARES AS AN INVESTOR AND NOT AS A TRADER.SO,THE COMPENSATION RE CEIVED BY HER DUE TO NON PERFORMANCE ON PART OF THE PURCHASER CANNOT BE TAXED UNDER THE HEA D REVENUE RECEIPT.PROLONGED NEGOTIATIONS AND FINAL SETTLEMENT ON A LATER DATE CANNOT ALTER T HE NATURE OF THE RECEIPT.WE HAVE GONE THROUGH THE ORDERS OF THE FAA IN THE CASES OF THE H USBAND AND FATHER IN LAW OF THE ASSESSEE.HE HAS,IN BOTH THE CASES, RELIED UPON THE CASE OF SAURASHTRA CEMENT LTD. AND HAS ALLOWED THE APPEALS FILED BY THE ASSESSEES.HE HAS P ASSED A REASONED ORDER.THE AO.S IN BOTH THE CASES HAVE FILED APPEALS BEFORE THE TRIBUNAL.IN THE PRESENT CASE,WE FIND THAT THE FAA HAS NOT DISCUSSED ANYTHING.HE HAS JUST REPRODUCED THE O RDER OF THE AO AND ADDED ONE LINE TO THE ORDER STATING THAT HE IS CONVINCED WITH THE ARGUMEN TS ADVANCED BY THE AO.WE ARE UNABLE TO UNDERSTAND RATIONAL BEHIND SUCH AN ORDER.A REASONED ORDER IS PRIMARY PRE-CONDITION OF ANY ORDER-ESPECIALLY OF APPELLATE AUTHORITIES.AN ORDER WITHOUT REASONS IS NO ORDER AT ALL.APPELLATE AUTHORITIES ARE REQUIRED TO MEET THE ARGUMENTS ADVA NCED BEFORE THEM DURING THE COURSE OF HEARING.IN THE MATTER BEFORE US,THE FAA HAS NOT UTT ERED A SINGLE WORD AS TO WHY THE 1166/M/13(09-10)- AMITA R. SHETH 5 ARGUMENTS OF THE ASSESSEE WERE NOT TO BE CONSIDERED OR AS TO WHY THE CASES RELIED UPON BY HER WERE NOT APPLICABLE TO THE FACTS OF THE CASE. 5.2. WE HAVE,AFTER CONSIDERING THE AVAILABLE MATERIAL,RE ACHED TO THE CONCLUSION THAT LIQUIDATED DAMAGE RECEIVED BY THE ASSESSEE ON ACCOUNT OF FAILU RE OF THE PURCHASER OF SHARES OF GOL TO PURCHASE THE SAME,THAT IT IS A CAPITAL RECEIPT AS T HE SHARES WERE NOT HELD BY THE ASSESSEE AS STOCK IN TRADE.REVERSING THE ORDER OF THE FAA,WE DE CIDE THE EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH FEBRUARY, 2017. 15 , 2017 SD/- SD/ - ( /SANJAY GARG) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 10.02.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR E BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.