Zavaresh Soli Poonawalla, Pune V. Deputy Commissioner of Income-Tax, Circle- 1(1) , Pune

ITA 169/PUN/2020

AI Insights

The case involves Zavaresh Soli Poonawalla, the assessee, who received compensation and a security deposit forfeiture amounting to Rs.95,28,666/- from Motorola India Pvt. Ltd. due to the premature termination of a lease agreement for office premises. The Assessing Officer (AO) taxed this amount as income from other sources, which was contested by the assessee. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the filing of an appeal with the Income Tax Appellate Tribunal. The Tribunal, referencing similar cases and legal precedents, ruled that the compensation should not be taxed under the head 'Income from Other Sources' and directed the deletion of this amount from the taxable income of the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134301 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 07-02-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 28-01-2020
• Other Referred Cases: Emil Webber Vs. CIT [1993] 200 ITR 483 (SC), Datar & Co., Vs. ITO [2000] 67 TTJ 546(Pune), Addl.CIT Vs. Rama Leasing Co. P. Ltd., 20 SoT 505, Avakash Holding Pvt. Ltd., in ITA No.475/PN/2010, Skyland Builders (P.) Ltd., Vs. ITO [2021] 121 taxmann.com 251 (Delhi)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Salary income; Capital Gains; CHAPTER IV
• Section: 56; 250; 251; 64

Judgement Text

आयकर अपीलीय अिधकरण “बी” Ɋायपीठ पुणेमŐ। IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES “B” :: PUNE BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.169/PUN/2020 िनधाᭅरण वषᭅ / Assessment Year : 2014-15 Zavareh S. Poonawalla, 16/B-1, Sarosh Bhavan, 2 nd Floor, Dr. Ambedkar Road, Opp. NIV, Pune – 411001. PAN: AAJPP 5268 N Vs The Dy.CIT, Central Circle-1(1), Pune. Appellant/ Assessee Respondent /Revenue Assessee by Shri Nikhil S Pathak – AR Revenue by Shri M.G.Jasnani – DR Date of hearing 08/02/2023 Date of pronouncement 27/04/2023 आदेश/ ORDER PER DR. DIPAK P. RIPOTE, AM: This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals), Pune-11, dated 27.12.2019 under section 250 of the Income Tax Act, 1961 for the A.Y.2014-15. The Assessee has raised the following grounds of appeal: “1] The learned CIT(A) erred in ignoring that rent is for use of premise and in the absence of such use affirmed receipt of compensation for non-occupancy amounting to Rs.95,25,666/- as income assessable U/sec.56 of the Income Tax Act’1961. 1.1] The learned CIT(A) erred in not appreciating that ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 2 compensation received from tenant (equivalent to four month’s rent) can’t be construed as rent but it is for breach of terms of lease agreement. 2] The learned CIT(A) erred in holding that the refund of Municipal Tax of amounting to Rs.76,55,841/- is rightly taxed by the A.O. as income from other source when said amount is otherwise deductible U/sec.24(b) and hence can’t travel to provisions of sec.56. 3] The learned CIT(A) was not justified in holding that the refund of municipal tax of Rs.76,55,841/- constitutes income of the appellant by ignoring the fact that unjust enrichment cant result in earning of income. 4] The learned CIT(A) failed to appreciate that – a. The refund of municipal tax of Rs.76,55,841/- could not be assessed income U/sec. 56 of IT Act when it is related with income assessable U/sec.22. b. In the absence of any provision similar to section 41(1) while assessing income U/sec.22/23 refund of cannot be assessed as income in the hands of the appellant by overriding in another head of income. 5] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.” 2. At the outset, ld.Authorised Representative(ld.AR) for the assessee submitted that assessee would not like to press the Ground No.2, 3 and 4. Accordingly, Ground No’s.2, 3 and 4 are dismissed as not pressed. Brief facts of the case: 3. Assessee is an individual, Director in several companies. Assessee had shown income from salary, rent and other income. Assessee had filed return of income on 30.09.2014 declaring total ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 3 income of Rs.11,40,96,390/-. Assessee filed revised return on 13.05.2013 declaring the same income as shown in the original return of income. During the assessment proceedings, the Assessing Officer(AO) observed that assessee had entered into leave and license agreement in June, 2010 with Motorola India Private Limited for the office premises admeasuring 2074.85 sq.metres, Office No.402 in the building known as the CEREBRUM I.T. PARK, Pune. The said leave and license agreement was terminated by the “Leave and License Termination Agreement” dated 29.11.2013(Page 63-65 of PB). Motorola India Pvt. Ltd.,(lessee) paid Rs.27,73,792/- vide cheque dated 05.12.2013 to the assessee as penalty/compensation towards early expiry of lock in period and subsequent notice period. Motorola the lessee also forfeited the security deposit amount of Rs.71,02,110/-(Page 64 of PB). The assessee claimed the said amount as not taxable. The AO taxed the said amount of Rs.95,28,666/- as income from other sources. The AO relied on the Hon’ble Supreme Court’s order in the case of Emil Webber Vs. CIT [1993] 200 ITR 483 (SC). Aggrieved by the same, assessee filed appeal before the ld.CIT(A). The Ld.CIT(A) has held as under : “8. From the above said agreement, it is understood that in a situation where there was a premature termination of the agreement which was not attributable to the licenser i.e. the appellant, the licensee was liable to pay license fee for the ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 4 unexpired lock-in period and notice period of 6 months license fees, as compensation for the notice period. From the facts of the case, it is seen that the invoice was raised by the appellant on Motorola Inia Pvt Ltd on 1/12/2013, as Motorola vacated the premises on 30/11/2013, much before the mandatory lock-in period of 12 months starting from 1/6/2013. As per the agreement, it became liable to pay compensation from December 2013 to June 2014 @ Rs.13,61,238/- per month for the early termination of the lease and license agreement. 9. The issue therefore, is whether the compensation as per the leave license agreement is a taxable receipt in the hands of the appellant and if so, under which head of income it should be taxed. 10. Income has been defined under the I.T. Act as per sec.2(24) and it states as “the income includes....”. It lists out various sub sections which includes income under the Act. Therefore, the definition of income as per the I.T.Act is an inclusive definition and not an exhaustive one. It does not cover all instances in its list which can be determined as income under the Act. Similarly, the heads of income have been laid down u/s 14 of the Act as salaries, income from house property, profits and gains from business or profession, capital gains and income from other sources. Sec.56 of the Act states as under: “56(1). Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to Income Tax under the head ‘income from other sources’, if it is not chargeable to income tax under any of the heads specified in section 14, Iten A to E”. 11. From the facts of the case as indicated above, the compensation received by the appellant is in lieu of the perceived loss of rental ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 5 income as a result of sudden vacation of the leased premises. There is no doubt that had the licensee continued in the hired building, the lease rent payments would qualify as revenue receipts assessed under the head ‘ income from house property’. The compensation is nothing but lease rental payments for a particular period i.e. in this case, for the balance of the lock-in period and notice period. As the compensation is for the revenue receipts, it has the character of revenue receipts only and therefore, should be offered to tax by the recipient. As the payments are received not as a result of the use of premises but on account of adherence to the terms of the agreement and in lieu of income, the AO has rightly assessed the receipts under the residuary head as per sec.56 of the Act as ‘income from other sources’. Reliance is placed on the judgement of the Kerala High Court 198 ITR 611 (Ker). The relevant extract of the judgement is reproduced below: “11. The second and only other question is regarding the taxability of Rs.3,66,649 for the asst. yr.1983-84. In this connection, cl. 17 of the agreement dt. 18 th July, 1982, entered into between the assessee-company and the purchaser is relevant. '17. If the purchaser commits breach of any of the terms and conditions of this agreement it shall be open to the vendor to treat the agreement as repudiated by the purchaser and claim specific performance of the agreement and/damages”. 12. After referring to.cl. 17. of the agreement aforesaid, and also, the printed statement of, accounts for the year ending 28th Feb., 1983, the Tribunal held thus: "The material furnished at the time of hearing amply show that the terms and conditions regarding the payment of sale consideration in instalments were not fulfilled by the purchaser and, therefore, the damage clause came into operation automatically. Admittedly, there is no provision in the agreement for ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 6 payment of any damages or compensation for the loss of revenue on account of cessation of agricultural operations by the assessee. Cl. 8 of the agreement clearly provides that time was of the essence of the contract and, consequently, any breach of the terms and conditions of the contract would give rise to a claim for specific performance and/or damages. As specified in the final statement of accounts, the assessee itself has shown the amount as relating to damages and compensation for the loss of agricultural income which has not been provided for in the contract. In other words, it is clear front the assessee's own version of the nature of the income that the amount represented compensation for loss of agricultural income, but it does not 'mean that itself is agricultural income in nature...............In this case, admittedly, the agricultural operations by way of tapping stopped in November., 1982, and, therefore, the receipt under consideration did not relate to any agricultural operations carried on by the assessee after that date". 13. After stating as above, the Tribunal held that the source and basis of the amount obtained is obviously the agreement dt. 18th July, 1982. It was further held that the damages to be paid by the purchaser, M/s Supriya Enterprises, under cl. 17 of the agreement arose directly from the failure of the terms and conditions of the payment of the sale consideration by the purchaser to the assessee- company and the amount of Rs. 3,66,649.29 represented compensation for the delay in receiving the instalments of sale consideration from the purchaser. It was further found that the assessee- company, admittedly, stopped the agricultural operations by way of tapping in November, 1982, and the receipt under consideration did not relate to any agricultural operations carried on by the assessee after that date. In the light of the above findings entered by the Tribunal which have not been questioned or assailed, we are of the view that the Tribunal was justified in holding that the sum of Rs. 3,66,649 was a taxable receipt for the year 1983-84. The basis for the receipt is important. It is based on the cause of action that arose by virtue of cl. 17 of the agreement. The amount was paid solely for breach of contract. It represented damages. We are of the view that the amount received by the assessee is linked or related to the damages sustained by the assessee for breach of contract. It is compensation. It cannot and was not shown at any point of time that the amount was fixed or arrived at and quantified as loss of agricultural income and, admittedly, it cannot be so, as found by the Tribunal. ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 7 In the instant case, the assessee-company stopped the agricultural operations in November, 1982, and the receipt of the amount in the instant case did not relate to any agricultural operations carried on by the assessee after the said date. The Tribunal was justified in holding that the CIT was justified in directing the ITO to assess the amount of Rs.3,66,649.29 as income from other sources. We answer question No. 2 in the affirmative, against the assessee and in favour of the Revenue. The above judgement of the Kerala High Court was upheld by the apex court (243 ITR 83) holding as under: “The second contention has to be rejected in view of the finding of fact recorded by the High Court. It was not shown at any stage of the proceedings, that the amount in question was fixed or quantified as loss of agricultural income and admittedly it is not so found by the Tribunal. The further question whether it will be agricultural income within the meaning of s. 2(1 A) of the Act as elucidated by this Court in CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC), does not arise for consideration. It is evident from the order of the High Court that the findings recorded by the Tribunal that the appellant stopped agricultural operation in Nov., 1982, and the receipt under consideration did not relate to any agricultural operation carried on by the appellant, were not questioned before it. Though we do not agree with the High Court that the said amount was paid for breach of contract as indeed it was paid in modification/relaxation of the terms of the contract, we hold that the High Court is justified in concluding that the said amount was a taxable receipt under the head "Income from other sources”. 3.1 The ld.CIT(A) upheld the order of the AO. 4. Aggrieved by the order of the ld.CIT(A), the assessee filed appeal before this Tribunal. Submission of ld.AR : 5. The ld.AR filed a paper book containing copy of leave and ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 8 license agreement, copy of termination agreement. The ld.AR vehemently relied on DATAR & Co., Vs. ITO [2000] 67 TTJ 546(Pune) and ITAT Mumbai’s decision in the case of Addl.CIT Vs. Rama Leasing Co. P. Ltd., 20 SoT 505 and Avakash Holding Pvt. Ltd., in ITA No.475/PN/2010. Submission of ld.Departmental Representative : 6. The ld.DR of the Revenue submitted that the lessee terminated the agreement during lock in period. Therefore, lessee paid compensation to the assessee. Thus, in the termination agreement it is categorically mentioned as “Penalty/Compensation”. Thus, the amount paid was compensation. Therefore, AO has rightly taxed it under the head Income from Other Sources. The ld.DR also relied on the order of Hon’ble Delhi High Court in the case of Skyland Builders (P.) Ltd., Vs. ITO [2021] 121 taxmann.com 251 (Delhi). Findings &Analysis : 7. We have heard both the parties and perused the records. There is no dispute between the parties that there was lock in period in the leave and license agreement. The lessee terminated the said leave and license agreement vide termination agreement dated 29.11.2013, before expiry of lock in period. As a result, the lessee paid amount of Rs.27,73,792/- and also agreed for forfeiture of security deposit of ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 9 Rs.71,02,110/-. It is observed that ITAT Pune in the case of Datar & Co.,(supra) on similar facts has observed in para 9 as under : “9. However, we find sufficient force in the alternate contention of the learned counsel for the assessee. It is well settled legal position that income of the assessee has to be computed under various heads specified in Chapter-IV. If any receipt does not fall under any specific head, then it has to be assessed under the residuary head "income from other sources", but if any receipt falls under a specific head, but the same cannot be computed under that head, then it cannot be assessed as income of the assessee under any other head and would escape the taxation. This principle has been laid down by the apex Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, Commissioner [1966] 61 ITR 428 (SC) and was applied by the Bombay High Court in the case of T.P. Sidhwa (supra). In the present case, the compensation arises out of the agreement of letting out immovable property and therefore, assumes the nature of the income from house property. Therefore, in our opinion, such receipt would fall under the head "income from house property". However, it is only annual value which can be assessed under the head "income from house property". Any other receipt other than the annual value cannot be computed as income under this head. Therefore, following the decision of the Bombay High Court in the case of T.P. Sidhwa (supra) and the decision of Supreme Court in the case of N.A. Mody (supra), it is held that the compensation received by the assessee cannot be taxed.” 8. Similarly, ITAT Mumbai in the case of Rama Leasing Company(supra) has held as under : “20. Their Lordships of Supreme Court in Emil Webber’s case (supra) had held that the definition of income in sect:: - 2(24) is an inclusive definition. In the facts of the case before Hon’ble Supreme Court, the assessee a foreign personne was providing services for setting up a plant in India for an Indian concern; but was not an employee of the said Indiar concern. The salary was to be paid to him net of taxes. The taxes paid by the Indian concern were included as income from other sources in the hands of the assessee as there was no employer-employee relationship between the two. Tr.: taxes paid were taxed under section 56 of the Act as in the absence of employer employee relationship, there was r.: basis for including the same as salary income. ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 10 21. The facts of the present case are different from the facts of the case before the Hon'ble Supreme Court in Z Webber's case (supra). The assessee herein received compensation for surrender of lease of property of which he is : r owner. The ownership rights bring the receipts from such property under the ambit of specific head of income : - account of property. It is an established rule of law that once the receipt is taxable under a specific head of income : r same has to be included under such head of income and the same cannot be brought to tax under the residuary her : income. The assessee in addition to arrears of rent had received compensation for premature surrender of lease t; : ; lessee. The compensation was relatable to premature vacation of the property. The lessor ie. assessee herein r -: exercised the option of releasing the lessee before the determination of lease agreement subject to the condition of payment of compensation in lieu thereof. The assessee herein had received the rent upto 1st day of September, 195r n:: thereafter received rent from the new tenant with effect from 6-9-1996. The annual value of the property wh:cr - includible as income under the head income from property was the rent received by the assessee from ICICI-SF _: 1-9-1996 and from M/s. Microsoft Corporation thereafter with effect from 6-9-1996. The compensation receive:: : assessee though related to the property was not exigible to tax in view of the definition of annual value of the pr:re under section 23 of the Income-tax Act. Such receipts were also not includible as income from other source in view of the fact that it fell within another head of income Le. income from property. Once a receipt falls under a specific r a: w income the same cannot be included under Residuary Head. 22. The Pune Bench of Tribunal in Datar & Co. ’s case (supra) had on similar fact held as under:— "It is well settled legal position that income of the assessee has to be computed under various heads specified in Chapter IV. If any receipt does not fall under any specific head, then it has to be assessed under the residuary head "income from other sources", but if any receipt falls under a specific head, but the same cannot he computed under that head, then it can not be assessed as income of the assessee under any other head and would escape the taxation. This principle has been laid down by the Ap e x Court in the case of Nalinikant Ambalal Modyv. S.A.L Narayan Row, CIT[1966] 61 ITR 428 (SC) and was applied by the Bombay High Court in the case of T.P. Sindhwa (supra). In the present case, the compensation arises out of the agreement of letting out immovable property and therefore, assumes the nature of the income from house property. Therefore, in our opinion, such receipt would fall under the head 'income from house property'. However, it is only annual value ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 11 which can be assessed under the head 'income from house property’. Any other receipt other than the annual value cannot be computed as income under this head. Therefore, following the decision of the Bombay High Court in the case of T.P. Sidhwa (supra) and the decision of Supreme Court in the case of N.A. Mody (supra), it is held that the compensation received by the assessee can not be taxed.” 23. The Ld. DR for the revenue had relying on the judgment of Hon’ble Supreme Court in Shriyans Prasad Jain's case (supra) stated that compensation received for premature termination of employment was taxable in the hands of the recipient. In view of the specific provisions of the Act, the ratio laid down by the Hon’ble Supreme Court is not applicable to the facts of the present case wherein the receipts arising from the property are not includible in the hands of the assessee as income from property in view of the restricted meaning of the minimum 'annual value' under section 23 of the Income-tax Act. 24. Respectfully following the ratio laid down by Pune Bench of Tribunal in Dattar & Co. 's case (supra), we hold that the compensation received by the assessee on premature termination of lease agreement is not chargeable to tax though it is a Revenue Receipt. We confirm the order of CIT(A) in holding that the said compensation amount is a non-taxable receipt in the hands of the assessee.” 9. The facts of the present case and facts in the case of Datar & Co.,(supra) and Rama Leasing Company(supra) are identical. In all these cases assessee had received compensation for pre-mature termination of the lease. In both these case, ITAT has held that the compensation received by the assessee assumes the nature of income from House Property; however, it is not chargeable to tax as only Annual value of the property can be assessed under the head Income from House property. In the case under consideration the “Compensation and security deposit forfeiture” have roots in the ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 12 Leave and License Agreement pertaining to the impugned property. The “Compensation and security deposit forfeiture” are emanating from the Leave & License Agreement and they are specifically mentioned in the said Leave &License Agreement. Therefore, as observed by the ITAT in the case of Datar &Co (supra) the compensation partakes the character of Income from House Property. Therefore, when any receipt falls under a specific Head, but the same cannot be computed under that head, then it cannot be assessed as income of the assessee under any other head. Respectfully following the above referred ITAT Decisions, we hold that the amount of Rs.95,28,666/- is not taxable as income from other sources. Accordingly, the AO is directed to delete the said amount. Accordingly, Ground No.1 and 1.1 of the assessee are allowed. 10. Ground No.5 is general in nature, hence, needs no adjudication. Accordingly, ground no.5 is dismissed. 11. In the result, appeal of the Assessee is Partly Allowed. Order pronounced in the open Court on 27 th April, 2023. Sd/- Sd/- (S.S.GODARA) (DR. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 27 th April, 2023/ SGR* ITA No.169/PUN/2020 Zavaresh Soli Poonawalla [A] 13 आदेशकᳱᮧितिलिपअᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीयᮧितिनिध, आयकर अपीलीय अिधकरण, “बी” बᱶच, पुणे / DR, ITAT, “B” Bench, Pune. 6. गाडᭅफ़ाइल / Guard File. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.