20 July 2009
Mr. X had booked a flat in Ansal for which he had made payment of Rs 25 :Lacs as an entire amount as cost of acquisition of flat in Building No 6 of Ansal, the Ansal did not constructed the building and instead of allotting the flat in building no 6 instead of which he was allot ed flat in Building No 2 .This flat was not having the amenities as they were supposed to be in the original allotment.Aggrieved by this decision of Ansal he filed complaint in Consumer Court and after which court decided to give compensation of Rs 15 Lacs in favour of Mr. X against which Ansal filed an appeal the case then was mutually decided at a figure of Rs 10 Lacs.
To ascertain weather Rs 10 Lacs is taxable income of Mr. X and if it is under which head of income or this is an exempt income not chargeable to tax?
20 July 2009
When agreements are entered into for purchase of property, rights are created in favour of the parties to the agreement. Failure to honour the agreement can lead to breach of contract and claims for damages or specific performance. Quite often, such breach of contract ultimately results in a compromise settlement of the dispute and monies are paid as quits.
Section 51 of the Income-Tax Act, 1961, provides that any advance or other money received and retained by the owner of the property shall be deducted from the cost of the asset, wherever the transaction does not end in transfer of the property.
This effectively means that the advance or other money received by the owner of the property will go to reduce the cost of the property for him. The other party to the agreement is not involved in this interpretation of Section 51 of the Act.
In the latest case on the subject, the Madhya Pradesh High Court considered a contract entered into by Lakshmi Devi Ratani and Indian Pharmaceuticals.
The lady agreed to sell immovable property to the firm for Rs 1,05,000 as per agreement dated September 25, 1970.
The agreement was not honoured. The firm filed a suit for specific performance of the contract.
The matter was compromised in 1986. The owner of the property agreed to pay to the prospective buyer a sum of Rs 14,85,000 as damages. The I-T department stepped in and taxed the same as capital gains. On appeal, the Income-Tax Appellate Tribunal (ITAT) ruled that no capital gains tax The Revenue went to the Madhya Pradesh High Court. The court held that the receipt of Rs 14,85,000 was exigible to capital gains tax as it involved transfer of property within the meaning of Section 2(47) of the Act. It pointed out that the expression “property of any kind” in Section 2(14) is of wide import.
Giving up of the right to claim specific performances to get conveyance of immovable property in lieu of monetary compensation results in extinguishment of rights in property thereby attracting the rigour of Section 2(14) read with Section 2(47). This is a clear case of relinquishment of a right in the property resulting in transfer.
The court upheld the action of the department in bringing the compensation amount to charge as capital gains (CIT vs Lakshmidevi Ratani — 296 ITR 363).
The court was echoing the views of the Bombay High Court in several cases, including the CIT vs Tata Services Ltd (122 ITR 594) case. The Madras High Court also took the same view in K. R. Srinath vs Assistant CIT (268 ITR 436).
The Calcutta and Gujarat High Courts have, however, taken a contradictory stance on the subject. Compensation for breach of contract gives rise to damages. Such damages, according to the Calcutta and Gujarat High Courts, are not assessable to tax.
There is no cost element involved and the Supreme Court ruling about goodwill in the Srinivasa Shetty (128 ITR 294) case should govern the law on the subject. The Calcutta High Court specifically cited the Supreme Court ruling in its judgment in CIT vs Asoka Marketing Ltd (164 ITR 664).
In all these cases, the receipt of compensation money is considered at great length and decisions are rendered about taxability or otherwise of the money compensation.