Chheda Housing Development Corpn. v. ACIT – [2019] 110 taxmann.com 56 (Mumbai – Trib.)

The assessee was engaged in the business of financing, construction and development. It entered into a Memorandum of Understanding (MOU) for developing saleable rights of floor surface index on a plot of land. It paid certain sum as advance to the owner at the time of execution of MOU. Later, it came to know that the development rights had already been transferred by the owner to a company of his family members.

Later, the assessee & the owner agreed to cancel the development agreement and a deed of cancellation was executed. On execution of cancellation deed, the assessee was paid Rs. 20 crores by the confirming party as refund of advance with interest, loss of profit, liquidated damages and loss of opportunity to develop his own property and cost of liquidation. In the return of income, the assessee declared the said compensation as a capital receipt not chargeable to tax. The Assessing Officer (AO) treated the said receipt as assessee’s income and taxed it as Long-Term Capital Gains.

On appeal, the ITAT held that the Act has not defined the terms ‘capital receipt’ and ‘revenue receipt’. One has to rely on the natural meaning of the terms as well as on the precedent of the decided cases. In order to determine the nature of a receipt, it is necessary to go by its nature in the hands of the recipients. In the present case the amount received by the assessee in excess of advance was on account of compensation for extinction of its rights to sue the owner. Since the assessee had not received said amount in the course of business, it couldn’t be construed as a capital receipt.