Compensation On Cancellation Of Leasehold Rights Over A Plot, Capital Receipt: Delhi High Court

The Delhi High Court has held that the leasehold rights held by the assessee in the plot were a capital asset and that the compensation received by the assessee from the Government of Goa on the cancellation of the plot was a capital receipt and not a revenue receipt.

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has observed that if an agreement for the transfer of rights in an immovable property is not performed by the transferor, the transferee is entitled to compensation as he/she is deprived of the price of escalation. Therefore, the character of the payment received as compensation by the transferee bears the character of a capital receipt. The payment of interest in the facts of the present case is compensatory in nature and, therefore, does not bear the character of a revenue receipt.

The respondent/assessee is a real estate developer who was allotted a plot of land in the Rajiv Gandhi I.T. Habitat in Goa, an initiative of the government of Goa. The allotment was subsequently cancelled by the State of Goa, and consequently, the assessee received a refund. The refund included compensation calculated as simple interest at the rate of 10% per annum, over and above the amount paid by the assessee for the allotment of the plot of land. The amount was received by the assessee during the financial year 2012–13, and the assessee filed its return of income and claimed a long-term capital loss.

The Assessing Officer, after perusing the replies and explanations filed by the Assessee with respect to the compensation received on the cancellation of the plot, accepted the ITR of the Assessee, vide assessment order dated February 15, 2016, passed under Section 143(3) of the Income Tax Act, 1961.

However, the Principal Commissioner of Income Tax set aside the assessment order passed by the AO, holding it to be erroneous and prejudicial to the interests of Revenue, and directed the AO to pass a fresh assessment order. The assessee had wrongly treated the property in question as its capital asset, and the claim of indexation costs for the property cannot be allowed.

The assessee appealed before the ITAT against the order of the PCIT. The ITAT allowed the assessee's appeal by holding that the compensation received for the cancellation of the plot was in the nature of a capital receipt and not a revenue receipt.

The department contended that the taxability of the interest (compensation) receipt, in the hands of the assessee, has to be adjudged after perusing the terms of the agreement between the lessee and the lessor. The ITAT failed to appreciate that the assessee was not the owner of the plot.

The court held that since the plot allotted to the assessee was to be used by the assessee for carrying on its business and was an income-producing asset for this company, the assessee, who is a real estate developer, intended to construct a building. The sublease or transfer of a building to third parties to earn income would constitute a capital asset.

Case Title: PCIT Versus Pawa Infrastructure (P) Ltd.

Citation: 2022 LiveLaw (Del) 1215

Date: 18.11.2022

Counsel For Appellant: Senior Standing Counsel Puneet Rai

Counsel For Respondent: None

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