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


The Delhi High Court in the case PCIT Versus Pawa Infrastructure (P) Ltd observed and has held that the leasehold rights held by the assessee in the plot were a capital asset and that the compensation received from the Government of Goa by the assessee on the cancellation of the plot was a capital receipt and not a revenue receipt.

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

In the present case, the assessee/respondent being a real estate developer who was allotted a plot of land in the Rajiv Gandhi I.T. Habitat in Goa, an initiative taken by the government of Goa. The State of Goa has subsequently cancelled the allotment and consequently, a refund is received by the assessee. However, the refund includes the 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. Further, the amount being received by the assessee during the financial year 2012–2013, and a return of its income has been filed by the assessee and has claimed a long-term capital loss.

However, the assessing officer, after perusing the explanations and the replies which are being filed by the Assessee with respect to the compensation received on the cancellation of the plot, wherin accepting the ITR of the Assessee, vide assessment order dated 15.02.2016, being passed under Section 143(3) of the Income Tax Act, 1961.

The assessment order passed by the AO has been set aside by the Principal Commissioner of Income Tax, wherein holding it to be erroneous and prejudicial to the interests of Revenue. It has been directed by the AO to pass a fresh assessment order. Thus, 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.

Further, an appeal is made by the assessee before the ITAT against the order of the PCIT. The assessee’s appeal has been allowed by the ITAT 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.

It has been contended by the department that the taxability of the interest (compensation) receipt, which is in the assessee’s hand has to be adjudged after perusing the terms of the agreement between the lessee and the lessor. It has been failed by the ITAT to appreciate that the assessee was not the owner of the plot.

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