The Income Tax Appellate Tribunal (ITAT), Raipur bench has held that the compensation received by the assessee- Company for the closure/ termination of business activity resulting in loss of source of income, impairing its profit-making structure or sterilization of profit making apparatus can be assessed as capital receipt which is not taxable under the Income Tax Act.
The assessee company was formed with the sole objective of undertaking the infrastructure development activity of construction of Railway Track & Siding on behalf of LIPL and acquired a part of the lands (including some development works) required for the said railway track and siding which were subsequently transferred to LIPL and income arising thereof was shown under the head “Profits & Gains of Business or Profession”. Later, the balance works assigned to the assessee as per the scope of work as stipulated in the aforesaid MOU were not got executed by LIPL due to various constraints. After a considerable amount of time, another MOU was executed on 31st January, 2009 between LIPL & assessee and in pursuance of the said MOU, the aforesaid “Compensation” has been determined by LIPL.
The assessing Officer, while completing assessment against the assessee, held that the said compensation is subject to income tax as the same amount to revenue receipt.
On first appeal, the CIT(A) allowed the claim of the assessee. Aggrieved by the order, the revenue approached the Tribunal for relief.
Upholding the order, the Tribunal relied on various case laws and held that “We find the assessee during the course of appeal proceedings had filed a certificate issued by LIPL where in they have certified that the compensation had been determined and paid by them for stalling the execution of the agreed work as above in terms of the earlier MOU. The above clarification issued by LIPL clearly shows that the compensation received by the assessee is for sterilization of the profit making apparatus of the assessee company.”
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