Compensation Received By Lessor On Account Of Termination Of Lease Due To Sale Of Property Is Capital Receipt

Facts of the case:

1. The assessee owned a property. It was given on long-term lease of 99 years to company BGAL. During year under consideration the said property was sold to the lessee-company BGAL itself for consideration of Rs. 3.76 crore.
2. On the same day, the assesse also entered into MoU with BGAL, according to which the assessee was paid Rs. 4.65 crore by BGAL to compensate the losses which assessee company could have earned if the godown was rented out then it would have saved as the building was used for its own business purpose and the same was claimed to be capital receipt by assessee.
3. However, the Assessing Officer held that compensation was received in lieu of loss of profit and therefore held as Revenue receipt. Further, the Assessing Officer also taken note of the fact that property was sold by the assessee company to the same party to whom the property was leased for 99 years, it should be considered as part of sale consideration.

Held by the ITAT Bench of Chennai:

The property was already sold for a consideration not below the guideline value prescribed for stamp duty purpose. Therefore, it was not genuine to consider the compensation amount as part of sale consideration. Further, the reference of other Supreme court judgement is given, where it was held that if payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade, the receipt is revenue. It was further held that where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee’s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.

Conclusion:

Any compensation received towards loss of source of income cannot be treated as revenue receipts but capital receipts which is not liable to be taxed.

Source: [2019] 111 taxmann.com 9 (Chennai – Trib.)

Butterfly Marketing P. Ltd. v. Deputy Commissioner of Income-tax, Corporate Circle 1(2), IT APPEAL NO. 3079 (CHNY) OF 2016, In the ITAT Chennai Bench

Case reference used:  Karam Chand Thapar and Bros (P) Ltd v. CIT [1971] 80 ITR 167