No Tax on compensation/damage for settlement of dispute as is capital receipt : ITAT

ORDER

Saktijit Dey, Judicial Member – This appeal has been filed by the Revenue against the order dated 04.01.2016 of the Commissioner (Appeals)-4, Mumbai for A.Y. 2011-12.

2. The solitary issue arising for consideration in the present appeal is, whether the damages/compensation received by the assessee amounting to Rs. 6,97,94,580/- is to be treated as capital receipt as claimed by the assessee or to be treated as revenue receipt as held by the AO.

3. The assessee is a film actor. For the assessment year under dispute, assessee filed his return of income on 29.09.2011 declaring total income at Rs. 75,09,219/-. During the assessment proceedings the AO noticing that though the assessee has received US $1.5 million, equivalent to Rs. 6,97,94,580/- from one Sudesh Iyer but has not offered it for taxation. He, therefore, called upon the assessee to explain the reason thereof. In response, it was submitted by the assessee that he along with other non-resident individuals proposed to bring Sony TV Channel to India. For that purpose a company by the name Atlas EqufinPvt. Ltd. (Atlas) was incorporated in India to hold shares in Multi Screen Media India Ltd. (MSM), the owners of Sony TV Channel. It was submitted that Atlas consists of Indian shareholders including the assessee and a company incorporated in Mauritius known as Alaudi Securities Ltd. Wherein, non-resident groups are shareholders. It was submitted that the aggregate share holding of Atlas and another Mauritius based company, Grandway Global Holdings (Grandway) in MSM was to the tune of 23% and the balance shares were held by Sony Inc. The assessee submitted that Atlas and Grandway were trying to exit MSM from 1995 onwards and various merchant bankers were being approached for this purpose. Finally, Standard and Chartered Bank, Singapore (SCB) was given the mandate. However, the SCB insisted that a joint mandate be given by Atlas and Grandway to sell their entire holdings so that a better value can be obtained for the shares. Accordingly, Atlas and Grandway and the shareholders of these companies were requested to sign a joint mandate in favour of SCB. It was submitted that though the assessee was requested to sign the mandate by the other shareholders, he refused to do so. It was submitted, on 24.03.2010 assessee received a letter from Clifford Chance Pte. Ltd., acting on behalf of SCB with an enclosure which was a mandate signed by the shareholders of Atlas and Grandway. Assessee was surprised to find that the mandate bore his signature. Therefore, on 19.04.2010 assessee filed a criminal complaint with the office of the Economic Offences Wing at Mumbai requesting an investigation in to the matteras theassessee never signed the mandate. After filing of the aforesaid complaint by the assessee, the other party approached the assessee to settle the matter amicably and on 03.01.2011 a deed of settlement was executed between the assessee and Shri Sudesh Iyer for settlement of the dispute. As per the terms of the settlement deed Shri Sudesh Iyer agreed to pay a sum of US $3,500,000/- on the condition that the assessee will withdraw the criminal complaint filed against him. As per the terms of agreement the amount was to be paid in two instalments. The first instalment of US $1.5 million was to be paid immediately on confirmation from the Economic Offence Wing that assessee had withdrawn the complaint and the balance amount was to be paid on sale of shares held by Atlas and Grandway in MSM. It was submitted that as per the terms of the settlement deed, assessee withdrew his complaint filed before the Economic Offence Wing and received the first instalment of US $1.5 million, equivalent to Rs. 6,77,94,580/-. However, it was submitted by the assessee that since the amount received by him was towards compensation/damage, it was not in the nature of capital receipt and not coming within the definition of income as provided under Section 2(24) of the Act. After considering the submissions of the assessee, the AO did not find merit in them and held that the amount received by the assessee towards compensation/damage is to be treated as income of the assessee and taxable in the impugned assessment year. Accordingly, he added back the amount of Rs. 6,77,94,580/- to the income of the assessee. Being aggrieved of such addition assessee preferred appeal before the learned Commissioner (Appeals).

4. After considering the submissions of the assessee and relying upon certain judicial precedents learned Commissioner (Appeals) accepted assessee’s claim that the amount received by him towards compensation/damage is in the nature of capital receipt, hence, not taxable. Accordingly, he deleted the addition.

5. Before us the learned D.R. relied upon the observations of the AO.

6. The learned A.R. strongly relying upon the findings of the learned Commissioner (Appeals) submitted that the amount received by the assessee being in the nature of compensation/damages for withdrawal of a criminal complaint is a capital receipt and cannot be treated as income as defined under Section 2(24) of the Act. In support of such contention he relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Amar Dye Chem Ltd. [1994 and the decision of the ITAT Mumbai Bench in the case of ITO v. Vinay P. Kaarve [2015] 152 ITD 58

7. We have heard rival submissions and perused material on record. Undisputed facts are, due to impersonation/forging of assessee’s signature in respect of sale of shareof a company, the assessee filed a criminal complaint before the Economic Offence Wing. It is a fact on record that to settle the dispute, the person against whom the assessee filed complaint came forward for amicable settlement of the dispute and a settlement deed was executed between the parties. As per the terms of settlement deed the assessee was to receive certain amount towards compensation/damage in lieu of withdrawing the criminal complaint filed before the Economic Offence Wing of the Mumbai Police. In terms of the settlement deed assessee withdrew the criminal complaint filed by him and in lieu thereof received compensation of Rs. 6,77,94,580/-. Thus, as could be seen, the compensation received by the assessee was not for his professional activities but for settlement of dispute between him and some other party resulting in filing of a criminal complaint. That being the case, the amount received towards compensation/damage cannot fit in to the definition of income as per section 2(24) r.w.s 4 of the Act. This view of our gets support from the decision of the Hon’ble Jurisdictional High Court in the case of Amar Dye Chem Ltd. (supra) wherein the Hon’ble High Court held that the amount received towards compensation/damage for settlement of dispute is capital receipt, hence not taxable. Same view was expressed by the ITAT Mumbai Bench in the case of Vinay P. Karve(supra). The learned D.R. has not brought to our notice any contrary decision. In view of the aforesaid, we do not find any infirmity in the order of the learned Commissioner (Appeals) in deleting the addition.

8. In the result, the appeal filed by the Revenue is dismissed.

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