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Compensation received on cancellation of auction is not subject to Income Tax

In INS Finance & Investment P Ltd vs ITO,  the assessee company, engaged in the business of finance and investment, originally acquired the right for purchase of property because of auction carried out by the Punjab National Bank where the assessee was the highest bidder. It paid the purchase price in entirety. Later the auction was disputed and cancelled leading to restoration of the property to the bank. The assessee was hence refunded this purchase price and damages. 

It was found by the AO at the very first instance that the amount shall be liable to be added since the sum received by the assessee on cancellation of auction holding is in the nature of a revenue receipt. The CIT (A) on an appeal confirmed the addition and hence the present appeal. The issue before the Tribunal was that whether the CIT (A) has properly appreciated and adjudicated the nature of receipt.

According to the submissions of the revenue, the damages recovered from the bank were in the nature of interest as surplus arising on account of compensation received by the assessee cannot be assessed under the head “capital gain” because no asset came into existence with the assessee.

The Tribunal after hearing both the parties went on to hold in favor of the assessee that the amount is not interest but compensation and hence is to be treated as ‘capital receipt’ for which no tax is payable under the Income Tax Act.

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