The Supreme Court while upholding the Kerala High Court ruling held that the income tax is chargeable on the compensation received for trusteeship relinquishment.
The bench of Justice Sanjiv Khanna and Justice Sanjay Kumar dismissed the special leave petition filed by the assessee.
Background – Kerala High Court On Taxability Of Trusteeship Relinquishment Compensation
The Carmel Educational Trust, Adoor was constituted by a registered trust deed dated 14.08.2001. It is engaged in running
educational institutions imparting education in the subjects of Engineering and Management. The 12 trustees of the Trust belong to
three closely related family groups.
Due to difficulties in managing the College, and also due to the personal differences, the trustees decided to discontinue the business and entered into an agreement with the Believers Church on 10.03.2009, whereby, all the existing trustees resigned from their trusteeship and simultaneously, new trustees nominated by the Believers Church were inducted. The agreement between the parties also provided for payment of Rs.37.5 crores to the erstwhile trustees for settling their liabilities as well as completing certain construction activities that had been commenced by them prior to the agreement. The agreement also provided for sale of 55.15 acres of land belonging to some of the erstwhile trustees for a consideration of Rs.12.50 crores.
A search under Section 132 of the Income Tax Act was conducted at the residence of the assessees and certain documents were seized. An unsigned draft agreement was found which indicated that the amount envisaged for settlement of liability was Rs.43.50 crores and that the value of the rubber estate extending to 55.15 acres of land was Rs.6.50 crores. Certain other documents relating to fee collection from students in excess of what was fixed by the Government, and investment details of trustees etc. were also seized.
The Assessing Authority found that the erstwhile trustees had in fact received approximately Rs.37.5 crores towards consideration for relinquishing their trusteeship but they had camouflaged these receipts under different heads by showing the receipt of Rs.14.55 crores towards reimbursement of amounts paid by assessees for clearing outstanding debts and liabilities of the Trust as on the date of the agreement, and also for completing certain ongoing constructions that had been undertaken by them. An amount of Rs.12.5 crores was shown as received by way of consideration for sale of approximately 56 acres of rubber plantation to the Believers Church.
The ITAT held that the amounts received by the assessees as consideration for relinquishment of their trusteeship would qualify as a capital receipt for the purpose of the Income Tax Act, and in the absence of any statutory provision under the Income Tax Act that provides for a determination of the cost of acquisition of the asset, the capital gains cannot be assessed.
The department filed the appeal before the Kerala High Court challenging the order passed by the Income Tax Appellate Tribunal (ITAT).
The Kerala High Court while overturning the ITAT’s ruling held that the en banc resignation/relinquishment by the assessees of their position as trustees of the Carmel Educational Trust, that too for a consideration, cannot get the imprimatur of this Court. The consideration received by them for such relinquishment cannot be treated as a capital receipt for the purposes of assessing the same under the head of capital gains. The consideration will have to be treated as the individual income of the assessees and assessed accordingly under the appropriate head.
Case Title: Jose Thomas Vs. PCIT
Case No.: Special Leave Petition (Civil) Diary No. 36001/2024
Date: 13-09-2024
Counsel For Appellant: Sr. Adv. Anil D Nair, AOR Jogy Scaria, Adv. Beena Victor, Adv. Vivek Guruprasad Ballekere, Adv. Keerthipriyan E, Ad. M Priya
Counsel For Respondent: None