Compensation for breach of contract is not capital gains when only a right to sue survives; interest accrues year by year.

Compensation received for breach of contract was not chargeable as capital gains where the original contractual right to obtain a lease deed had already come to an end and the surviving claim was only a right to sue, which is not transferable property or a capital asset. The amount was therefore treated as compensation for breach, not consideration for transfer of a capital asset. Interest described in the consent decree as interest on compensation was a revenue receipt and, for an assessee on the mercantile system, accrued year by year; only the portion referable to the relevant previous year could be taxed in that assessment year.

---

---

Issues: (i) Whether the sum of Rs. 2,52,000 received as compensation for breach of contract was taxable as capital gains for the assessment year 1970-71. (ii) Whether the sum of Rs. 1,56,030 received under the consent decree was taxable as income, and if so, for which period.

Issue (i): Whether the sum of Rs. 2,52,000 received as compensation for breach of contract was taxable as capital gains for the assessment year 1970-71.

Analysis: For capital gains tax to arise, there must be a transfer of a capital asset and the gains must arise in the previous year in which such transfer takes place. The right under the 1945 agreement to have the lease deed executed was treated as having come to an end, at the latest, when specific performance was refused in 1961. The substituted claim for damages after breach was only a right to sue, which is not transferable property and does not amount to a capital asset in the relevant sense. The amount received under the consent decree was therefore compensation for breach of contract and not consideration for transfer of a capital asset during the year under reference.

Conclusion: The sum of Rs. 2,52,000 was not taxable as capital gains and the answer was in favour of the assessee.

Issue (ii): Whether the sum of Rs. 1,56,030 received under the consent decree was taxable as income, and if so, for which period.

Analysis: The decree expressly described this amount as interest on the compensation. Interest on compensation is revenue receipt, and for an assessee following the mercantile system it accrues from year to year rather than only on receipt. Accordingly, only the portion relatable to the period falling within the previous year relevant to the assessment year 1970-71 could be taxed in that year.

Conclusion: Only the part of the interest referable to the period from 1 April 1969 to the date of the consent decree was taxable in the year under reference; the remainder was not taxable in that year.

Final Conclusion: The reference succeeded on the capital gains issue in favour of the assessee, but the interest component was held taxable only to the extent accruing in the relevant previous year.

Ratio Decidendi: Compensation received on failure of a contract to convey property is not capital gains where the original contractual right has ceased and the only surviving claim is a mere right to sue, while interest on compensation under the mercantile system accrues from year to year for tax purposes.

---