Compensation for relinquishing a right to sue was not capital gains, as the claim was not a transferable capital asset.

Compensation received on relinquishment of the right to obtain conveyance of land and to sue for specific performance was held not taxable as capital gains because a mere right to sue is not property capable of transfer under section 6(e) of the Transfer of Property Act and therefore is not a capital asset under section 2(14) of the Income-tax Act. The Tribunal applied binding jurisdictional authority and the taxpayer-favourable interpretation where divergent views existed, and upheld deletion of the addition.

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Issues: Whether compensation received on relinquishment of the right to obtain conveyance of land and to sue for specific performance constituted consideration for transfer of a capital asset and was taxable as capital gains.

Analysis: The assessee had entered into agreements for purchase of land, part performance failed, and the dispute ended in arbitration, where compensation was paid in full and final settlement. The core question was whether the assessee had transferred a capital asset within the meaning of the Income-tax Act. The Tribunal followed binding jurisdictional authority holding that a mere right to sue is not property transferable under section 6(e) of the Transfer of Property Act and, therefore, does not amount to a capital asset for purposes of section 2(14) of the Income-tax Act. The Tribunal noted divergent High Court views but applied the settled rule that where two interpretations are possible, the one favourable to the taxpayer must be adopted, and found the jurisdictional High Court decision decisive.

Conclusion: The compensation was not chargeable as capital gains, and the deletion of the addition was upheld in favour of the assessee.

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