Capital receipt treatment for settlement compensation where disputed development rights were surrendered, not taxed as business income.

Compensation received in settlement of disputes over development rights was treated as a capital receipt because the assessee had no title or enforceable interest in the land and, at most, held a bare right to sue. A right to sue is not a transferable asset under section 6 of the Transfer of Property Act, 1882, and the payment was for surrendering the claimed right to purchase, develop, or operate the property rather than for trading income. The receipt was linked to loss of a capital advantage and impairment of the capital structure, so it was not liable to tax.

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Issues: Whether the compensation of Rs. 3.5 crores received in settlement of disputes relating to development rights over land was a capital receipt not liable to tax.

Analysis: The assessee had no title or enforceable right in the land and, at best, possessed a right to sue under the development arrangements. A right to sue is not a transferable asset under section 6 of the Transfer of Property Act, 1882. The compensation was paid for giving up the claimed right to purchase, develop, or operate the property, and not as business income from a trading transaction. The receipt was therefore referable to loss of a capital advantage and loss of source of income, bringing it within the principle that compensation for impairment of the capital structure is capital in nature.

Conclusion: The receipt was a capital receipt not liable to tax, and the addition made by the Assessing Officer was rightly deleted.

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