Breach-of-contract compensation after sale to a third party is not capital gains where only a bare right to sue survives.

Compensation received for breach of a contract for sale of movable property, after the property had been sold to a third party, is not taxable as capital gains when only a bare right to sue for damages survives. A mere right to sue is not an actionable claim, is not transferable under section 6(e) of the Transfer of Property Act, and does not amount to transfer of a capital asset under section 2(47) of the Income-tax Act. Without a transfer and computable consideration, section 45 does not apply, and the receipt is outside the capital gains head.

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Issues: Whether compensation received for breach of a contract for sale of movable property, after the subject-matter had been sold to a third party, was chargeable to tax as capital gains.

Analysis: The right remaining with the assessee after the breach was only a right to sue for damages. Such a right is not an actionable claim and, by reason of section 6(e) of the Transfer of Property Act, a mere right to sue cannot be transferred. The payment received in settlement was compensation for breach of contract, not consideration for transfer of a capital asset. For charge under section 45 of the Income-tax Act, 1961, there must be a transfer of a capital asset within section 2(47), read with a computable consideration under section 48. A bare right to sue, having no transferable character and no ascertainable cost of acquisition in this context, does not satisfy those requirements.

Conclusion: The receipt was not chargeable to tax under the head 'Capital gains' and the question was answered in favour of the assessee.

Ratio Decidendi: Compensation received for breach of contract, where only a mere right to sue survives, is not consideration for transfer of a capital asset and cannot be taxed as capital gains.

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