Right to sue for damages is not a capital asset; breach compensation was held outside capital gains tax.

Damages received on breach of an agreement to sell immovable property were not taxable as capital gains because, after the assessee gave up specific performance, only a right to sue for damages remained. A mere right to sue is not a transferable capital asset under section 6(e) of the Transfer of Property Act, 1882, and capital gains under sections 45 and 2(47) of the Income-tax Act, 1961 require a transfer of a capital asset. As the receipt arose only from satisfaction of the damages claim and not from any transfer, the Delhi HC held that it could not be assessed as capital gains and answered the reference in favour of the assessee.

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Issues: Whether damages received for breach of an agreement to sell immovable property, after the claim for specific performance was given up, were assessable as capital gains under the Income-tax Act, 1961.

Analysis: The assessee retained only a right to claim damages after abandoning specific performance. A mere right to sue for damages is not transferable under section 6(e) of the Transfer of Property Act, 1882. Since capital gains taxation under sections 45 and 2(47) of the Income-tax Act, 1961 presupposes a transfer of a capital asset, and the receipt in question arose only from satisfaction of the damages claim for breach of contract, there was no transfer of any capital asset. The receipt could not be brought to tax as capital gains.

Conclusion: The amount of Rs. 1,02,500 was not assessable as capital gains and the answer to the referred question was in favour of the assessee.

Ratio Decidendi: A mere right to sue for damages is not a transferable capital asset, and damages received on breach of contract are not taxable as capital gains unless they arise from a transfer within section 45 read with section 2(47) of the Income-tax Act, 1961.

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