Right to sue compensation as capital receipt excluded from capital gains tax and MAT book profit

Compensation received for relinquishment of a mere right to sue on settlement of a land dispute was treated as a capital receipt outside the definition of capital asset, because such a right is not transferable under property law. On that basis, the receipt could not be taxed as capital gains under the normal provisions or brought to tax as income from other sources. The same receipt also could not be included in book profit under MAT, as a pure capital receipt with no income character cannot be artificially added under section 115JB merely because it appears in the accounts. Relief was thus upheld for the assessee on both issues.

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Issues: (i) Whether compensation received for relinquishment of the right to sue on settlement of a land dispute was chargeable as capital gains or other income under the normal provisions of the Income-tax Act, 1961. (ii) Whether the same receipt could be included in book profit for the purpose of section 115JB of the Income-tax Act, 1961.

Issue (i): Whether compensation received for relinquishment of the right to sue on settlement of a land dispute was chargeable as capital gains or other income under the normal provisions of the Income-tax Act, 1961.

Analysis: The receipt arose from settlement of litigation in which the assessee had only a right to sue for damages after the land dispute frustrated the original transaction. A mere right to sue is not transferable by virtue of section 6(e) of the Transfer of Property Act and does not fall within the expression "capital asset" under section 2(14) of the Income-tax Act, 1961. Since capital gains taxation under section 45 presupposes a transfer of a capital asset, and the receipt was capital in nature rather than revenue income, it could not be taxed as capital gains or as income from other sources.

Conclusion: The receipt was not chargeable to tax under the normal provisions and the finding was in favour of the assessee.

Issue (ii): Whether the same receipt could be included in book profit for the purpose of section 115JB of the Income-tax Act, 1961.

Analysis: The amount was treated as an extraordinary capital receipt and not as a trading profit in the profit and loss account. A receipt which is not income at all and is not otherwise chargeable under the Act cannot be artificially brought into book profit under the MAT provisions merely because it appears in the accounts. The adjustments contemplated by section 115JB do not authorise inclusion of a pure capital receipt having no income character.

Conclusion: The receipt was not includible in book profit under section 115JB and the finding was in favour of the assessee.

Final Conclusion: The Revenue's challenge failed on both the normal taxability issue and the MAT issue, and the assessee retained the relief granted by the first appellate authority.

Ratio Decidendi: Compensation received for relinquishment of a mere right to sue is a non-transferable capital receipt outside the definition of capital asset, and a receipt that is not income in law cannot be brought to tax under section 45 or included in book profit under section 115JB.

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