Indexation and right-to-sue compensation: relief granted where capital gains computation and taxability of receipt were rejected.

ITAT Ahmedabad held that indexation could not be denied where the land was accepted as a long-term capital asset and its cost of acquisition was accepted for capital gains computation; the addition was therefore deleted. It also held that compensation received for relinquishment of a mere right to sue, arising from breach of a development agreement, was a capital receipt not chargeable to tax. Such a right is not an actionable claim, is not transferable under section 6(e) of the Transfer of Property Act, and does not amount to a capital asset under section 2(14) or fall within section 28(va) of the Income-tax Act.

---

---

Issues: (i) whether denial of indexation benefit while computing long-term capital gains was justified, and (ii) whether compensation received for relinquishment of the right to sue on breach of a development agreement was taxable as revenue income.

Issue (i): whether denial of indexation benefit while computing long-term capital gains was justified.

Analysis: The cost of acquisition had been accepted and the land was treated as a long-term capital asset. Once the asset and its cost were accepted for capital gains computation, statutory indexation could not be denied, because indexation follows from the scheme of computation of long-term capital gains.

Conclusion: The denial of indexation was unjustified and the addition was deleted in favour of the assessee.

Issue (ii): whether compensation received for relinquishment of the right to sue on breach of a development agreement was taxable as revenue income.

Analysis: A mere right to sue for damages arising from breach of contract is not an actionable claim and is not transferable in view of the bar under section 6(e) of the Transfer of Property Act. Such a right does not constitute a capital asset for the purposes of section 2(14) of the Income-tax Act, and compensation received for relinquishment of that right is not consideration for transfer of a capital asset. The receipt also did not fall within section 28(va) of the Income-tax Act, 1961, since it was not received for carrying on or not carrying on any activity of the kind contemplated there.

Conclusion: The compensation was held to be a capital receipt not chargeable to tax, in favour of the assessee.

Final Conclusion: The appeal was allowed, and both additions were deleted.

Ratio Decidendi: Compensation received for relinquishment of a mere right to sue, arising from breach of contract, is not taxable as capital gains or business income because such a right is not a transferable capital asset and does not fall within the charging provisions applicable to capital receipts.

---