Compensation for extinguishment of a mere right to sue is capital in nature and not taxable as capital gains.

Compensation received on cancellation of a development arrangement was treated as capital in nature where no capital asset was transferred and the assessee was left only with a mere right to sue. The analysis distinguished consideration for transfer of property rights from compensation for breach of contract, noting that the cancellation deed described the payment as refund of advance, interest, loss of profit, damages for loss of opportunity, and litigation costs. On that basis, the receipt was characterised as arising from extinguishment of a non-transferable right to sue and not as a taxable capital gain. The capital gains addition was deleted.

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Issues: Whether compensation received on cancellation of a development arrangement, stated to be for surrender of the right to sue, constituted a capital receipt not chargeable to capital gains tax or a taxable transfer of a capital asset.

Analysis: The receipt was examined in the light of the nature of the assessee's interest under the aborted arrangement and the settled distinction between consideration for transfer of a capital asset and compensation for breach of contract. The cancellation deed showed that no right in the property was transferred to the payer; instead, the amount represented refund of advance, interest, loss of profit, damages for loss of opportunity, and litigation costs. The assessee's surviving claim was held to be only a mere right to sue, which is not transferable and does not amount to a capital asset for the purposes of capital gains tax. The authorities relied on the principle that compensation for extinguishment of a right to sue on breach of contract is capital in nature, and that tax under the capital gains head requires a transfer of a capital asset within the statutory definition.

Conclusion: The compensation was held to be a capital receipt not chargeable to tax as long-term capital gain.

Final Conclusion: The addition made by treating the compensation as taxable capital gains was deleted and the assessee succeeded in the appeal.

Ratio Decidendi: Amounts received for extinguishment of a mere right to sue arising from breach of contract, without transfer of any capital asset, are capital receipts and are not assessable as capital gains.

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