Right to sue receipts and capital gains: consent-term payment held outside sale consideration and not taxable

An additional sum received under consent terms was treated as a capital receipt for relinquishment of a mere right to sue, not as part of the sale consideration for transfer of property. The ITAT applied the distinction between a capital asset, transfer, and a non-transferable right to sue, noting that such a right is not transferable under section 6 of the Transfer of Property Act, 1882. As the amount was not consideration for transfer and the cost of acquisition of the right could not be ascertained, the charging and computation provisions under sections 45 and 48 of the Income-tax Act, 1961 did not apply. The addition was deleted.

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Issues: Whether the additional sum of Rs. 9 crore received pursuant to the consent terms was part of the sale consideration chargeable as long-term capital gains, or whether it was a capital receipt arising from relinquishment of the right to sue and therefore not taxable as capital gains.

Analysis: The receipt was found to be payable only under the consent terms for the time, effort and cost spent in contesting the acquisition and pursuing the litigation, and not as consideration for transfer of the property. The distinction between a capital asset, transfer, and a mere right to sue was applied. Since a mere right to sue is not transferable under section 6 of the Transfer of Property Act, 1882, any amount received for surrender of that right could not be treated as consideration for transfer under section 45 of the Income-tax Act, 1961. The computation provisions under section 48 also failed because the cost of acquisition of such right could not be ascertained, attracting the principle that the charging provision cannot operate where the computation machinery breaks down.

Conclusion: The additional Rs. 9 crore was held not to be part of the sale consideration and not chargeable as capital gains; the addition was rightly deleted.

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