Tribunal rules compensation for relinquishing right to sue as capital receipt not taxable

The tribunal ruled that the compensation received by the assessee for relinquishing its right to sue is a capital receipt not chargeable to tax. The decision was based on precedents and the tribunal's earlier ruling for AY 2009-10. The tribunal overturned the CIT(A)'s order, directing the AO to delete the addition of Rs. 18,02,53,000, and allowed the assessee's appeal.

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Issues Involved:

1. Whether the compensation received by the assessee for relinquishment of right to sue is a capital receipt not chargeable to tax.
2. Whether the case of the assessee is covered by the order of the tribunal in its own case for the assessment year 2009-10.
3. Whether the amount of compensation received by the assessee represents the income of the assessee.

Detailed Analysis:

1. Compensation Received as Capital Receipt:

The core issue revolves around the nature of the compensation amounting to Rs. 18,02,53,000/- received by the assessee for relinquishing its right to sue. The assessee argued that this compensation should be treated as a capital receipt, not chargeable to tax, based on precedents from various High Courts and the ITAT's own decision in the assessee's case for AY 2009-10. The assessee contended that the right acquired under the development agreements was a "Right to Sue," which, according to Section 6(e) of the Transfer of Property Act, is not a property and thus not a "Capital Asset." Consequently, the compensation received for relinquishing this right should not be taxable as either capital gains or business income.

2. Tribunal's Previous Decision for AY 2009-10:

The assessee cited the ITAT Ahmedabad's decision for AY 2009-10, where a similar compensation was treated as a capital receipt, not subject to tax. The CIT(A) distinguished the facts of the current year from AY 2009-10, noting differences such as the timing of agreements and payments. However, the tribunal found that these differences did not alter the nature of the transaction. The tribunal emphasized that the character of the transaction does not change merely because the agreements and payments occurred in different financial years. The tribunal also noted that the assessee had made or agreed to make payments to the societies in both years, thus invalidating the CIT(A)'s distinction.

3. Nature of Compensation as Income:

The CIT(A) and AO argued that the compensation should be treated as business income, suggesting that the transactions were part of a scheme to avoid tax. The CIT(A) highlighted several points, such as the unregistered agreements, common notary, and the close relationship between the parties involved. The CIT(A) also noted that the compensation received constituted a significant portion of the sale consideration and was immediately transferred to related parties, indicating a circular transaction within the Popular Group. However, the tribunal found that these points did not change the nature of the compensation. The tribunal held that the compensation for relinquishing the right to sue is not taxable as business income or capital gains, reaffirming its decision from AY 2009-10.

Conclusion:

The tribunal concluded that the compensation received by the assessee for relinquishing its right to sue is a capital receipt, not chargeable to tax. The tribunal's decision was guided by its previous ruling for AY 2009-10 and various judicial precedents. The tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal.

Final Order:

The appeal of the assessee was allowed, and the addition of Rs. 18,02,53,000/- was deleted.

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