Compensation for cancelled property-rights deal turns on whether it is capital, revenue, or only the actual receipt.

Compensation received on cancellation of an agreement for acquisition of property rights is analysed by distinguishing a mere right to sue from a right to seek conveyance of property. If the payment is for surrender of a mere right to sue, it is not a capital asset; if it reflects relinquishment of property rights, capital gains consequences may arise. The commentary also notes that the record did not support treatment of the receipt as business income, and that taxability, if any, must be confined to the amount actually received rather than a notional figure in the relinquishment deed. The colourable device allegation cannot justify taxing a sum higher than the real receipt.

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Issues: Whether compensation received on cancellation of an agreement for acquisition of property rights was a capital receipt not chargeable to tax, or a revenue receipt assessable as business income or capital gains, and whether the amount actually received could be brought to tax.

Analysis: The agreement for acquisition of the project created rights in favour of the assessee, but the transaction was subsequently cancelled and compensation was paid. The distinction between a mere right to sue and a right to seek conveyance of property was material: compensation for surrender of a mere right to sue is not a capital asset, whereas compensation for relinquishment of rights in property can attract capital gains. On the facts, the record did not support the view that the assessee was acquiring the project as stock in trade for its business; there was also no reliable basis to treat the receipt as business income. The authorities below had proceeded largely on inference, while the surrounding circumstances indicated that the compensation was paid in settlement of the failed transaction. The Tribunal also held that taxability, if any, must be confined to the amount actually received and not the notional figure in the relinquishment deed. The colourable device allegation did not justify taxing the assessee on a basis contrary to the real receipt.

Conclusion: The compensation was held to be not chargeable to tax in the assessee's hands, and only the actual receipt of Rs. 4.89 crores could be considered, if taxable at all. The assessee succeeded on this issue.

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