Surrender of specific performance rights can amount to transfer of a capital asset and trigger capital gains tax treatment.

Surrender of a contractual right to seek specific performance in return for consideration is treated as relinquishment or extinguishment of rights in a capital asset, bringing the receipt within the statutory meaning of transfer and exposing it to capital gains tax. The right to obtain conveyance or specific performance is treated as property of wide import, so the compromise amount is not merely a non-taxable payment for a right to sue. The separate claim for deduction under section 54F required verification of the assessee's residential property position and was remitted for fresh factual examination after hearing.

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Issues: (i) Whether the amount received on compromise for giving up the contractual right to seek specific performance was a capital receipt outside the ambit of capital gains, or a taxable transfer giving rise to capital gains; (ii) Whether the deduction claimed under section 54F required fresh examination by the Assessing Officer.

Issue (i): Whether the amount received on compromise for giving up the contractual right to seek specific performance was a capital receipt outside the ambit of capital gains, or a taxable transfer giving rise to capital gains.

Analysis: The right to obtain conveyance or specific performance was treated as property of a wide import within the definition of capital asset. The compromise by which the assessee gave up the right to specific performance amounted to relinquishment and extinguishment of rights in relation to a capital asset within the meaning of the statutory definition of transfer. The receipt was therefore linked to transfer of the capital asset and not merely to a non-transferable right to sue. The amount received in lieu of surrender of that right was held exigible to tax under the head capital gains, with computation to follow the statutory scheme.

Conclusion: The receipt was held to be taxable as capital gains and not as an exempt capital receipt; the finding was against the assessee and in favour of the Revenue.

Issue (ii): Whether the deduction claimed under section 54F required fresh examination by the Assessing Officer.

Analysis: The claim for deduction under section 54F was not finally sustained on the existing record. The matter required verification of the assessee's ownership of residential properties and reconsideration of the factual position after granting a reasonable opportunity of hearing.

Conclusion: The issue was remitted to the Assessing Officer for fresh consideration and was not finally decided in the assessee's favour.

Final Conclusion: The Revenue succeeded on the principal taxability issue, while the deduction claim under section 54F was sent back for fresh adjudication, resulting in a partial allowance of the appeal.

Ratio Decidendi: Surrender of a contractual right to obtain specific performance, in exchange for consideration, constitutes extinguishment or relinquishment of rights in a capital asset and is chargeable to capital gains tax under the statutory definition of transfer.

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