Contractual claim settlement was not capital gains where consent decree compensation replaced only a specific performance remedy.

An agreement to sell did not create any right, title or interest in the immovable property; it only gave the assessee a contractual remedy to seek specific performance or, failing that, damages. Because the property had already been conveyed to the tenants, the later consent decrees settled the pending specific performance claim and the receipt was treated as compensation for the failure or extinguishment of that contractual remedy, not as consideration for transfer of a capital asset. Clause 10 of the consent terms was regarded as only an internal payment arrangement and not a transfer of rights to the partners. The receipt was therefore not taxable as capital gains, and the corresponding additions in the hands of the firm and partners did not survive.

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Issues: Whether the amount received under the consent decrees was taxable as long-term capital gains or was a capital receipt received in lieu of the assessee's right to sue, and whether the corresponding additions in the hands of the firm and the partners survived.

Analysis: The agreement to sell did not itself create any right, title, or interest in the immovable property; it only gave the assessee a contractual remedy to seek specific performance and, in default, damages. The property had already been conveyed to the tenants, and the later settlement under the consent decrees was entered to resolve the pending suit for specific performance. The payment received was therefore traced to the failure of the contractual claim and the refusal or extinguishment of the specific performance remedy, not to a transfer of any pre-existing property right in Villa Nirmala. The Tribunal treated the settlement amount as compensation in substitution of the specific performance claim, which does not amount to consideration for transfer of a capital asset. Clause 10 of the consent terms was also held to be only an internal payment arrangement and not a transfer of rights to the partners.

Conclusion: The receipt of Rs.135 crore was not taxable as capital gains, and the additions based on that receipt in the hands of the firm and the partners did not survive.

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