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Issues: Whether the amount received under the settlement for the lessee's contractual preferential right to purchase and related claim over the property was taxable as capital gains under the Income-tax Act, 1961.
Analysis: The contractual clause in the lease deed did not create a true right of pre-emption attaching to the land. It only conferred an enforceable promise giving the lessee a first option to purchase, which was contingent on the lessor's proposed sale and did not amount to an alienable property right. Once possession had already been surrendered pursuant to court orders, no surviving pre-emption right remained capable of transfer or relinquishment. The settlement amount was, in substance, paid to end litigation and clear title, not for transfer of a capital asset. In any event, the computation machinery also failed because the alleged right had no ascertainable cost of acquisition.
Conclusion: The receipt was not assessable as capital gains and the addition could not stand.
Final Conclusion: The assessee succeeded and the tax authorities' orders were set aside.
Ratio Decidendi: A mere contractual right to be offered first purchase of immovable property, being only a right to sue for specific performance and not a transferable capital asset, cannot be taxed as capital gains on settlement.
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