Settlement compensation for a mere right to sue was held capital in nature, and the protective addition was deleted.

Compensation received under a settlement for withdrawing pending suits, claims and litigation, where the assessee had only a mere right to sue and no subsisting transferable right in the property, was treated as a capital receipt and not as capital gains or business income. The tribunal noted that compensation for sterilisation of a profit-making apparatus is capital in nature and that the amendment to section 28(ii)(e) operates prospectively from assessment year 2019-20. The protective addition was also deleted because the balance settlement amount belonged to other co-venturers who had received and accounted for their shares, not to the assessee.

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Issues: (i) Whether the settlement amount of Rs. 6,58,00,000 received by the assessee under the settlement agreement was taxable as capital gains or business/revenue income, or was a capital receipt not liable to tax; and (ii) Whether the protective addition of Rs. 11,42,00,000 in the assessee's hands was sustainable.

Issue (i): Whether the settlement amount of Rs. 6,58,00,000 received by the assessee under the settlement agreement was taxable as capital gains or business/revenue income, or was a capital receipt not liable to tax.

Analysis: The settlement agreement showed that the payment was made in consideration of withdrawal of pending suits, claims and litigations, and not for transfer or relinquishment of any enforceable right in the property. The earlier arbitral awards had already held that the assessee had no subsisting right to specific performance in the property. On the facts, the assessee was left only with a right to sue, and the compensation was received for giving up that right and for settling litigation. Applying the principles that compensation for loss of a source of income or sterilization of the profit-making apparatus is capital in nature, and that a mere right to sue is not a transferable capital asset, the receipt could not be brought to tax as capital gains. The amendment to section 28(ii)(e) of the Income-tax Act, 1961 was also noticed as prospective from assessment year 2019-20 onwards.

Conclusion: The receipt of Rs. 6,58,00,000 was held to be a capital receipt not liable to tax, in favour of the assessee.

Issue (ii): Whether the protective addition of Rs. 11,42,00,000 in the assessee's hands was sustainable.

Analysis: The balance amount belonged to the other three co-venturers who were also parties to the settlement agreement, and the material showed that they had received and accounted for their respective shares. The amount did not belong to, nor was it received by, the assessee. In these circumstances, there was no basis to retain the amount as a protective addition in the assessee's assessment.

Conclusion: The protective addition of Rs. 11,42,00,000 was deleted, in favour of the assessee.

Final Conclusion: The settlement receipt was treated as capital in nature and the protective assessment was vacated, resulting in full relief to the assessee.

Ratio Decidendi: Compensation received for relinquishment of a mere right to sue, where no subsisting transferable right in property exists, is a capital receipt not chargeable as capital gains; amounts belonging to other settled parties cannot be protected in the assessee's hands.

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