TaxTMI 
TaxTMI 
2025 (4) TMI 1616
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....justified in holding that the amount of Rs. 8,24,95,144/- received by the assessee pursuant to the consent decree dated 10.07.2017, cannot be taxed under the head Capital Gain? 2. Whether in the frets and circumstances of the case, the Ld. CIT(A) erred in law and in facts by appreciating the provisions of Section 6 of the Transfer of Property Act, 1882, which status that a "mere right to sue" cannot be transferred. In the present case, the right acquired by the assessee under the agreement to purchase immovable property is not merely a right to sue but a substantive right to have the immovable property conveyed to the assessee. 3. Whether the amount received by the assessee constitutes a capital receipt or whether it should be considered as part of a transaction involving the transfer of a capital asset, thereby attracting capital gains tax under Section 45 of the Income Tax Act 4. Whether, in the facts and circumstances of the case and in law, the order of the Ld. CIT(A) is justified in holding that the judgment of the Hon'ble Bombay High Court in the ease of CIT v. Vijay Flexible Containers, CIT v. Abbasbhoy A. Dehgamwalla, and the Hon'ble Gujar....
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....f the Transfer of Property Act. Therefore, the compensation received is not liable to be taxed as per the provisions of Section 45 of the LT Act, as the conditions stipulated therein are not fulfilled. In view of the facts of the case and the decision of the Hon'ble ITAT in the case of Virendra Gala, as discussed above, the addition made by the AO of Rs. 5,81,34,144/- is hereby deleted. Accordingly, the appeal on this ground is ALLOWED." 7. It has been admitted by both the parties that this issue stands covered by the decision of the ITAT. First of all the relevant facts of the case which is pari-materia with the present cases has been discussed in detail by the Tribunal are as under:- 3. The facts in brief are that the assessee is an individual, who had entered into an MOU with Aadi Properties LLP on 08/07/2010 with the intention to book commercial space to be developed and constructed in a proposed project by M/s. Aadi Properties LLP on a plot of land for consideration of Rs. 10,75,00,000/-. Accordingly, payment of Rs. 25,00,000/- by cheque No.017447 drawn on bank of India dated 02/07/2010 was paid by the assessee. This amount of Rs. 25,00,000/- was nearly 2.33% o....
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.... consent terms filed by the parties. As per the consent decree an amount of Rs. 7,65,26,000/- was agreed to be paid by the Aadi Properties LLP by way of damages for its inability to provide the commercial space and the assessee not waiving the "right to sue" as per Para 9 and 10 of the consent decree dated 10/07/2017 which reads as under:- "9. In Course of the discussions and negotiations between the Parties, the Plaintiff released that due to the constant changes in the applicable laws governing planning, FSI and other development accept the Defendant was forced to abort the Old Project and the Defendant have aborted the Old Project and undertaken the development of the project, had made significant progress in the construction of the project which was in stark variance with the Old Project in which the Plaintiff had agreed to invest by way of allotment of 25,000 square feet (Saleable area) of the commercial premises therein and consequently, the contours of the Old Project by completely different from that of the Project as is presently envisaged. The Old Project was comprised of mostly commercial buildings whereas the Project is predominantly residential and very little....
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....his revisionary jurisdiction issued of notice u/s. 263 on 02/03/2023 and the issue of taxability of receipt of compensation. The ld. PCIT has relied upon the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Vijay Flexi Containers reported in 186 ITR 692 and finally the ld. PCIT has set aside the assessment order to concede the aforesaid judgment. Thereafter, the Tribunal had decided the issue on merits after detailed discussion of the facts and the various judgments including the judgment of the Hon'ble Bombay High Court which has been referred by the department in the case of CIT vs. Vijay Flexi Containers (supra), the relevant observation reads as under:- 11. We have heard both the parties at length and also perused the relevant finding given in the impugned order as well as various materials referred to before us at the time to hearing. To put the issue succinctly, whether the compensation received by the assessee as per the consent decree dated 10/07/2017 of the Hon'ble Bombay High Court which was based on the basis of consent terms filed by the parties, can be brought to tax or it is a capital receipt not chargeable to tax. As noted above in the consen....
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.... object or consideration within the meaning of section 23 of the Indian Contract Act, 1872 (9 of 1872), or (3) to a person legally disqualified to be transferee. (i) Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate, under the management of a Court of Wards, to assign his interest as such tenant, farmer or lessee. 13. Now whether the damage received by the assessee can be said to be in respect of transfer of capital asset and if there was a breach of contract and the assessee received damages on account of mere "right to sue" for the damages, can it be held to be transfer of the property. As noted above, Section 6 of the Transfer of Property Act clearly provides that "a mere right to sue cannot be transferred", even if it is to be treated as "property" u/s. 5 of the Transfer Property Act. Transfer of property means the act by which a person conveys a property to another and to transfer property is to perform such act. The mere right to sue may or may not be property but certainly it cannot be trans....
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....e matter, no part of the amount was taxable as capital gains." 14.1 Thus, the sequitur of the said judgment can be summarized in the following manner:- i. The right that a person acquires on the establishment of the Breach of Contract is a mere right to sue. ii. Despite the definition of capital asset in the wildest possible terms in s. 2(14), a right to a capital asset must fall within the expression 'property of any kind'. iii. S.6 of Transfer of Property Act, 1882 uses the same expression 'property of any kind' in the context of transferability of any property under that Act. iv. The said S. 6 of Transfer of Property Act, 1882 makes an exception for 'a right to sue' while defining property of any kind. v. Such right to sue for damages is held to be not an actionable claim and it cannot be assigned. vi. Transfer of such a right to sue for damages is opposed to public policy as is gambling in litigation vii. It is not correct to say that such a right to such damages is a "Capital Asset" being on interest in property of any kind; viii. Both parties had filed their objections in ....
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....the Assessee by the sale agreement of "property of any kind?" It is in that context that the Division Bench arrived at the conclusion that the right acquired is not a mere right to sue. The Assessee acquired under the said agreement for sale the right to have the immovable property conveyed to him. He was, under the law, entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right. What he acquired under the said agreement for sale was, therefore property within the meaning of the IT Act and consequently a capital asset. In the Suit that he filed, a settlement was arrived at, at which point of time, the Assessee gave up his right to claim specific performance and took only damages. His giving up of the right to claim specific performance by conveyance to him of the immovable property was relinquishment of the capital asset. There was, therefore, a transfer of a capital asset within the meaning of the IT Act. It is this view which was placed before this Court in the case of Abbasbhoy A. Dehgamwalla (supra). 24. However, the Division Bench deciding the issue in the case of Abbasb....
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....a seal of approval or satisfaction of the Court and in terms of Order XXIII Rule 3 of the Civil Procedure Code, 1908. In such circumstances, even if there was any interim order in favour of the Assessee in the present case eventually the Suit ended in the Assessee's claim for specific performance being refused and he being entitled to receive the sum stipulated in this Court's order in lieu of the specific performance. In these circumstances, the Assessee was right in urging that he has no right, title or interest in the immovable property. The Tribunal completely misread and misconstrued this Court's order. In the Consent Terms, which are drawn up and based on which the Suit is decreed by the Court, it does not deal with the rival cases on merits. There is no requirement of the Court then passing an order and Judgment on merits of the claim of the parties. The Court is required to apply its mind and consider as to whether the arrangement reached by the parties can be accepted by it. Once it is accepted and an order or decree is passed in terms thereof, then, it is an order of the Court. Thus, the Court has not undertaken any mechanical exercise or has not casually and ....
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....right to obtain performance of the agreement by approaching Court of law and seeking a Decree of specific performance in terms of the Specific Relief Act, 1963. It is that limited right which is recognised by law and the difference between contract for sale of an immovable property and sale as emerging from section 54 of the Transfer of property Act, 1882 is thus explained. 28. ....................................................................................................................................... ...................................... 29. In such circumstances, we do not think that the Tribunal's finding and from paras 6 to 11 need to be referred to. In this case as well, the specific performance was refused by this Court. In any event, there was enough doubt and the legal position was not clear. This was not a case where power under section 263 of the Income Tax Act could have been exercised. 30. In view of the above, we are of the opinion that the Appeal must succeed. The substantial questions of law, as framed and on debatable issues need to be answered as under:- "Answers to Question Nos. :- (i) The Tribun....
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....nt terms were arrived. There was no such clause which accepted that no Specific Performance was possible, neither a clause which said that compensation was paid for right to sue. 19. On the contrary here in this case, the facts are entirely different, because the provision of Specific Relief Act was not possible and therefore, right to sue was the only remedy u/s. 6 of Transfer of Property Act. Here, the specific performance was not possible since the project was itself aborted. Since the property for which right in the property was claimed, was not in existence, the question of giving up the right in the property does not arise at all. Thus, the judgment of Viay Flexible Containers is not applicable at all and therefore, the ld. PCIT has erred in law and on facts in setting aside the assessment order solely relying upon the judgment of M/s. Vijay Flexible Containers. 20. Apart from that there are various other High Court Judgments directly on this issue wherein, they have held that a damage on account of right to sue is a capital receipt not chargeable to tax. Some of the judgments for the sake of clarity are as under:- 1. C.I.T. Vs. Dalmia (1984) [149 I....
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....erred. There cannot be any dispute with the proposition that in order that receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a 'transfer' within the meaning of s. 45 r/w s. 2(47). Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by the assessee as damages was not assessable as capital gains" 2. Baroda Cement & Chemicals Ltd. V/s. C.I.T [158 ITR 636] (Guj.) Facts: Seller company contracted to sell a second hand mill to taxpayer for agreed consideration. In breach of contract, seller company sold the mill to third party. Taxpayer received compensation from seller in settlement of claims of the taxpayer for breach of the contract which was claimed as non-chargeable capital receipt. Held: HC held that once there is a breach of contract and defaulting party not only refuse to perform his part of contract but also disposes of the subject-matter, the injured party has nothing left in the contract except right to sue for damages. A right to sue not being an actionable claim cannot b....
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....ce, the terms 'consideration' and 'compensation' or 'damages' have distinct connotations. The former in the context of ss. 45 and 48 would connote payment of a sum of money to secure transfer of capital asset; the latter would suggest payment to make amends for loss or injury occasioned on the breach of contract or tort. Both s. 45 and 48 postulate the existence of a capital asset and consideration received thereof................................................. ..............................once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefore, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee's rights therein since such a transfer would be hit by s. 6(e) of the Transfer of Property Act...." "...The asset referred to in s. 45 must be one in the acquisition whereof ....