TaxTMI 
TaxTMI 
2026 (5) TMI 1317
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....assessee had entered into a cooperation agreement dated 07.04.2004 with three bodies corporate namely, M/s Rixebe Estates & Development Pvt Ltd, M/s Surana Mercantiles Pvt Ltd and M/s Eriabarie Films and Foils Pvt Ltd, in terms of which they had agreed to cooperate between themselves for undertaking real estate project. The ld. AO observed that, the assessee thereafter had entered into an unregistered agreement with SIL on 30.04.2004 in terms of which it had agreed to purchase the factory land of SIL situated at Jessore Road, Kolkata for undertaking real estate project, which was subject to several terms and conditions. Upon being unable to obtain the performance of the agreement, the assessee had referred the matters for arbitration and the Arbitrator issued the award against the assessee by his order dated 03.10.2012 inter alia observing that, the SIL itself did not have any marketable title/right in the impugned land and therefore it could not have legally transferred the land in assessee's favour. Being aggrieved by the decision of Arbitrator, the assessee filed suits in the Barasat Court. The Ld. District Judge at Barasat vide his interim order dated 07.02.2015 had directed th....
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....ent amount of Rs. 18 crores was agreed between SIL and the assessee along with the three bodies corporate, who were parties to the Cooperation Agreement dated 07.04.2004. The ld. CIT(A) held that, the assessee's share in the settlement amount was only Rs. 6,58,00,000/- and the balance amount of Rs. 11,42,00,000/- was paid to the other three parties and he, therefore, held that, the amount relating to the other three parties could not have been added in the hands of the assessee. The ld. CIT(A) thus restricted the addition u/s 45 of the Act to the extent of Rs. 6,58,00,000/- in the hands of the assessee. At the same time, the ld. CIT(A) retained the balance amount of Rs. 11,42,00,000/- on protective basis, until the same gets substantively assessed to tax in the hands of other three parties. 6. Assailing the action of the ld. CIT(A), the ld. AR for the assessee submitted the entire sequence of events, which we shall discuss later and claimed that the impugned settlement receipt was towards withdrawal of pending suits & claims and thus was in the nature of capital receipt not liable to tax. He further contended that, there was no transfer of any right/property involved whatsoever ....
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....ransfer the property at Jessore Road, Kolkata for consideration of Rs. 16,10,44,466/-, towards which the assessee had paid token advance of Rs. 25,00,000/-. However, certain disputes arose between the assessee and SIL, and the assessee sought appointment of Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, who vide his award dated 18.10.2012 dismissed the prayers of assessee for, inter alia (i) specific performance of the AFS; (ii) execution of conveyance at the consideration mentioned in the AFS; and (iii) handing over vacant possession of the premises to assessee. The Arbitrator inter alia observed that SIL itself did not have any marketable right or title in the impugned property and therefore it could not have possibly agreed to transfer the same to the assessee. The Arbitrator has observed that, the impugned property could have been retained by SIL only for 'factory' purposes and that the said land vested with the State of West Bengal in accordance with the WB Estate Acquisition Act, 1953. It was further held by the Arbitrator that, Section 14(z) of the WB Land & Land Reforms Act, 1955 which allowed disposal of premises was not applicable (condition....
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....eration for the settlement and covenants between the Parties, Belani shall, simultaneously with the receipt of the first instalment of the Claim Settlement Amount, execute two sets of the withdrawal applications (in the forms set out in Schedule II to this Agreement) and further execute an irrevocable power of attorney (the "POA") in favour of Saregama and/or its nominees (in the format attached as Schedule III to this Agreement) authorising them, jointly and/or severally, to take all necessary steps to withdraw the Said Suit, the Said Application and all other cases referred to in Schedule I to this Agreement. The POA shall be accompanied with 2 nos. of Vakalatnama duly signed by Belani's authorized signatory/(ies) in respect of the Said Suit and Said Application, which Saregama may use in the event the proceedings for withdrawal are not filed as per the terms of this Agreement or inordinate delay is perceived by Saregama during pendency of the proceedings after filing. The originals of the executed withdrawal applications, the original executed POA, along with the original Vakalatnamas, shall be kept in escrow by Khaltan Co. LLP, Advocates and Solicitors located at Emerald Ho....
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....o Clause 1.2.8, this Claim Settlement Amount is Inclusive of any other payment, claim or receivable from Saregama to Belani, including any amount which Saregama is liable to pay to Belani vide any court order or arbitral award. 1.2.8 In the event, Saregama fails to pay the Claim Settlement Amount in accordance with Clause 1.2.5 above, it shall be liable to pay simple interest at the rate of 12% per annum from the Due Date on the outstanding amount, until the date of actual payment ("Delay Interest"). Provided that, the provision of paying the Delay Interest shall not be construed as the permission to pay the Claim Settlement. Amount beyond the Due Date." 9. The relevant Schedule I of the Settlement Agreement in relation to which the settlement amount was agreed to be paid, is as follows:- Schedule I List of Outstanding Litigations 1. Belani Housing Development Limited Vs Saregama India Limited, Misc Case No. 601 of 2014 (earlier numbered as Misc No. 5 of 2013) 2. Belani Housing Development Limited Vs Saregama India Limited, Misc Case No. 40 of 2015 (earlier numbered as Misc No. 36 of 2015) 10. A perusal of the above terms of Settlement reveals....
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....gh Court in the case of CIT vs Laxmi Devi Ratani (supra) and K.R. Srinath vs ACIT (supra) relied upon by the ld. AO was factually distinguishable. In both these decisions, the question before both the High Courts was whether extinguishment of right to claim specific performance is taxable u/s 2(47) read with Section 2(14) of the Act. In these cases, the assessees had entered into valid agreements for sale and thus obtained a valuable right under the said agreement. Subsequent thereto, the assessee entered into a cancellation agreement with the owner wherein in lieu of giving up the rights in the agreement to sell, that the owner paid consideration to the assessees. On these facts, it was held that the extinguishment of the rights in the agreement resulted in transfer of capital asset which was taxable u/s 45 of the Act. We find that, the facts involved in the case before us is distinguishable as because,the settlement claim of Rs. 18 crores was paid for withdrawing all pending cases/complains/suits filed against SIL and not for cancellation of any rights obtained under the AFS. 12. There is merit in the ld. AR's submission that, the impugned compensation was received by the asse....
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....me, then the payment is in capital field. The relevant findings are noted to be as under:- "6. Applying the aforesaid test laid down by this Court in the present case, in our view, the Tribunal was right in arriving at a conclusion that it was a capital receipt. Reason is that as provided in article XVIII of the first agreement, the assessee was having an option or right or lien, if owner desired to transfer the hotel or lease all or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in September 1975 between the receiver and the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received th....
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....arded as capital, if it is for loss of an asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction." (p. 272) 10. After analysing number of cases, the Court observed that following satisfactory measure of consistency in the principle is disclosed : ". . . Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading struc- ture of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." (p. 282) 11. The aforesaid principal is relied upon in the case of Karam Chan....
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....ement dated 1-9-1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset, i.e., the cement plant, which would obviously lead to delay in coming into existence of the profit-making apparatus, rather than a receipt in the course of profit-earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for ste....
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....to unconditionally withdraw the suit, effectively resulted in extinguishing their 'right to sue'. It is important to remember that, the judicial forums as well as the arbitrators had at all material times rejected the claim of the assessee and upheld the legal right, title & interest in the impugned property in favour of SIL. At the time when the settlement agreement dated 27.03.2018 was executed, the assessee was left with only the pending suit before the Barasat Court. What the assessee held was only the right to sue SIL at the time when settlement was reached. The outcome of the litigation was unknown and uncertain and there was no surety that the assessee would ultimately succeed. There is force in the Ld. AR's contention that, SIL entered into settlement agreement not because they recognised that the assessee would be able to secure rights in the impugned property but because the pending suit against them could adversely affected the saleability of their property and their economic interest as well. We find that, the Courts have consistently held that, the 'right to sue' is not a property which can be transferred but it is a privilege which is enjoyed in persona and therefore ....
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....9;any property over which or the profits of which any person has a disposing power which he may exercise for his own benefit'. The definition of the word 'property' being inclusive was rightly held to be not exhaustive. The Court then proceeded to consider the different senses in which the word 'property' was used and after quoting from Salmond on Jurisprudence, it held that the word 'property' cannot be confined to material object, it must include rights in and over that object. These jure in re aliena were held to be 'property' of the person owning them, though the material object is owned by another. In that sense 'benefits arising out of a contract' stood included in the term 'property'. The Court then observed : "The right to claim damages for breach of contract is one of the benefits of a contract." The learned Judge then made the following observations in paragraph 14 of the judgment : "... A claim for damages on account of breach of contract is a right arising out of contract and is an obligation qua the person who is guilty of breach and his property. ..." (p. 436) With respect, this ob....
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....ere right to sue for damages which is not an actionable claim and is not transferable and observations of Harington, J., that after the breach the contract is 'at an end'. But, with respect to the learned Judge the question of exercise of the remedial right to sue for damages can arise only when the antecedent right is denied and is rendered unenforceable. The view expressed in Abu Mahomed's case (supra) has been approved by the Supreme Court in Raman Iron Foundry's case (supra) wherein their Lordships observed : "The only right which the party aggrieved by the breach of the contract has is the right to sue for damages." The Supreme Court has also approved the view that it is not an actionable claim and, therefore, cannot be transferred. Or the same line of reasoning and for the reason that the case did not arise under the Provincial Insolvency Act, the Allahabad High Court did not approve the decisions which were based on the ratio in Abu Mahomed's case (supra) including the decision of the Bombay High Court in Hirachand's case ( supra). Needless to say that the ratio of Abu Mahomed's case (supra) was later approved by Chagla, CJ., and the Supreme Court....
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....nted stay on the order of Division Bench and directed the assessee to not press the land owner to cancel the sale agreement. The said petition & litigation continued for 10 years and remained status quo. To put an end to the disputes, the new purchaser and the original land owner entered into a settlement agreement with the assessee to release rights, if any, pertaining to the said premises arising under the MOU for which it agreed to pay settlement compensation to withdraw all the claims & pending suits. Though the assessee claimed the receipt of compensation to be capital in nature, the AO however treated it to be revenue and taxed it as business income of the assessee. On appeal, this Tribunal following the decision of Hon'ble Supreme Court in the case of Oberoi Hotels (P) Ltd vs. CIT (supra) held that, the assessee by giving up its right to purchase the property, resulted in loss of source of income and thus treated the settlement compensation as capital receipt. The relevant findings are noted to be as under:- "6. From the above facts, it emerges that assessee has no right or title or interest in the property as on the date of agreement, by virtue of which, the compen....
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....rchase certain agricultural land parcels with original landowners and paid various amounts as agreed. However, it was later learnt by the assessee, that the original landowners had also sold land parcels in question to family members of one 'G'. In consequence of dispute arising towards rightful ownership of land parcels, the original landowners, original purchasers and assessee went through various levels of litigations before Tribunals, who upheld the claim of the original purchasers to title and ownership with rightful possession of the disputed land. The assessee further carried the dispute by filing Special Civil Application seeking its claim on land parcels. Pending settlement of ongoing dispute in the Court of law, both the original purchasers and assessee referred the matter for arbitration to resolve the disputes outside the Court. The arbitrator eventually passed an arbitration award in pursuance whereof, the original purchasers sold the disputed land to MCPL and out of such sale proceeds, a sum of Rs. 70 crores were apportioned to the assessee in consonance with arbitration award, on the condition that, the pending civil suit shall stand withdrawn. The AO treated....
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....ed to and relied upon on behalf of the assessee. The co-ordinate bench, after a detailed analysis, opined that mere 'right to sue', while a capital receipt, is not a capital asset under s.2(14) of the Act and thus compensation received on release of right to sue is not a taxable receipt. The relevant operative para of the order is reproduced hereunder for the sake of easy reference: .... 16.6 On perusal of the first appellate order, we find that CIT(A) has analysed the fact situation threadbare and applied the law correctly. The action of the CIT(A) is found to be consistent with the law propounded in the judicial decisions as quoted in the first appellate order as well as in earlier paragraphs. 16.7 We thus find little merit in the plea raised on behalf of the Revenue. On facts, as rightly stated on behalf of the assessee, the proceedings on challenge for rightful owner of land before the Court of law were continuing and had not come to an end and as a corollary, the right of the assessee to sue the defaulting party was open and subsisting. Pending proceedings before the Court of law, a consensus settlement was arrived by the Arbitral Tribunal wh....
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....king relief for specific performance of MOU and to execute joint development agreement. The assessee also filed criminal complaint against land owner. Later on, the parties settled the dispute with the assessee and paid Rs. 20 crore in settlement thereof. The Revenue had taxed the receipt by way of long term capital gain. On appeal, this Tribunal held that the amount received by assessee was towards extinction of its right to sue the owner, which was not in ordinary course of its business, and thus it was to be construed as capital receipt not liable to tax. The findings relevant to the present case before us, is as follows:- "20. From the contents of clause 5 of the cancellation deed dated 11th September 2011, we have noted that the assessee has not transferred any right in favour of the confirming party (third Party) in respect with regard to the rights, which were sought to be confirmed in MOU dated 24th March and 25th March 2005. In facts all those right were already stand transferred by the owners in favour of M/s Star Habitat Pvt Ltd. The assessee received compensation of Rs. 20 Crore consisting of refund of the amount paid by assessee to the owners in pursuance of t....