Compensation for foregoing right to sue is it a
capital asset taxable as capital gains
Facts:
Arising
out of a search on the assessee firm a consent decree adjudicated by Mumbai
high court was unearthed whereby assessee was found to be in receipt of monetary
payouts by one RA ventures realty Ltd. to the tune of Rs. 134 crores. On
investigation, way back in 1974 assessee entered into a purchase agreement to
buy a said prime property in Mumbai with a right to sue for specific
performance in the event the sale did not materialize. It so happened that
the seller gave the property to the tenants and a suit for specific
performance was lodged by the assessee firm. As part of an amicable
solution a consent decree was signed dated 28-01-2011 whereby in lieu of the
right to sue which will be withdrawn by the assessee firm a sum of Rs. 135
crores with interest etc. would be paid. Assessee offered the interest to tax
as income from other sources. AO held that right to sue in the property was a
relinquishment/extinguishment of a right in a capital asset and subjected it to
capital gains under section 45 read with 2(14). CIT(A) upheld the same.
Assessee's plea was right to sue is not a transferable and a capital asset and
it was only a capital receipt. On appeal -
Held
in favour of the assessee that the right to sue did not bring forth any capital
asset and accordingly there was no capital gains which was taxable. Rest of the
protective assessments made were also quashed.
Applied:
Sterling Construction & Investments v. ACIT, (2015) 374
ITR 474 (Bom.) : 2015 TaxPub(DT) 2323 (Bom-HC)
Ed. Note:
Reference be made to the Flash No. 153/Isvakoo Grand Plaza decision dated
10-05-2023 where a detailed discussion on this topic is found on right to sue
whether it is a capital asset or otherwise. It is quite likely that the
upcoming budget 2024 will plug capital asset definition with a clause
"right to sue or right not to sue" as well as a capital asset.
"Right
of pre-emption was not an enforceable right it merely gave an offer to the
assessee. The same accordingly could not be read as one creating
extinguishing/relinquishing rights in rem on a property. The right to sue is
not a transferable right as per section 6(e) of the Transfer of Property Act,
1882. The right of pre-emption also got extinguished in the mediation process
as there was no court judgment holding that the compensation arose out of
cancellation of such rights of pre-emption".
Case: Mahendra Corpn. v. Dy. CIT 2023 TaxPub(DT) 3276 (Mum-Trib)