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2016 (1) TMI 814 - THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI

2016 (1) TMI 814 - THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI - [2016] 381 ITR 1 - Taxability of Settlement amount - TDS u/s 195 - Settlement Fund payable under the Stipulation to the Qualified Settlement Fund - whether will be regarded as sum chargeable under the provisions of the Act in the hands of the QSF? - For the purposes of deducting tax at source under Section 195 of the Act on the transfer of the Settlement Amount to the QSF, whether Satyam can take into account the chargeability of t .....

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amount in the hands of the QSF is not chargeable to tax. Therefore, we do not think it is necessary to go into other issues like whether authorized claimants were not known to Satyam and therefore deduction of tax was not appropriate or whether such income accrues or arises in India or not or is deemed to accrue or arise in India or not. Once the answer to the question no.1 is in negative, such issues are not relevant and it is also not necessary to go into the issue of stages of transfer at wh .....

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mon order incx AAR Nos. 1045, 1060, 1078, 1087 & 1088 of 2011. Out of these, the applicant in AAR No.1060 and 1078 challenged the judgment in the Delhi High Court, by way of writ petition. The Hon ble Delhi High Court set aside rulings in so far as it relates to the application nos. 1060 and 1078 and directed a rehearing of these applications. 2. The questions raised for the ruling for AAR 1060 are as under:- (1) Whether, on the facts and circumstances of the case, the Settlement Amount paya .....

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) of the Stipulation? (3) Whether on the facts and circumstances of the case, Section 195 of the Act will also apply to the QSF when it distributes the Settlement Amount to the Authorized Claimants pursuant to the judgment and final approval of the US Court? (4) If the answer to Question No.1 or Question No.2 is in the affirmative and Satyam is required to deduct income tax under section 195 of the Act, at what rate shall income tax be deducted? (5) If the answer to the Question No.3 is in the a .....

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Whether, on the facts and circumstances of the case, for the purposes of deducting tax at source under section 195 of the Act on the transfer of the Settlement Fund Initial Escrow Account to the QSF, can the PWC entities take into account the chargeability of the Settlement Fund in the hands of the Authorized Claimants, as defined in paragraph 1(d) of the stipulation? (3) Whether on the facts and circumstances of the case, section 195 of the Act will also apply to the QSF when it distributes th .....

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he rulings pronounced by this Authority in the order dated 27th August, 2012 were as under: In AAR No.1060 of 2011, I rule that the settlement amount will be regarded as sum chargeable under the provisions of the Act as required under section 195 of the Act. On question No.2, I rule that the time to deduct the tax is when the amount is moved from the segregated account in India to the initial escrow account in the US. In view of the ruling on question No.2, no separate ruling on question No.3 is .....

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claimants. Question No.3 raised has to be raised before the tax authorities in US. Once the tax is deducted on the fund as a whole, in the present context, the obligation of QSF will come to an end. The other aspect is not for consideration now. On question No.4, I rule that the deduction of tax will be at the rate of 30%. 5. In the order dated 18th September, 2014, Hon ble Delhi High Court observed as under:- The primary question which was there before the Authority for Advance Rulings was whe .....

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That is not the correct position in as much as from the impugned Ruling itself it would be evident that the stand of the petitioner was that they were not revenue receipts but capital receipts not chargeable to tax. It was the further case of the petitioner that the settlement amounts would only go towards reducing the cost of acquisition of the American Depository Shares. We are of the view that the Authority for Advance Rulings has rendered its ruling based upon the wrong premise that the peti .....

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his aspect in the context of Section195 of the Income-tax Act, 1961 and for that purpose it has to consider whether these receipts, if they are to be regarded as income, could be construed as income at the point of time at which the tax was to be deducted at source. These issues need to be examined by the Authority for Advance Rulings apart from the other issues that may arise including the question of any income having arisen in India, having been received in India or deemed to have accrued in .....

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ficient to set out the facts in one case, i.e. Satyam Computer Services, and pronounce the rulings which will apply in the case of PWC also. 7. Satyam Computers Services Limited is an Indian company incorporated under the Indian Companies Act, 1956. Its shares were listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). In May 2001, it issued 14.5 lakhs American Depositors Shares (ADS) which were listed on the New York Stock Exchange (NYSE). In May, 2005 it issued another 13 .....

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ges. All these suits were consolidated on 9.4.2009 by the United States judicial panel on multi district litigation into one proceeding in the United States Court for the Southern District of New York. On 12.5.2009 the United States Court appointed Lead Plaintiffs in the action and approved their selection of the applicant as the Lead Counsel. On 17.7.2009 a consolidated class action complaint was filed on behalf of the Lead Plaintiffs. 8. The claims in the Complaint were filed on behalf of a Cl .....

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orts and filings with the SEC and NYSE, etc., containing false and misleading information, the Plaintiffs were defrauded in acquiring Satyam securities at artificially inflated prices. Upon public disclosure of true facts concealed from US authorities in the fillings made by Satyam before the SEC and NYSE, the market prices of these securities declined sharply. The Plaintiffs claimed that as a direct and proximate result of these wrongful acts and misconduct of Satyam and its statuary auditors P .....

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mplaint with respect to Satyam, subject to approval of US Court and final operation of its judgment. 10. The scheme of payment of the settlement amount as per settlement agreement was as under:- a. Satyam will open a bank account in India, called Segregated Account, and deposit USD 125 million into it in Indian currency. b. After preliminary approval of the Settlement Agreement from the United States Court is obtained, Satyam will, with the approval of the Reserve Bank of India (RBI), transfer t .....

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Regulations QSF is a fund, account or trust established pursuant to a United States Court order to resolve or satisfy contested or uncontested claims that have resulted from an event or a related series of events that has occurred and that has given rise to at least one claim asserting liability arising out of a tort, breach of contract, or violation of law. As per United States Tax Regulations, QSF is a separate United States person and a tax resident of a United States subject to entity level .....

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Satyam (AAR No.1060) as under:- 17.02.2011 Satyam filed application before the AAR seeking advance ruling 25.02.2011 Satyam opened account with Citibank, Secundrabad (the Segregated Account) and deposited INR 5,671,250,000.00 as the Settlement Amount in it. 21.03.2011 US Court passed order granting Preliminary Approval to the Settlement Agreement and directed issue of public notices. 29.03.2011 RBI granted approval to Satyam for transfer of Settlement Amount from the Segregated Account to the I .....

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Amount. 16.03.2012 Satyam terminated its ADS Scheme by notice to NYSE. 29.03.2012 Security Exchange Commission (SEC) de-registered the ADS program. 27.08.2012 AAR ruled that TDS needs to be deducted @ 30% on transfer of Settlement Amount from Segregated bank account to the Initial Escrow Account. 10.09.2012 Satyam transferred an amount equal to 30% of Settlement Amount from Initial Escrow Account in Citi Bank New York back to India and deposited TDS of ₹ 171 crore in compliance with the R .....

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Distribution Plan. 28.03.2014 First round of distribution to Authorized Claimants Applicant s arguments 12. The applicants have submitted that the transfer of funds in the Segregated Account remains the property of Satyam and Section 195 of the Act relating to the deduction of tax at source was not attracted. As per paragraph 1(x) of the Settlement Agreement the settlement amount and earnings thereon in the Initial Escrow Account also remains property of Satyam and Section 195 was not attracted .....

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es or in India. It has been further submitted that at the time when the Settlement Amount was transferred to the QSF, the identities of the eventual authorized claimants were not known and there was no payment or credit to the account of any person liable to be assessed to tax. The applicants have relied upon the judgment of Hon ble Supreme Court in the case of GE India Technology Centre Private Limited vs. CIT 2010 327 ITR 456 (SC) and UCO Bank vs. Union of India 2014 369 ITR 335 (Delhi). 13. T .....

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The applicants have also pointed out that the TDS certificates, after deduction of tax by Satyam, has not been issued so far. The issue of TDS certificates to the person from whose income-tax is deducted within a specified timeframe under Rule 3I IT Rulings, 1962 is a statutory duty. The fact that the TDS certificates have not been issued by the Satyam so far confirms that machinery provisions of TDS have failed. 15. According to the applicants the Settlement Amount is capital receipt. Complain .....

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to pursue the class action complaint and it is a capital receipt in the hands of both QSF and the authorized claimants. The applicants have further submitted that this amount is not for making good any lost income as the class action did not allege any loss of income due to normal price fluctuations in stock exchanges. On the question of distinction between capital and Revenue receipt, the applicants relied upon the judgment in Kettlewell Bullen and Co. Ltd. vs. CIT (1964) 53 ITR 261 SC and Bomb .....

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the Settlement Amount accrues in favour of QSF only on the US Court passing the final judgment and, therefore, such right accrued in the US and not in India. They have further submitted that section 5(2) (b) becomes applicable only when income is deemed to accrue or arise in India under Section 9(1)(i) of the Act, directly or indirectly- • through or from any business connection in India, or • through or from any property in India, or • through or from any asset or source of incom .....

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re right to sue is neither an actionable gain nor property of any kind and, therefore, is not a capital asset within the meaning of Section 2(14) of the Income-tax Act. Reliance has been placed on the judgment in Union of India vs. Raman Iron Foundry, AIR 1974 SC 1265. It has been further stated that a mere right to sue cannot be transferred and it has no cost of acquisition. 18. The applicants have further stated that the Settlement Amount cannot be taxed as income from any other source as the .....

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s, administrative costs etc. as provided in Paragraphs 1(dd), 17 to 24 and 26 of the Settlement have to be allowed. Therefore, attorney s fees (up to 17%), litigation expenses (up to USD 12.5 million) and litigation fund (for pursuing cases against non-settling defendants) have to be deducted. Further, QSF and the Plaintiffs are both tax residents of US. If the Settlement Amount is held to be income from Other Sources then Article 23 of the India-US DTAC gets attracted under which any income of .....

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has already been shown that it does not accrue or arise in India. As regards the contention of the Revenue that the word arising occurring in Article 23(3) of the DTAC should be interpreted to include deemed to arise as provided in Section 9(1)(i) of the Indian Income-tax Act, the applicants are of the view that such contention is entirely misconceived and contrary to ordinary rules of interpretation of Treaties. It was also pointed out that under US Treasury Regulations QSF has no liability to .....

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d paid to the Government account in accordance with the terms of settlement. According to the Revenue questions 2, 3, 4 and 5 of the applicant relate to deduction of tax under section 195 by the payer and these questions have lost their relevance because the taxes have been deducted and paid by Satyam. Therefore, these questions are no longer open to adjudication. According to the Department of Revenue there is no provision in the Income-tax Act whereby the payer-deductor having not disputed the .....

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t s counsel, the Department has given a point wise reply, the gist of which is as under:- a. The Department argues that the submission of the applicant that Section 195 is not applicable to settlement amount at any stage of proceedings is irrelevant in the facts and circumstances of the case as these exist at present. b. According to the Department issue of certificate of TDS to the payee is a matter between the payer and the payee and the Revenue, under the law, has no role to play. c. The Depa .....

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ho are taxable entities in their own rights and also in their representative capacity representing a class of Members. d. The Department has further submitted that Indian tax laws also stipulate the initiation of proceedings and making of assessments of persons in respect of income of other persons in respect of which they are assessable as Representative Assessees. The definition of assessee in section 2(7) includes representative assesses. The provisions contained in sub-clauses (i) and (iii) .....

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recipient, with regard to the settlement amount, is against the lost income . Satyam was in no way concerned with the loss of capital (Share or ADs in this case) of the claimants. The shares had already been sold by the investors on their own. The damages were determined / settled long after the sale of the asset (shares or ADs). Hence, the compensation payable by Satyam was in no way related to the loss of income generating asset (shares) but to the income which the investors would have earned .....

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some statement of the company regarding an upcoming project or some policy announcement of the respective governments regarding incentives in future, merger or acquisitions or the overall market sentiments may still keep the prices high or vice versa. ii. Compensation was not for the cost of acquisition, the compensation was worked out only for shares/ADs sold at a loss between 15.09.2008 and 06.04.09 or those not sold as on 06.04.2009. No compensation is agreed to be given to the shares/ADs so .....

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of accounts done by Satyam. It is not paid in consideration for transfer of any capital asset (which by its very definition in section 2(14) would include property of any kind extending the scope to all rights and entitlements). Hence the income not being exempt in section 10 (Chapter III) and not falling under any other head would need to be characterized as Other Income chargeable to tax under section 56(1) of the Act. i. Without prejudice and as an alternate submission, the Department has con .....

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er the place of accrual. The proximate cause of the compensation was the fraud and misrepresentation happening in India. The agreement between the parties on the amount of compensation was to compensate for the damage suffered as a direct consequence of fraud. In terms of section 9(1) (i) of the Act, any income arising directly or indirectly through or from an asset or source of income in India shall be deemed to arise in India. The word through has been clarified by the Finance Act of 2012 with .....

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has been stated by the Department that the narrow view taken by the applicant that the income deemed to arise in India under section 9 is within the ambit of Article 23 is wholly erroneous. The word arising is not defined in the Income Tax Act as well. However, section 9 extends the scope of taxable income by deeming certain income which otherwise do not arise in India as arising in India. A legal fiction created under section 9 to enlarge the scope of accrual/arising of income cannot be nullif .....

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es, if any, payable in India as per the terms of the agreement. The amount needed the custody of the US Court, if at all to be so, would be only that part of the money which is available for distribution and not the amount of statutory taxes which were to be paid, if found payable by the Authority. INFERENCES 21. We have summarized the contentions of both parties in earlier paragraphs. The following issues arise for our consideration: i. Whether questions no. 2, 3, 4 and 5 are required to be adj .....

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t amount can be characterized as capital gains or income from other sources ? At this juncture it would be appropriate to recapitulate the facts to see how the settlement agreement was arrived at. On 7.1.2009 Chairman of Satyam admitted that the balance sheet of Satyam was inflated on account of false, inflated receipts, incomes and profits over several years. Satyam also submitted statement before SEC that PWC audit reports and opinions in relation to Satyam s financial statement from the quart .....

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iff in the US Court, alleging breach of several sections of US Securities Act, 1933 and US Securities Exchange Act, 1934. The Plaintiffs claimed that as a direct and proximate result of wrongful acts and misconduct of Satyam and its auditors, the plaintiffs suffered damages for which Satyam and other defendants were liable. On 16.2.2011 a settlement agreement was arrived at between Lead Plaintiffs and Satyam whereby in lieu of Satyam paying US dollar 125 million, the Lead Plaintiffs and the clas .....

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of payments when the amount was kept in segregated account in Indian currency in India, Satyam/PWC remained owner of such account. When the amount was transferred to Initial Escrow Account in US, the amount still remained the property of Satyam and it was only when the amount was transferred to Final Escrow Account, the amount did not remain the property of the Satyam. As per paragraph 14 of the Settlement agreement all funds in the Initial Escrow Account or Final Escrow Account shall be deemed .....

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ubject to continuing jurisdiction of US Court. QSF is a separate taxable entity under US Tax Law. However, the amount transferred to QSF to resolve or satisfy a disputed law is excluded from its gross income for US tax purposes. 22. In this case the rulings were pronounced on 27.8.2012 holding that the settlement amount will be regarded as sum chargeable to tax as required under section 195 of the Act and the deduction of the tax will be made by the payer when the amount is moved from the segreg .....

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on Nos. 2, 3, 4 & 5 relate to deduction of tax at source on the transfer of the settlement amount to the QSF and on further distribution of this amount by QSF to the authorized claimants. In view of the fact that taxes have already been deducted at source in accordance with the rulings given, the Department of Revenue is correct in saying that the only question which survives is question No.1. The taxes have been deducted by the payers and refund, if any, can be paid to QFS only on filing of .....

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er the provisions of the Act. While setting aside the earlier ruling, the Hon ble High Court has also asked this authority to examine the position, first of all, in the light of whether the receipts were in the nature of capital receipts or revenue receipts and thereafter to determine as to whether those receipts were chargeable to income-tax in India. 24. Section 195 puts responsibility on the payer making payment to a non-resident to deduct taxes on any interest or any other sum chargeable und .....

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ment amount can be treated as sum chargeable to tax because other events like deduction of tax at source and rate thereof have already taken place. 25. Coming back to the nature of settlement amount, we notice that the complaint filed by Lead Plaintiffs before the US Court was in respect of the fraud committed by Satyam by filing various false annual reports and quarterly reports before US authorities for 2004 and 2005 along with a certificate of verification by PWC to artificially inflate marke .....

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y defrauded by them. It is clear that the plaintiffs have exercised their right to sue Satyam/PWC in US for damages under US laws for injury caused to them in US. The settlement agreement clarifies that Satyam entered into the settlement without any admission of any wrong doings on its part and to enhance its credibility and business opportunities in the US. On the other hand, the plaintiffs entered into the settlement recognizing the inherent risks associated in prosecuting a complex action of .....

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rt. 26. Both the applicant and the Revenue have cited a number of cases on distinction between capital and revenue receipts. Some of the important cases cited by them are:- (i) Kettlewell Bullen & Co. Ltd. V. CIT [1964] 53 ITR 261 (SC) (ii) Karam Chand Thapar and Bros. Ltd. V. CIT [1971] 80 ITR 167 (SC) (iii) CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) (iv) CIT vs Barium Chemicals 1987 31 Taxman 471 AP The issue relating to distinction between capital and revenue receipts has engaged the atte .....

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it earning source (capital assets) such receipt not being in the ordinary course of the business, it must be construed as capital receipt. In the case of Kettlewell Bullen and Company , the Apex Court analyzed a large number of cases and concluded as under:- On analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation .....

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s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. . When this general principle to identify capital or revenue receipt is applied to the facts in this case, it is clear that the nature of settlement amount in the hands of QSF is capital only because this has been received not to compensate the loss suffered but in lieu of surrender of right to sue. 27. The Revenue has argued that the nature of income has to be examined from the pers .....

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d, therefore, would be revenue because the surrender of right to sue can never qualify as income. On the one hand the Revenue is saying that the compensation was worked out only for shares/ADS sold at a loss between 15.9.2008 and 16.4.2009 or those not sold as on 6.9.2009 and on the other hand it is arguing that this represents income which investors would have earned in future. This is contradictory. Moreover, the settlement amount was not worked out on the basis of loss suffered between 15.9.2 .....

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the Indian Income-tax Act, connotes a periodical monetary return coming in with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. The settlement amount received as per the Court Order is not a periodical monetary return. As it is against surrender of right to sue , it is .....

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most important point here is that we have to consider the nature of receipt in the hands of QSF which is not doing any activity to earn such receipt which may qualify as income. QSF is not in the business of suing and seeking settlement amount. Surrender of right to sue has also been made by investors and not by QSF. Under no circumstances the theory of loss of future income would apply to QSF as neither is it owner of ADS nor it is doing any business relating to ADS. We are required to give rul .....

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ecifically includes (vi) any capital gains chargeable under section 45 within the ambit of income. Thus a capital receipts would be chargeable to tax only if it falls under section 45 of the Act (as capital gains) though capital receipt as such is not taxable. This principle was described by the Income Tax Appellate Tribunal (Mumbai) in Dhruv N. Shah v. Commissioner of Income Tax 88 ITD [2004] 118 as follows: Further, all receipts are not taxable under the Income Tax Act. Section 2(24) defines i .....

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ich has been treated as income under section 2(24). Further under section 2(24)(vi), the Legislature has not stopped with the words any capital gains . On the contrary it is obviously stated that only capital gains which are taxable under section 45 could be treated as income . In other words, capital gains not chargeable to tax under section 45 fall outside the definition of income in section 2(24). Therefore, the words chargeable under section 45 are very important. So, whenever an amount whic .....

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y of any kind held by an assessee, whether or not connected with his business or profession . Section 6 of the Transfer of Property Act states that property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force. Section 6 (e) notes that a mere right to sue cannot be transferred . Therefore, a right to sue is property and thus Capital Asset as defined under section 2(14) of the Act but is not transferable. There cannot be any tran .....

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and a mere right to sue. Before the amendment, only the right to sue for damages arising out of a tortuous act fell within the ambit of the said clause. The right to sue arising ex-contractual, therefore, did not fall within the mischief of the clause even if it were a mere right to sue. After the amendment a mere right to sue, whether arising out of tortuous act or ex- contractual is not transferable. - "Chagla C.J. had an occasion to consider this aspect of the law in Iron & Hardware .....

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n order that there should be an actionable claim, there must be a debt in the sense of an existing obligation. But inasmuch as a breach of contract does not result in any existing obligation on the part of the person who commits the breach, the right to recover damages is not an actionable claim and cannot be assigned. - In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to .....

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s a result of the fiat of the court. Therefore, no pecuniary liability arises till the court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the court is doing is ascertaining a pecuniary liability which already existed. The court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination, there is no liabi .....

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this position is made amply clear by the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. " The Supreme Court endorsed the views of J. Chagla "This statement in our view represents the correct legal position and has our full concurrence. If right to sue cannot be transferred and it has no cost of acquisition, the question of considering the same for the purpose of capital gains u/s 45 of the Act would .....

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to the decision of this court in Vanias case. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression extinguishment of any rights therein to such extinguishment on account of transfers or to the view that the expression extinguishment of any rights therein cannot be extended to mean the extinguishment .....

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tive from 1.4.1962. This explanation reads as under:- Explanation 2 - For the removal of doubts, it is hereby clarified that transfer includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding t .....

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had considered this issue and held that the Charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. The Apex Court also held that none of the provisions pertaining to the head capital gains suggests that they include an asset in the acquisition of which no cost of acquisition can be conceived. It is clea .....

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t and cannot be characterized as capital gains. It is only as an alternative argument that they have brought the issue of capital gains. 32. According to Revenue the settlement amount is chargeable to tax as income from other sources under the provisions of section 56(1) of the Act. According to Revenue all kinds of income, which are not exempt and which are not chargeable under other heads (profit, salary, business and capital gains) would be taxable as other income and the amount paid by Satya .....

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contemplates only such source which does not specifically fall under any one of other four heads of income i.e. Salaries, Income from house property, profit or gains of business or profession, or capital gains. To come within the ambit of this section the following conditions have to be fulfilled: a) There has to be an income (under section 2(24) read with section 4 and 5 of the Act). b) That income should not be exempt under section 10 to 13A of the Act. c) That income is neither salary income, .....

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erred to Final Escrow Account. Before this and up to the stage of Initial Escrow Account the amount remains the property of Satyam. After it becomes QSF the amount remains under the jurisdiction of the US court and the amount is to be utilized only for the purpose of distribution to the authorized claimants. QSF has no ownership over the amount. In the circumstances the issue of QSF being a separate legal entity as per US law or being assessable as representative assessee in India becomes irrele .....

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