TMI Blog2018 (9) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... to hold that the receipt towards compensation in lieu of ‘right to sue’ is of capital nature which is not chargeable to tax under s.45 of the Act. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/compensation to shun the possible legal battle. The intrinsic point with respect to accrual of ‘right to sue’ has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. It is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid litigation. This amply shows the existence of ‘right to sue’ in the perception of the defaulting party. As find from the facts of the case that assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share in knowhow, patent, copyright, trademark, license etc. as specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damages for relinquishment of right to sue in the Courts of law would only be a capital receipt in the hands of the appellant company not subject to tax. 3. Ground No.1 relates to addition of ₹ 1,51,988/- by denying the indexation on cost of acquisition while computing the long term capital gains. 4. Addressing the issue, the learned AR for the assessee submitted that the limited controversy on the issue pertains to denial of indexation benefits on the cost of acquisition of land under sale giving rise of the long term capital gains. The learned AR pointed out that notwithstanding the fact that documents in respect of land acquired 7 8 years back could not be produced, the land was duly reflected in the balance sheet for last many years. It was thereafter contended that the AO has duly accepted the long term capital gain on sale of such land parcels. This being so the cost of acquisition of ₹ 4,19,533/- requires to be accepted as sacrosanct. The AO has granted long term capital gain based on the aforesaid amount of cost of acquisition but however has denied indexation benefit which is inexplicable. Per contra, the learned DR relied upon the order of the AO CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of Property Act. It was further contended that right to sue also does not have any cost of acquisition. The learned AR professed that there is no property in such right to sue as discussed in wide ranging decisions rendered by the Courts and Tribunals. Such right to sue does not fall within the sweep of definition of capital asset under s. 2(14) of the Act. This apart, the right to sue is a personal right and is not susceptible to transfer for its taxability. Consequently, the damages received from the potential purchaser for such relinquishment of right to sue in the Courts of law for breach of development agreement is clearly a non taxable capital receipt. 8.1 The learned AR submitted that the issue is no longer res integra and is squarely covered in favour of the assessee by following the decisions including the decision of the Hon ble Jurisdictional High Court: i. Baroda Cement Chemicals Ltd. vs. CIT [1986] 158 ITR 636 (Gujarat) ii. CIT vs. Ashoka Marketing Ltd. [1986] 164 ITR 664 (Calcutta) iii. CIT vs. J. Dalmia [1985] 149 ITR 215 (Delhi) iv. Shri Sekhar G. Patel L/h. of Late Shri Govindbhai C. Patel ITA No. 1997/Ahd/2010 (Ahmedabad T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the case laws cited. The substantive question that arises for consideration is whether damages received by the assessee for breach of development agreement are capital in nature or otherwise chargeable to tax. It is the case of the assessee that the compensation/damages received by the assessee from the purchaser on transfer of land under development agreement is capital in nature. It is the case of the assessee that the only right that accrues to the assessee who complains of the breach is right to file a suit for recovery of damages from the defaulting party. The breach of contract does not give rise to any debt and therefore a right to recover damages is not assignable because it is not a chose-in action. For actionable claim to be assigned, there must be a debt in the sense of an existing obligation to consider it to be an actionable claim. It is the case of assessee that the assessee had a mere right to sue which is neither a capital asset within the meaning of Section 2(14) of the Act nor is capable to being transferred and therefore not chargeable under s.45 of the Act. 10.1 The essence of long list of judicial pronouncements cited on behalf of assessee is that Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of this Court in CIT vs. R.M. Amin (1971) 82 ITR 194 (Guj). In that case this Court observed that the use of the word 'include' in the definition of the word 'transfer' in s. 2(47) was intended to enlarge the meaning of 'transfer' beyond its natural import so as to include extinguishment/relinquishment of rights in the capital asset for the purpose of s. 45 of the Act. Since the transfer contemplated by s. 45 is one as a result whereof consideration has passed to the assessee or has accrued to him, extinguishment of the right must relate to that 'capital asset', corporeal or incorporeal. It is, therefore obvious that a transfer of a capital asset in order to attract liability to tax under the head 'Capital gains' must be a 'transfer' as a result whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by s. 48 of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, there must be receipt of consideration for such extinguishment to attract liability to tax. Now, in leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recover damages is not an actionable claim and cannot be assigned.' Proceeding further, the learned Chief Justice stated (p. 425) : '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 the contract who complains of the breach has any amount due to him from the other party. As already stated, the only right which he has the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as 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 exists. The Court in the first place must decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the receipt towards compensation in lieu of right to sue is of capital nature which is not chargeable to tax under s.45 of the Act. 11. At this juncture, it may be pertinent to observe that the Revenue has inter alia questioned the basis giving rise to the cause of action for creation of right to sue . We do not see any purport in such aspect. A development agreement was executed which enabled the assessee to utilize the land for construction and for sharing of profits. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/compensation to shun the possible legal battle. The intrinsic point with respect to accrual of right to sue has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. It is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid lit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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