TaxTMI 
TaxTMI 
2025 (4) TMI 1616
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....4/- 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 Gujarat High Court in the case of Baroda Cement and Chemical Ltd, are not applic....
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....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% of the total consideration payable by the assessee. Later on, the said project did not materialize and was aborted and accordingly, the builder ....
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....ue" 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 commercial user. In fact, the location where the commercial premises were to be provided, residential buildings are being put up there. The Defendant, having made significant progress in the construction of the Project and also having created other party rights....
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....nd 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 consent decree of the Hon'ble Bombay High Court, in para 9, it has been clearly stated that since specific performance of allotment of 25,000 sq.ft (salable area) of the commercial premises is not possible, damages in lieu of the plaintiff's right to sue would thus be the only relief....
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.... 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 transferred as per law. 14. Before coming to the decision of the Hon'ble Bombay High Court as has been referred and relied upon by the ld. PCIT in the case of CIT vs. Vijay Flexible Containers supra, there is another decision of the Hon'ble Bombay High Court in the case of CIT vs. Abbasbhoy D Deghghamwala, 195 ITR 28 (Bom), which held otherwise. The relevant gist of the judgme....
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....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 the suit and but for the compromise, there would have been prolonged litigation and uncertainty about fate of litigation. ix. The right to receive damages accrued on the date of consent decree only and not before. 15. In the case of the assessee also MOU was not capable of specific performance under the Specific Relief Act and was confirmed by the Hon'ble Bombay High Court vide para 9 of the consent decree dated 10/07/2017 and it was decreed that the only right available to the assessee....
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.... 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 Abbasbhoy A. Dehgamwalla (supra) noted that once the Assessee's claim to specific performance of the agreement was rejected, then, the alternative claim for damages for breach of agreement even if worded the receipt of that sum could be taxed as the Assessee's income under the head capital gains. That could not have been taxed as such after the Assessee's right to obtain specific performance was extinguished when the Court refused to grant such a relief. 25. Thereafter, the alternate argument of the Revenue that the right to recei....
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.... 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 lightly accepted the terms and approved the same. It has performed a conscious act and in terms of Order XXIII Rule 3 of the Civil Procedure Code, 1908. This clearly means that the relief was refused. One cannot then pick up a stray sentence or observation from the Judgment of this Court and apply it to the given fact situation. We find that the present case was similar to that of Abbasbhoy A. Dehgamwalla (supra). In this case this Court declared that the Plaintiff/Assessee has no right, title or interest in the immovable property. That specific perfor....
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.... 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 Tribunal was not justified in holding that the order passed by the Assessing Officer under section 143(3) read with section 144 A was erroneous and prejudicial to the interest of the Revenue and, therefore, the Commissioner of Income Tax was justified in exercising the jurisdiction under section 263 of the IT Act. (ii) The answer is in favour of the Assessee and against the Revenue by holding that the amount of compensation received by the Assessee/Appellant was not liable to capital gains tax. (iii) It is held that the Appellant's case was covered by the ratio of this Court in the case of Commissi....
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....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 ITR 215] (Del.) Facts: Pursuant to agreement to sell, taxpayer acquired right to the property under construction from builder. Final sale deed was to be executed on completion of construction. Agreement provided purchaser with a right to specific performance. On builder's failure to execute sale deed post completion of construction, taxpayer filed suit for injunction against the builder restraining him for selling or alienating property. After dispute being referred to arbitration, taxpayer was awarded certain sum as damages for breach of contract. Consequently, taxpayer agreed to give up his claim for specific performance enabling builder to transfe....
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.... 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 be considered as capital asset and hence, there is no question of it resulted in transfer by extinguishment of taxpayer's right. Also, compensation received does not represent consideration for transfer as for computation under S.45 the taxpayer ought to have incurred cost. If the Revenue fails to show that the taxpayer had incurred a cost as in the present case, it would be impossible to compute the income chargeable to tax under the head 'capital gains' and what the Revenue would be charging would be the capital value of the asset and not any profit or gain. Therefore damages cannot be held to be chargeable as capital gains. Basis the above, damages were not liable to capital gains tax levy. Relevant Extracts: "......