13 Sep 2023 10:30 AM GMT
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the damage on account of the right to sue is a capital receipt not chargeable to tax.The bench of Amit Shukla (Judicial Member) and Amarjit Singh (Accountant Member) has observed that 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...
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the damage on account of the right to sue is a capital receipt not chargeable to tax.
The bench of Amit Shukla (Judicial Member) and Amarjit Singh (Accountant Member) has observed that 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" under Section 5 of the Transfer Property Act. Transfer of property means the act by which a person conveys property to another, and to transfer property is to perform such an act. The mere right to sue may or may not be property, but it certainly cannot be transferred as per law.
The appellant/assessee is an individual who entered into an MOU with Aadi Properties LLP 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.
The payment by cheque drawn on the Bank of India was paid by the assessee. The amount was nearly 2.33% of the total consideration payable by the assessee. Later on, the project did not materialise and was aborted, and accordingly, the builder cancelled the allotment, returning the advance that was not deposited in the bank by the assessee.
The assessee then filed suit before the Bombay High Court, claiming damages. A consent decree was passed by the Bombay High Court on the basis of consent terms filed by the parties. As per the consent decree, an amount was agreed to be paid by Aadi Properties LLP by way of damages for its inability to provide the commercial space and the assessee not waiving the "right to sue".
The case of the assessee was selected for scrutiny under the E-assessment Scheme 2019 to verify the claim of exemption. In the course of assessment proceedings, the AO issued notices from time to time inquiring about whether the receipts towards compensation under the consent decree were taxable or not.
The Assessing Officer completed the assessment under Section 143(3), accepting the return of income, and confirmed that the capital receipt received of Rs. 7,65,26,000 was not taxable.
The PCIT in his revisionary jurisdiction issued a notice again on the same issue of taxability of receipt of compensation of Rs. 7,65,26,000. In the show-cause notice, PCIT held that the assessment order passed by the AO was erroneous in so far as it was prejudicial to the interest of the revenue as per clause (d) of Explanation 2 to Section 263.
The tribunal noted that specific performance of the MOU is not possible and that it has been agreed that damages shall be paid by the defendant to the plaintiff in lieu of the plaintiff's right to sue.
The ITAT held that the right that a person acquires upon the establishment of a breach of contract is a mere right to sue. Despite the wildest possible definition of capital asset in Section 2(14), a right to a capital asset must fall within the expression 'property of any kind'. Section 6 of the Transfer of Property Act, of 1882, uses the same expression 'property of any kind' in the context of the transferability of any property under that Act. Section 6 of the Transfer of Property Act, of 1882, makes an exception for a right to sue while defining property of any kind. The right to sue for damages is held to not be an actionable claim and cannot be assigned.
Case Title: Virendra Bhavanji Versus PCIT
Case No.: ITA No.1654/Mum/2023
Counsel For Appellant: Pradip Kapasi
Counsel For Respondent: Zeenia Handa
Click Here To Read The Order