1985 (12) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received for breach of contract under the head 'Capital gains'.
2. Definition and transferability of "capital asset" and "actionable claim".
3. Applicability of sections 2(14), 2(47), 45, and 48 of the Income-tax Act, 1961.
4. Interpretation of section 6(e) of the Transfer of Property Act.

Summary:

1. Taxability of Compensation Received for Breach of Contract:
The primary issue was whether the compensation of Rs. 1,40,000 received by the assessee for breach of contract could be taxed under the head 'Capital gains'. The Tribunal had held that the right acquired by the assessee was a capital asset u/s 2(14) of the Income-tax Act, and its extinguishment amounted to a "transfer" u/s 2(47), making the compensation taxable as capital gains. However, the High Court concluded that the compensation received was not for the transfer of a capital asset but for the breach of contract, and thus, it could not be taxed under the head 'Capital gains'.

2. Definition and Transferability of "Capital Asset" and "Actionable Claim":
The court examined whether the right to sue for damages constituted a "capital asset". It was determined that once a contract is breached and the subject matter is disposed of, the only right that survives is the right to sue for damages, which is not transferable u/s 6(e) of the Transfer of Property Act. This right is not an actionable claim and thus, not a capital asset that could be transferred.

3. Applicability of Sections 2(14), 2(47), 45, and 48 of the Income-tax Act, 1961:
The court analyzed the definitions of "capital asset" and "transfer" under sections 2(14) and 2(47) respectively. Section 45 deals with the chargeability of capital gains tax on the transfer of a capital asset, and section 48 provides for the computation of capital gains. The court held that since the right to sue for damages was not a capital asset, there could be no transfer of such an asset, and thus, sections 45 and 48 were not applicable.

4. Interpretation of Section 6(e) of the Transfer of Property Act:
The court referred to section 6(e) of the Transfer of Property Act, which states that a mere right to sue cannot be transferred. The court concluded that the right to sue for damages due to breach of contract falls under this category and is, therefore, non-transferable. This interpretation was supported by various judicial precedents, including decisions from the Privy Council and the Supreme Court.

Conclusion:
The High Court answered the reference in the negative, holding that the amount received by the assessee by way of damages for breach of contract of sale of movable property was not chargeable to tax under the head 'Capital gains'. The reference was disposed of with no order as to costs.