2019 (8) TMI 768 - AT - Income Tax

Taxability of compensation for giving-up of the litigation for land - right to sue - capital OR revenue receipt - additional compensation was paid in addition to sale consideration as per sale deed - several litigation was going on in respect of land, firstly encroached by some slum lords by slum later slum redevelopment area - amicable resolution of the dispute by 'way of filing Consent Terms by both the parties was reached before the Hon'ble Supreme Court HELD THAT - The additional compensation of ₹ 9 Crores was payable to the assessee only pursuant to consent terms dated 03/01/2012 filed before Hon ble Supreme Court. As per Clause-5 of the consent terms, the assessee was to be paid the said compensation for time, money and effort put in by him to challenge the acquisition of the suit property and for pursuing litigation before the Authorities, Hon ble Bombay High Court and Hon ble Supreme Court. The additional compensation was towards time, cost and effort of the assessee in pursuing the litigation. This being so, we are unable to concur with the submissions of Ld. DR that the said compensation was part and parcel for the sale transaction and received by the assessee as a consideration of sale of property. On the other hand, the learned CIT(A), in our considered opinion, has clinched the issue in the proper perspective. As rightly held, there could not be any transfer of a right to sue under Indian Law and any capital receipt arising from a right to sue cannot thus be considered capital gains u/s 45. Additionally, the cost of the said right being indeterminable, the charging Section would fail as per the cited decision of Hon ble Supreme Court rendered in CIT V/s B.C.Srinivasa Shetty 1981 (2) TMI 1 - SUPREME COURT . Therefore, no infirmity could be found on the issue in adjudication done by learned CIT(A). The same is further fortified by the decision of this Tribunal rendered in Sushmita Sen V/s ACIT 2018 (11) TMI 792 - ITAT MUMBAI wherein it has been held that compensation received for loss of reputation and not to initiate civil or criminal proceedings would be capital in nature. Similar is the decision in ACIT V/s Jackie Shroff 2018 (9) TMI 1006 - ITAT MUMBAI wherein it has been held that compensation / damages received for withdrawal of criminal complaint would be capital receipt and could not be treated as income u/s 2(24). This decision places reliance on the decision of Hon ble Bombay High Court rendered in CIT V/s Amar Dye Chem Ltd. 1993 (10) TMI 366 - BOMBAY HIGH COURT - the appeal as well as cross-objections stands dismissed

Summary

Issues Involved:
1. Whether the ?9,00,00,000/- received by the assessee is in the nature of compensation or part of the sale consideration.
2. Whether the compensation received can be considered as capital gains under Section 45 of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Nature of ?9,00,00,000/- Received by the Assessee
The primary issue was whether the ?9,00,00,000/- received by the assessee was compensation for litigation efforts or part of the sale consideration for the property. The assessee, a lawyer, sold a disputed plot of land for ?4 Crores and received an additional ?9 Crores as per consent terms approved by the Supreme Court. The Assessing Officer (AO) included this additional amount in the sale consideration, treating it as taxable long-term capital gains. However, the assessee argued that the ?9 Crores was compensation for his time, effort, and costs incurred over decades of litigation and not part of the sale consideration. The CIT(A) ruled in favor of the assessee, stating that the ?9 Crores was for the time, effort, and cost put in by the assessee and not for the sale of the property.

Issue 2: Taxability of Compensation as Capital Gains
The CIT(A) examined whether the ?9 Crores could be taxed as capital gains under Section 45 of the Income Tax Act. The CIT(A) noted that the compensation was for the "right to sue," which is not a transferable asset under Indian law. The CIT(A) referenced Section 6(e) of the Transfer of Property Act, 1882, which states that a mere right to sue cannot be transferred. Additionally, the CIT(A) cited the Supreme Court's decision in CIT v. B.C. Srinivasa Shetty, which held that if the cost of acquisition of an asset is indeterminable, the computation provisions of Section 48 fail, and consequently, the charging provision of Section 45 also fails. Therefore, the ?9 Crores received by the assessee could not be taxed as capital gains.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, agreeing that the ?9 Crores was compensation for the assessee's litigation efforts and not part of the sale consideration. The Tribunal noted that the compensation was specifically for the time, effort, and costs incurred by the assessee in challenging the acquisition of the property, as per the consent terms approved by the Supreme Court. The Tribunal concurred that the "right to sue" is not a capital asset and cannot be transferred, and any capital receipt arising from it cannot be considered capital gains under Section 45. The Tribunal also referenced previous decisions, including Sushmita Sen v. ACIT and ACIT v. Jackie Shroff, which supported the view that compensation for loss of reputation or withdrawal of complaints is capital in nature and not taxable as income.

Conclusion:
The appeal by the revenue was dismissed, and the cross-objections by the assessee were rendered infructuous. The Tribunal confirmed that the ?9 Crores received by the assessee was compensation for litigation efforts and not taxable as capital gains or income from other sources. The order was pronounced on 09th August 2019.