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2023 (9) TMI 746 - AT - Income TaxRevision u/s 263 - Nature of receipt - compensation received by the assessee as per the consent decree of the Hon ble Bombay High Court - taxability of receipt of damages which was claimed as capital receipt not chargeable to tax, whereas the ld. PCIT has held it to be in the nature of income - HELD THAT - 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. In the case of the assessee MOU was not capable of specific performance under the Specific Relief Act and was confirmed by the Hon ble Bombay High Court vide consent decree dated 10/07/2017 and it was decreed that the only right available to the assessee was the right to sue for damages and the compensation was paid under the decree towards the said right to sue. As considering judgments of various High Courts including the two judgments of the Hon ble Jurisdictional High Court in favour of the assessee, the impugned order of the ld. PCIT cancelling the assessment order solely relying on the judgment of M/s. Vijay Flexible Containers 1989 (9) TMI 16 - BOMBAY HIGH COURT which is not applicable on the facts of the assessee s case cannot be sustained and is hereby set aside and the order of the Assessing Officer accepting the claim is upheld. Also once the ld. AO has examined this issue threadbare relying upon the various judgments of the High Court which was cited before him accepting the claim, then ld. PCIT cannot set aside the assessment order within the scope of u/s. 263 is not adjudicated as we have already held on merits that the judgment of the ld. PCIT is incorrect in law. Accordingly, the appeal of the assessee is allowed.
Issues Involved:
1. Taxability of receipt of damages claimed as a capital receipt. 2. Validity of the PCIT's order under Section 263 of the Income Tax Act. Summary: Taxability of Receipt of Damages: The primary issue was whether the compensation of Rs. 7,65,26,000/- received by the assessee as per the consent decree dated 10/07/2017 from the Hon'ble Bombay High Court, based on the consent terms filed by the parties, could be considered taxable income or a capital receipt not chargeable to tax. The assessee claimed that this compensation was a capital receipt for the "right to sue," which is not taxable. The Assessing Officer (AO) accepted this claim during the assessment proceedings under Section 143(3) and confirmed that the receipt was not taxable. Validity of the PCIT's Order under Section 263: The Principal Commissioner of Income Tax (PCIT) invoked his revisionary jurisdiction under Section 263, asserting that the AO's order was erroneous and prejudicial to the interests of the revenue. The PCIT argued that the AO failed to consider the decision of the Bombay High Court in the case of CIT vs. Vijay Flexi Containers, which the PCIT believed made the assessment order erroneous. The PCIT set aside the AO's order and directed a fresh assessment. Tribunal's Analysis and Decision: 1. Right to Sue Not Transferable: The Tribunal emphasized that under Section 6 of the Transfer of Property Act, a mere "right to sue" cannot be transferred. The compensation received was due to the inability to perform the specific contract, thus falling under the "right to sue," which is not a taxable capital asset. 2. Precedent Cases: The Tribunal referred to several judgments, including CIT vs. Abbasbhoy D Deghghamwala and Sterling Construction Investment vs. ACIT, which supported the assessee's position that compensation for the right to sue is a capital receipt and not taxable. 3. Inapplicability of Vijay Flexi Containers Case: The Tribunal distinguished the present case from the Vijay Flexi Containers case, noting that in the latter, the specific performance of the contract was possible, and the compensation was for giving up the right to claim specific performance. In contrast, in the present case, specific performance was not possible, and the compensation was solely for the right to sue. 4. High Court Judgments: The Tribunal cited various High Court judgments, including those from the Delhi and Gujarat High Courts, which consistently held that compensation for the right to sue is not taxable as capital gains. Conclusion: The Tribunal concluded that the PCIT's order under Section 263 was not sustainable as it erroneously relied on the Vijay Flexi Containers case, which was not applicable to the facts of the present case. The Tribunal set aside the PCIT's order and upheld the AO's original assessment, confirming that the compensation received was a capital receipt not chargeable to tax. The appeal of the assessee was allowed.
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