2018 (9) TMI 1239 - AT - Income Tax

Addition denying the indexation on cost of acquisition while computing the long term capital gains - Held that - A simple perusal of the orders of the authorities below suggest that the cost of acquisition of ₹ 4,19,533/- has been admitted and the long term capital gain have also been accepted. Therefore, the benefit of statutory indexation cost to offset the effect of inflation cannot be denied. Once, the cost of acquisition is determined and the land under sale was found to be a long term capital asset, indexation of cost of acquisition becomes automatic as per the statutory provisions of the Act. No rationale for denial of indexation benefits. Therefore, the aforesaid addition of ₹ 1,51,988/- arising on account of such denial requires to be reversed. The AO is directed to delete the addition on this score. Receipt towards compensation in lieu of right to sue - Treatment as capital receipt OR revenue income - Claim of the Revenue that amount received towards relinquishment of such right is purely a revenue receipt - Held that - We are disposed to hold that the receipt towards compensation in lieu of right to sue is of capital nature which is not chargeable to tax under s.45 of the Act. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/compensation to shun the possible legal battle. The intrinsic point with respect to accrual of right to sue has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. It is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid litigation. This amply shows the existence of right to sue in the perception of the defaulting party. As find from the facts of the case that assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share in knowhow, patent, copyright, trademark, license etc. as specified under s.28(va) of the Act enacted for its taxability under the head of business income. Consequently, we are of the considered view that compensation received in lieu of right to sue could not be regarded as revenue receipt. Therefore, we find merit in the appeal of the assessee.

Issues Involved:
1. Addition on account of Long term capital gain treating as wrong claim.
2. Addition on account of exempt income claimed treating the same as business income.

Issue-wise Detailed Analysis:

1. Addition on account of Long term capital gain treating as wrong claim:

The first issue concerns the addition of ?1,51,988/- by denying the indexation on the cost of acquisition while computing long-term capital gains. The appellant argued that the cost of acquisition of the land, which was reflected in the balance sheet for many years, was accepted by the Assessing Officer (AO). Despite this, the AO denied the indexation benefit, which the appellant contended was inexplicable. The respondent relied on the AO's order.

The Tribunal observed that the cost of acquisition of ?4,19,533/- was admitted, and the long-term capital gain was accepted. Therefore, the statutory indexation cost to offset inflation effects should not be denied. The Tribunal found no rationale for the denial of indexation benefits and directed the AO to delete the addition of ?1,51,988/-. Consequently, Ground No.1 of the assessee’s appeal was allowed.

2. Addition on account of exempt income claimed treating the same as business income:

The second issue pertains to the treatment of capital receipt claims as revenue income by the AO. The appellant entered into a development agreement, creating a right in the property/land. The landowner decided to sell the land to other parties, breaching the development agreement. The appellant argued that the only recourse was to file a suit for specific performance, which is a ‘right to sue’. Under Section 6(e) of the Transfer of Property Act, a ‘right to sue’ is not transferable and does not have any cost of acquisition, thus not falling within the definition of a ‘capital asset’ under Section 2(14) of the Income Tax Act.

The appellant cited several judicial precedents, including the Hon’ble Gujarat High Court’s decision in Baroda Cement & Chemicals Ltd. vs. CIT, which stated that a ‘right to sue’ is not a property and therefore not a capital asset. The appellant contended that the compensation received for relinquishing the ‘right to sue’ is a non-taxable capital receipt.

The Tribunal carefully considered the submissions and the judicial precedents. It concluded that the damages received for breach of the development agreement are capital in nature and not chargeable to tax. The Tribunal referred to the Hon’ble Gujarat High Court’s decision, which clarified that a ‘right to sue’ is not an actionable claim and cannot be transferred. Therefore, the compensation received is not assessable as capital gains.

The Tribunal also addressed the Revenue's contention that the compensation should be treated as revenue receipt. It noted that the compensation was received for relinquishing the ‘right to sue’ and not for terminating development rights. The Tribunal found that the compensation does not fall under Section 28(va) of the Income Tax Act, which pertains to business income. Consequently, Ground No.2 of the assessee’s appeal was allowed.

Conclusion:

Both grounds of the appeal were allowed by the Tribunal. The addition of ?1,51,988/- on account of long-term capital gain was reversed, and the compensation received for relinquishing the ‘right to sue’ was held to be a non-taxable capital receipt. The appeal of the assessee was allowed in full.

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