Right to sue for damages is a capital receipt and not taxable: ITAT Mumbai

 

Facts:

1. The 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 for consideration of Rs. 10,75,00,000/-.

2. Accordingly, payment of Rs. 25,00,000/- 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.

3. 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.

4. Thereafter, 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’.

5. AO completed the assessment u/s. 143(3), accepting the return of income, and confirmed that the capital receipt received of Rs. 7,65,26,000 was not taxable.

6. PCIT invoking revisionary jurisdiction u/s 263 issued 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.

ITAT Mumbai held as below:

1. The right that a person acquires upon the establishment of a breach of contract is a mere right to sue.

2. 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’.

3. 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.

4. The right to sue for damages is held to not be an actionable claim and cannot be assigned.

5. Thus, damages on account of right to sue is a capital receipt and accordingly not chargeable to tax.

 

 

The copy of the order as under:

1693813079-ITA No.1654-2023 Virendra Bhavanji Gala (1)