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Tax Publishers Compensation for foregoing right to sue is it a capital asset taxable as capital gains *Facts:* Arising out of a search on the assessee firm a consent decree adjudicated by Mumbai high court was unearthed whereby assessee was found to be in receipt of monetary payouts by one RA ventures realty Ltd. to the tune of Rs. 134 crores. On investigation, way back in 1974 assessee entered into a purchase agreement to buy a said prime property in Mumbai with a right to sue for specific performance in the event the sale did not materialize. It so happened that the seller gave the property to the tenants and a suit for specific performance was lodged by the assessee firm. As part of an amicable solution a consent decree was signed dated 28-01-2011 whereby in lieu of the right to sue which will be withdrawn by the assessee firm a sum of Rs. 135 crores with interest etc. would be paid. Assessee offered the interest to tax as income from other sources. AO held that right to sue in the property was a relinquishment/extinguishment of a right in a capital asset and subjected it to capital gains under section 45 read with 2(14). CIT(A) upheld the same. Assessee's plea was right to sue is not a transferable and a capital asset and it was only a capital receipt. On appeal - Held in favour of the assessee that the right to sue did not bring forth any capital asset and accordingly there was no capital gains which was taxable. Rest of the protective assessments made were also quashed. *Applied:* Sterling Construction & Investments v. ACIT, (2015) 374 ITR 474 (Bom.) : 2015 TaxPub(DT) 2323 (Bom-HC) *Ed. Note:* Reference be made to the Flash No. 153/Isvakoo Grand Plaza decision dated 10-05-2023 where a detailed discussion on this topic is found on right to sue whether it is a capital asset or otherwise. It is quite likely that the upcoming budget 2024 will plug capital asset definition with a clause "right to sue or right not to sue" as well as a capital asset. "Right of pre-emption was not an enforceable right it merely gave an offer to the assessee. The same accordingly could not be read as one creating extinguishing/relinquishing rights in rem on a property. The right to sue is not a transferable right as per section 6(e) of the Transfer of Property Act, 1882. The right of pre-emption also got extinguished in the mediation process as there was no court judgment holding that the compensation arose out of cancellation of such rights of pre-emption". *Case:* Mahendra Corpn. v. Dy. CIT 2023 TaxPub(DT) 3276 (Mum-Trib)

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Compensation for foregoing right to sue is it a capital asset taxable as capital gains

Facts:

Arising out of a search on the assessee firm a consent decree adjudicated by Mumbai high court was unearthed whereby assessee was found to be in receipt of monetary payouts by one RA ventures realty Ltd. to the tune of Rs. 134 crores. On investigation, way back in 1974 assessee entered into a purchase agreement to buy a said prime property in Mumbai with a right to sue for specific performance in the event the sale did not materialize. It so happened that the seller gave the property to the tenants and a suit for specific performance was lodged by the assessee firm. As part of an amicable solution a consent decree was signed dated 28-01-2011 whereby in lieu of the right to sue which will be withdrawn by the assessee firm a sum of Rs. 135 crores with interest etc. would be paid. Assessee offered the interest to tax as income from other sources. AO held that right to sue in the property was a relinquishment/extinguishment of a right in a capital asset and subjected it to capital gains under section 45 read with 2(14). CIT(A) upheld the same. Assessee's plea was right to sue is not a transferable and a capital asset and it was only a capital receipt. On appeal -

Held in favour of the assessee that the right to sue did not bring forth any capital asset and accordingly there was no capital gains which was taxable. Rest of the protective assessments made were also quashed.

Applied:

Sterling Construction & Investments v. ACIT, (2015) 374 ITR 474 (Bom.) : 2015 TaxPub(DT) 2323 (Bom-HC)

Ed. Note: Reference be made to the Flash No. 153/Isvakoo Grand Plaza decision dated 10-05-2023 where a detailed discussion on this topic is found on right to sue whether it is a capital asset or otherwise. It is quite likely that the upcoming budget 2024 will plug capital asset definition with a clause "right to sue or right not to sue" as well as a capital asset.

"Right of pre-emption was not an enforceable right it merely gave an offer to the assessee. The same accordingly could not be read as one creating extinguishing/relinquishing rights in rem on a property. The right to sue is not a transferable right as per section 6(e) of the Transfer of Property Act, 1882. The right of pre-emption also got extinguished in the mediation process as there was no court judgment holding that the compensation arose out of cancellation of such rights of pre-emption".

Case: Mahendra Corpn. v. Dy. CIT 2023 TaxPub(DT) 3276 (Mum-Trib)