DCIT Vs Kekin Kunverji Chheda (ITAT Mumbai)
Revenue filed appeals against CIT(A)’s orders deleting additions made on account of compensation received by the assessees (Kekin Chheda and Kaushal Agarwal) from a real estate developer pursuant to a Bombay High Court consent decree, which AO treated as capital gains.
Assessees had entered into MoUs in 2010 with Aadi Properties LLP for commercial space booking. The project was later aborted. Assessees filed suits for damages before the Bombay High Court. A Consent Decree dated 10.07.2017 awarded compensation (e.g., ₹7.19 Cr to Kekin Chheda) in lieu of the “right to sue“, due to impossibility of specific performance. AO taxed the amounts as capital gains, treating the MoU rights as a “transferable capital asset.”
CIT(A) , referring to Section 6(e) of the Transfer of Property Act, which prohibits transfer of a “mere right to sue” and relying on ITAT Mumbai’s decision in Virendra Gala (also a party to the same decree) and held that the right to sue is not a “capital asset” u/s 2(14).
ITAT, relying on established case law and multiple prior rulings (including in the same set of cases), held that the compensation was for surrender of a “mere right to sue”, which is not a transferable capital asset under the Transfer of Property Act, and hence not taxable u/s45 . The compensation was not for the transfer of any capital asset, but for surrender of an unfulfilled contractual right, i.e., a “mere right to sue”, which Cannot be transferred as per Section 6(e) of the Transfer of Property Act and is not a “capital asset” u/s2(14). Thus, its extinguishment does not amount to a “transfer” u/s2(47). The consent decree explicitly confirmed that the damages were awarded due to impossibility of specific performance and were in lieu of the right to sue.
