Ramesh Seth Legal Heir Vs National Faceless Appeal Centre (ITAT Mumbai)
Summary: ITAT Mumbai partly allowed the appeal of Ramesh Seth, legal heir of late Samrathmal Phoolchand Seth, and deleted an addition of ₹55.75 crore assessed as “Income from other sources” for Assessment Year 2009-10. The principal controversy concerned consideration received pursuant to a Deed of Assignment executed in June 2008 under which the assessee assigned rights, claims, benefits and entitlements arising from and connected with Suit No. 783 of 1987 pending before the Bombay High Court. The Tribunal held that, whether the rights surrendered represented an assignable proprietary or beneficial interest or merely a litigative right/right to sue, the receipt retained its capital character and could not be taxed in its entirety under section 56 of the Income-tax Act, 1961.
The underlying dispute related to M/s S.P. Building Corporation and a property at Mahalaxmi Estate, Carmichael Road, Mumbai. Late Samrathmal Seth entered into an agreement dated 14.07.2006 with Housing Development and Infrastructure Ltd. for aggregate consideration of ₹69 crore, of which ₹13.25 crore was payable directly to tenants and other persons, leaving ₹55.75 crore receivable by the assessee. The assessee disclosed the transaction for AY 2007-08 under the head “Capital gains”, adopted the cost as on 01.04.1981 at ₹11.85 crore and, after indexation, returned a long-term capital loss of ₹5,75,15,000. A registered Deed of Assignment was subsequently executed in June 2008.
The Assessing Officer held that the 2006 agreement did not transfer the land or any right therein because title remained disputed, possession was not handed over and several conditions remained unfulfilled. According to the AO, what was eventually assigned was the “actionable claim and/or chose in action” connected with the pending civil suit. The entire ₹55.75 crore was therefore assessed in AY 2009-10 as income from other sources. CIT(A) affirmed the assessment, reasoning that an actionable claim was intangible movable property and did not fall within the definition of a capital asset.
The Tribunal rejected that reasoning. It observed that section 2(14) defines “capital asset” widely as property of any kind, subject to specified exclusions. A proprietary or beneficial right does not cease to constitute property merely because it is incorporeal, intangible or incapable of physical possession. An actionable claim may represent a legally enforceable debt or assignable beneficial interest and, depending upon its true attributes, may constitute property. At the same time, the Tribunal emphasised the distinction between an actionable claim and a mere right to sue. Section 6(e) of the Transfer of Property Act, 1882 specifically prohibits transfer of a mere right to sue.
Relying on CIT v. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 (Bom), Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bom), Sterling Construction & Investments v. ACIT (2015) 374 ITR 474 (Bom) and DCIT v. Shelter Developers, ITA No. 3753/Mum/2023, order dated 18.02.2025, the Tribunal held that the true content of the right surrendered, rather than the label attached to it, determines its tax character. A mere right to sue for damages is not transferable under section 6(e), and consideration for relinquishment of such a right bears the character of a capital receipt.
On the facts, ₹55.75 crore was not received from any recurring commercial activity or through exploitation of an asset while retaining its underlying source. It was received once and for all against the assessee divesting himself of the entire bundle of rights, claims, benefits and entitlements asserted in relation to the partnership property and pending litigation. If those rights represented an assignable beneficial or proprietary interest, the consideration was for extinguishment or transfer of a capital right. Alternatively, if the Revenue’s own case was accepted that the assessee possessed no clear title or transferable interest and held merely a right to contest the pending suit, what was relinquished was essentially a litigative right or mere right to sue. On either hypothesis, the receipt was capital in character.
The Tribunal further rejected the proposition that an amount which was not chargeable as capital gains automatically became taxable as “Income from other sources”. It held that section 56, although residuary, cannot bring every receipt within the tax net merely because it does not fall conveniently under another head. The receipt must first possess the character of income. A capital receipt does not become revenue income merely because its taxation under section 45 or computation under section 48 encounters a legal impediment. Accordingly, the ₹55.75 crore addition was deleted.
Having deleted the principal addition, the Tribunal left open subsidiary issues concerning the year of accrual, possible capital-gains liability, determination of cost of acquisition, the ₹11.85 crore value adopted as on 01.04.1981 and indexation. It separately upheld disallowance of expenditure of ₹62,90,576 claimed against interest income of ₹97,19,161 because the assessee failed to furnish cogent material establishing the precise nature of the expenditure and its direct and proximate nexus with earning the interest income. The Tribunal reiterated that deduction under section 57 requires the expenditure to be laid out or expended wholly and exclusively for earning the relevant income. Legal grounds concerning reassessment under sections 147 and 148 and proceedings relating to a deceased assessee were expressly left open as academic. The appeal was consequently partly allowed.
Cases Discussed
- CIT v. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 (Bombay High Court) — relied upon for the principle that a right to receive damages consequent upon breach of contract is a mere right to sue, is non-transferable under section 6(e) of the Transfer of Property Act, and compensation for its relinquishment cannot be treated as consideration from transfer of a capital asset attracting section 45.
- Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bombay High Court) — relied upon as reiterating the principle concerning the non-transferability of a mere right to sue and the capital character of the corresponding receipt.
- Sterling Construction & Investments v. ACIT (2015) 374 ITR 474 (Bombay High Court) — relied upon for distinguishing an enforceable contractual right to obtain conveyance of immovable property from a mere claim for compensation or damages after the right to specific performance ceases to survive.
- DCIT v. Shelter Developers, ITA No. 3753/Mum/2023, order dated 18.02.2025 (ITAT Mumbai) — relied upon for holding that consideration received for withdrawing proceedings and relinquishing claims relating to disputed immovable property, where no subsisting enforceable proprietary interest remained, represented surrender of a right to sue and constituted a capital receipt not chargeable to tax.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
2. Though several grounds have been raised, the principal controversy on merits is, whether the amount of ₹55,75,00,000 received pursuant to the Deed of Assignment executed in June 2008, under which the assessee assigned his rights, claims, benefits and entitlements arising out of and connected with Suit No. 783 of 1987 pending before the Hon’ble Bombay High Court, could be assessed in its entirety as “Income from other sources.” The assessee has also challenged the disallowance of expenditure amounting to ₹62,90,576. Besides these substantive grounds, certain legal grounds have been raised questioning the validity of the reassessment proceedings and the orders passed in relation to a deceased assessee. Since, for the reasons discussed hereinafter, the principal addition is being deleted on merits, the legal grounds are being left open and treated as academic in the present appeal.
3. The relevant facts are that a partnership firm in the name and style of M/s S.P. Building Corporation was constituted under a Deed of Partnership dated 30.01.1974 between late Shri Samrathmal Phoolchand Seth, Shri N.J. Gamadia and Shri Oomar Ahmad. A property bearing Plot No. 14, Mahalaxmi Estate, situated at Carmichael Road, Mumbai, was brought into the partnership by Shri N.J. Gamadia. Shri Oomar Ahmad retired from the firm on 02.08.1976, where after the firm continued with late Shri Samrathmal Seth and Shri Gamadia as its remaining partners. Disputes subsequently arose between them in relation to the dissolution of the firm and the ownership and control of the aforesaid property. Shri Gamadia instituted Suit No. 783 of 1987 before the Hon’ble Bombay High Court, seeking, inter alia, dissolution of the partnership and restoration of ownership of the property in his favour. Shri Gamadia died in the year 2002 leaving behind his legal heir; however, the dispute concerning the partnership and the property continued to remain sub judice. The property was under the management of the Court Receiver, possession had not been delivered to any developer and the competing claims in relation thereto had not attained finality.
4. During the subsistence of the aforesaid litigation, late Shri Samrathmal Seth, describing himself as proprietor of M/s S.P. Building Corporation, entered into an agreement dated 14.07.2006 with M/s Housing Development and Infrastructure Ltd. (“HDIL”). The aggregate consideration stipulated under the agreement was ₹69 crore, out of which ₹13.25 crore was to be paid by HDIL directly to the tenants and other persons, leaving a net consideration of ₹55.75 crore receivable by the assessee. The assessee accounted for the transaction in the financial year 2006–07, following the mercantile system of accounting, and disclosed it in his return of income for the Assessment Year 2007–08 under the head “Capital gains.” Against the net consideration of ₹55.75 crore, the assessee adopted the cost of acquisition as on 01.04.1981 at ₹11.85 crore and, after indexation, claimed an indexed cost of ₹61,50,15,000, thereby returning a long-term capital loss of ₹5,75,15,000. It is, therefore, an admitted position that the transaction was not concealed from the Department; rather, the dispute pertains to its true legal character and the year in which its tax consequences, if any, arose.
5. A registered Deed of Assignment was thereafter executed in June 2008. The Assessing Officer examined the agreement dated 14.07.2006 and observed that it was merely an executory arrangement which enumerated the property, the agreed consideration and the respective obligations of the parties. According to him, the agreement was contingent upon the assessee settling the dispute with the legal heir of Shri Gamadia, resolving the claims of the tenants and occupants, making out a clear and marketable title, removing the encumbrances and ultimately executing the necessary development, sale or conveyance documents in favour of HDIL. He further observed that no possession was handed over under the agreement, a substantial part of the consideration was payable only upon the execution of the final documents and delivery of vacant and peaceful possession, and HDIL had retained the right to terminate the arrangement if the assessee failed to make out a marketable title. On this basis, the Assessing Officer held that the agreement dated 14.07.2006 did not result in the transfer of the land or any right therein in the financial year 2006–07 and that the amounts received until execution of the registered deed retained the character of advances.
6. The Assessing Officer then examined the Deed of Assignment executed in June 2008 and concluded that what was ultimately assigned to HDIL was not the immovable property as such, but the “actionable claim and/or chose in action,” together with all the rights, benefits, claims and entitlements arising out of and connected with Suit No. 783 of 1987 and its subject matter. According to him, since the assessee neither conveyed a clear and marketable title nor handed over possession of the property, the consideration was essentially for assigning the right to contest the pending suit and the incidental claims flowing therefrom. He, therefore, held that the consideration accrued in the financial year 2008–09 upon execution of the registered deed and assessed the entire amount of ₹55.75 crore under the head “Income from other sources.” He further rejected the cost of acquisition claimed by the assessee and adopted the same at nil, principally on the ground that the property had originally been introduced into the partnership by Shri Gamadia and that the assessee had not demonstrated the basis on which the value of ₹11.85 crore as on 01.04.1981 had been adopted. The expenditure of ₹62,90,576 claimed against the income shown in the return was also disallowed for want of substantiation.
7. The learned CIT(A) affirmed the assessment. He concurred with the Assessing Officer that the agreement dated 14.07.2006 did not result in any transfer and that the transaction crystallised only upon execution of the Deed of Assignment during the previous year relevant to the Assessment Year 2009–10. He further held that an actionable claim is an intangible movable property in the nature of a debt or beneficial interest which is not physically possessed and, therefore, according to him, it did not fall within the definition of a “capital asset.” From this premise, the learned CIT(A) concluded that the consideration received for assigning such a claim was liable to be assessed under the head “Income from other sources.” He also sustained the adoption of nil cost of acquisition and the disallowance of expenditure.
8. Before us, the learned counsel for the assessee submitted that the consideration received from HDIL had an intrinsic and inseverable nexus with the assessee’s rights in the partnership property and the litigation concerning the said property and, therefore, the receipt was manifestly on capital account. It was contended that the mere existence of litigation did not convert the underlying proprietary or beneficial interest into a revenue receipt. Without prejudice, the learned counsel submitted that if the Revenue’s own characterization of the transaction was accepted, namely, that neither the land nor any completed interest therein had been transferred and that the assessee had merely relinquished the right to pursue or contest the pending litigation, then what was surrendered was, at the highest, a mere right to sue. Such a right, by virtue of section 6(e) of the Transfer of Property Act, 1882, is incapable of transfer and cannot be regarded as an actionable claim. Consideration received for giving up such a right is a capital receipt and cannot be brought to tax either as capital gains or as income from other sources. In support of these propositions, reliance was placed upon the judgments of the Hon’ble Bombay High Court in CIT v. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 (Bom), Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bom) and Sterling Construction & Investments v. ACIT (2015) 374 ITR 474 (Bom), as well as the decision of the Tribunal in DCIT v. Shelter Developers, ITA No. 3753/Mum/2023, order dated 18.02.2025. The learned Departmental Representative, on the other hand, relied upon the findings of the Assessing Officer and the learned CIT(A) and submitted that the registered Deed of Assignment expressly described its subject matter as an actionable claim and, therefore, the consideration received thereunder had rightly been brought to tax in the Assessment Year 2009–10.
9. We have heard the rival submissions, perused the impugned orders and examined the material placed on record. The character of a receipt cannot be determined in isolation from the nature of the right which is parted with or the source from which it arises. Equally, the nomenclature assigned by the parties to an instrument, though relevant, cannot be conclusive of its legal or fiscal character. The true nature of the transaction must be gathered from the rights subsisting with the transferor, the obligations undertaken by the transferee and the legal effect of the document read as a whole. In the present case, the foundation of the assessment is not that the assessee had conveyed the land or delivered possession of an undisputed immovable property to HDIL. The Assessing Officer has, in fact, rejected that very proposition. His categorical case is that no transfer of the property took place under the agreement dated 14.07.2006, since the title remained disputed, possession was never handed over, the pending litigation had not been resolved and the conditions contemplated for execution of the development, sale or conveyance documents remained unfulfilled. According to the Assessing Officer himself, what the assessee eventually parted with under the registered Deed of Assignment was the right to contest the pending suit, together with all incidental claims, benefits and entitlements flowing from its subject matter. The taxability of the amount must, therefore, be examined on this very factual premise adopted by the Revenue.
10. Section 2(14) defines “capital asset” in terms of considerable amplitude as “property of any kind” held by an assessee, subject to the specific exclusions contained therein. A proprietary or beneficial right does not cease to be property merely because it is incorporeal, intangible or incapable of physical possession. The reasoning of the learned CIT(A) that an actionable claim cannot constitute a capital asset merely because it is an intangible movable property is, therefore, legally untenable. An actionable claim may represent a legally enforceable debt or an assignable beneficial interest and, depending upon its true nature and attributes, can constitute property. At the same time, a clear distinction has to be maintained between an actionable claim and a mere right to sue for unliquidated damages. Section 6(e) of the Transfer of Property Act specifically declares that a mere right to sue cannot be transferred. Thus, where the subsisting right is confined merely to approaching a Court and seeking damages or other relief in respect of an alleged breach or disputed claim, it is neither an actionable claim capable of assignment nor a transferable capital asset in the ordinary sense. The legal effect cannot be altered merely by describing such a right in the deed as an “actionable claim” or “chose in action.”
11. The Hon’ble Bombay High Court in CIT v. Abbasbhoy A. Dehgamwalla (supra) held that a right to receive damages consequent upon breach of a contract is a mere right to sue and is not transferable in view of section 6(e) of the Transfer of Property Act. Since such a right cannot be transferred, compensation received for its relinquishment cannot be regarded as consideration arising from the transfer of a capital asset so as to attract the charging provision under section 45. The same principle was reiterated in Bharat Forge Co. Ltd. v. CIT (supra). In Sterling Construction & Investments v. ACIT (supra), the Hon’ble Jurisdictional High Court examined the distinction between an enforceable contractual right to obtain conveyance of an immovable property and a mere claim for damages after the relief of specific performance had ceased to survive. It was explained that an enforceable right under an agreement for sale may, in a given case, constitute property and hence a capital asset; however, where the right to obtain the property itself no longer subsists and what remains is merely a claim for compensation or damages, the receipt assumes an altogether different character. These decisions underscore that it is the true content of the right and not the label affixed to it which governs the tax consequence.
12. In DCIT v. Shelter Developers (supra), the Tribunal considered a comparable situation where the assessee had received consideration for withdrawing proceedings and relinquishing its claims in relation to disputed immovable property. After examining the decisions of the Hon’ble Bombay High Court, including Abbasbhoy A. Dehgamwalla and Sterling Construction & Investments, the Tribunal held that where the assessee had no subsisting and enforceable proprietary interest in the land and the amount was received for giving up the right to pursue litigation, what was relinquished was essentially a right to sue. The compensation received for surrender of such a right was held to be a capital receipt not chargeable to tax. The relevant principle which emerges is that, once the very source or substratum of the asserted right is surrendered and the assessee is denuded of the right to pursue the claim thereafter, the consideration received bears the character of a capital receipt and not of a revenue return.
13. When the facts of the present case are examined in the light of the aforesaid principles, the conclusion reached by the lower authorities cannot be sustained. The consideration of ₹55.75 crore was not received in the ordinary course of any recurring commercial activity, nor was it a return generated by the exploitation of an asset while retaining the underlying source. It was received once and for all against the assessee divesting himself of the entire bundle of rights, claims, benefits and entitlements which he asserted in relation to the partnership property and the pending civil suit. The source from which the claims emanated stood completely relinquished in favour of HDIL. If those rights constituted an assignable beneficial or proprietary interest in the partnership property, the consideration was for extinguishment or transfer of a capital right. If, as held by the Assessing Officer, the assessee did not possess any clear title or transferable interest in the property and merely held a right to contest the pending suit and pursue the consequential claims, then what stood relinquished was essentially a litigative right or a mere right to sue. On either hypothesis, the receipt retained its capital character. The Revenue cannot, on the one hand, deny that the assessee possessed or transferred any proprietary interest in the property and, on the other, treat the consideration received for surrendering the residual litigative claims as an ordinary revenue receipt taxable in its entirety under the residuary head.
14. The further reasoning that, since the amount was not chargeable under the head “Capital gains,” it necessarily became taxable under the head “Income from other sources,” is equally fallacious. Section 56 is a residuary charging provision, but it is not a provision of unlimited amplitude capable of bringing every receipt within the tax net merely because it does not conveniently fall under another head. The anterior and indispensable requirement is that the receipt must first partake of the character of “income.” A capital receipt does not shed its capital character merely because its chargeability under section 45, or its computation under section 48, encounters a legal impediment. Nor can the residuary head be invoked to tax the gross capital value of the very source or right surrendered by the assessee. The heads of income under section 14 classify taxable income; they do not enlarge the scope of the charging provision so as to convert a receipt which is intrinsically capital into revenue income.
15. We may also observe that the assessee had disclosed the transaction in the return of income for the Assessment Year 2007–08 and had computed a long-term capital loss thereon. Therefore, it cannot be said that the transaction was kept outside the knowledge of the Department. At the same time, the argument that the very same “income” has been subjected to tax twice requires some qualification, because the computation made in the Assessment Year 2007–08 had resulted in a returned capital loss and not in a positive amount of income suffering tax. Nevertheless, this does not advance the case of the Revenue, for the issue before us is not merely one of timing but of the intrinsic character of the receipt. Once it is found that the consideration was received for the complete surrender of a capital or litigative right, its assessment as gross income under section 56 cannot be sustained, irrespective of the year in which the assessee had earlier disclosed the transaction.
16. Thus, having regard to the nature of the underlying dispute, the continued pendency of the civil suit, the absence of conveyance of any clear and marketable title or delivery of possession, the recitals and legal effect attributed by the Assessing Officer himself to the Deed of Assignment and the principles enunciated in the aforesaid decisions, we hold that the amount of ₹55,75,00,000 received by the assessee was a capital receipt and could not have been assessed in its entirety under the head “Income from other sources.” The conclusion of the learned CIT(A) that an actionable claim is outside the ambit of a capital asset merely because it is intangible, and that the consideration received for its assignment must consequently be taxed under section 56, is based upon an erroneous understanding of both the nature of an actionable claim and the scope of the residuary head of income. The addition of ₹55,75,00,000 is, accordingly, directed to be deleted.
17. Once the addition has been deleted on the aforesaid substantive ground, it is unnecessary for us to adjudicate the subsidiary controversies as to whether the transaction accrued in the Assessment Year 2007–08 or the Assessment Year 2009–10, whether the rights assigned could otherwise be subjected to capital-gains tax, whether the cost of acquisition was capable of determination, whether the value of ₹11.85 crore adopted as on 01.04.1981 was justified, or whether indexation was admissible. These questions would arise only if the receipt were otherwise found chargeable as capital gains in the year under consideration. Since that is not the basis upon which the assessment has been framed and the gross receipt brought to tax under section 56 has been held to be unsustainable, these issues do not require any adjudication and are left open.
18. The remaining substantive ground relates to the disallowance of expenditure of ₹62,90,576. The assessee had shown interest income of ₹97,19,161 and claimed that the expenditure was incurred for earning such income. However, apart from pointing out that the expenditure claimed was less than the interest income earned, neither before the Assessing Officer nor before the learned CIT(A) was any cogent material furnished to establish the precise nature of the expenditure or its direct and proximate nexus with the earning of the interest income. The arithmetical fact that the expenditure is lower than the corresponding receipt cannot, by itself, establish its deductibility. Where deduction is claimed against income chargeable under the head “Income from other sources,” the assessee must satisfy the conditions prescribed in section 57 and demonstrate that the expenditure was laid out or expended wholly and exclusively for the purpose of making or earning such income. In the absence of supporting evidence or any demonstrable nexus, we do not find any infirmity in the conclusion of the learned CIT(A) on this limited issue. Accordingly, the ground challenging the disallowance of ₹62,90,576 is dismissed.
19. The assessee has also raised legal grounds challenging the validity of the reassessment proceedings, including the assumption of jurisdiction under sections 147 and 148 and the passing of the impugned order in relation to a deceased assessee. Since the principal addition of ₹55,75,00,000 has been deleted on merits, adjudication of these legal grounds would have no further bearing upon the substantive controversy decided by us. These grounds are, therefore, expressly left open and treated as academic in the present appeal.
20. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 7th September, 2026.
