Virendra Bhavanji Gala Vs PCIT (ITAT Mumbai)
ITAT Mumbai held that damage on account of right to sue is a capital receipt and accordingly not chargeable to tax.
Facts- 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/-. 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. 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.
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’.
The case of the assessee was selected for scrutiny under the E-assessment Scheme 2019 to verify the claim of exemption. In the course of assessment proceedings, the AO issued notices from time to time inquiring about whether the receipts towards compensation under the consent decree were taxable or not. 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.
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.
Conclusion- Hon’ble High Court have held that a damage on account of right to sue is a capital receipt not chargeable to tax.
Held that the right that a person acquires upon the establishment of a breach of contract is a mere right to sue. 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’. 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. The right to sue for damages is held to not be an actionable claim and cannot be assigned.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. The aforesaid appeal has been filed by the assessee against order dated 29/03/2023 passed by PCIT (Central Mumbai-4) in his revisionary jurisdiction u/s.263 for the A.Y.2018-19.
2. In various grounds of appeal assessee has challenged the order of the ld. PCIT passed u/s.263 on various legal and factual The main issue on merits is with regard to taxability of receipt of damages which was claimed as capital receipt not chargeable to tax, whereas the ld. PCIT has held it to be in the nature of income.
3. The facts in brief are that the assessee is an individual, who had entered into an MOU with Aadi Properties LLP on 08/07/20 10 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 10,75,00,000/-. Accordingly, payment of Rs.25,00,000/- by cheque No.017447 drawn on bank of India dated 02/07/2010 was paid by the assessee. This amount of Rs.25,00,000/- was nearly 2.33% of the total consideration payable by the assessee. Later on, the said project did not materialize and was aborted and accordingly, the builder had cancelled the allotment returning the advance of Rs.25,00,000/- vide cheque dated 29/07/2014 which amount was not deposited in the bank by the assessee. The assessee then filed suit on 30/11/2015 before the Hon‟ble Bombay High Court, being suit No.21/2016 for claiming damages, that an agreement sale u/s .4 of Maharashtra Ownership Flats Act (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act (MOFA) was entered for the suit premises and prayed for perpetual injunction restraining the Defendant from selling or dealing with, disposing of, alienating, encumbering, parting with possession or creating third party rights of any nature whatsoever in respect of the suit area or part thereof.
4. Aadi Property LLP contested the assessee’s suit on the following grounds and expressed its inability to provide the agreed commercial space and refused to meet the claims of the assessee in the suit;
