A Mere Right to Sue Not Subject to Income Tax under Capital Gains, Not Transferable: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that a mere right to sue could not be subject to income tax under the head of capital gains and would not be transferable.

The assessee,Ishvakoo Grand Plaza was a firm having income from Business or Profession.  During the year under consideration, the assessee received an amount  in a settlement in the court, which the assessee had claimed as non - taxable and had credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio. 

Thus the AO enquired from assess that the right of Preemption/right of first priority of purchase of the premises falls under the definition of “Capital Asset” under Section 2(14) of the Income Tax Act and the relinquishment of the said right fell under the definition of "Transfer” as per the Act. Therefore, why should not be treated as Long Term Capital Gain arising from such transfer.

Thereafter, considering the clauses of lease deal in favour of the assessee and the litigation initiated by the assessee in the form of suit for specific performance/ for pre-emption, AO observed that assessee had given up all its right by virtue of settlement agreement.

He observed that, the withdrawal of the suit which was filed for the enforcement of the right of pre-emption by the assessee as part of settlement agreement showed that when the assessee gave up all its rights as part of the said agreement, it also relinquished its “right of preemption” which was the premises for the suit..

Ajay Vohra,on behalf of the assessee submitted that tax authorities had committed error in not understanding the nature of right of pre-emption. It was submitted that this right was a mere right to sue and could not be considered to be transferable asset.

Mohd.Gayasuddin Ansari,on behalf of the revenue submitted that there were numerous judgments of Supreme Court and various High Courts wherein it had been held that the transfer of lease hold rights and lease in perpetuity constitute a transfer and liable to tax on capital gains.

The two member Bench of N. K. Billaiya, (Accountant Member) And Sh. Anubhav Sharma, (Judicial Member) allowed the appeal and referring to the decision in CIT vs. B.C. SrinivasShetty, observed that, “In the present case, AO himself has considered the cost of acquisition of the so called right of preemption to be Nil. Thus, the computation provisions fail, therefore, capital gains could not have been calculated. This too establish that a mere right to sue in regard to immovable property cannot be subject to Income Tax under the head ‘Capital Gains’ as restricted by Section 6(e) of the Transfer of Property Act 1882, laying that a mere right to sue cannot be transferred.”

To Read the full text of the Order CLICK HERE

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