Compensation in lieu of ‘Right to Sue’ of Capital Nature, not chargeable to Tax: ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) in the case of M/s Chedda Housing Development Corporation v Addl. CIT held that compensation in lieu of ‘right to sue’ is of capital nature not chargeable to tax under Section 45 of the Income Tax Act.

The assessee is a partnership firm engaged in the business of financing, construction and development. The assessee filed its return of income declaring Nil income and claimed the refund of tax paid in advance. The AO noted that assessee claimed an amount to be a capital receipt not chargeable to tax which he received as compensation under agreement for relinquishing his right to sue in a development agreement.

The revenue questioned the basis giving rise to the cause of action for the creation of ‘right to sue’.

The Bench constituting of members S.S. Pannu and Pawan Singh held that receipt towards compensation in lieu of ‘right to sue’ is of capital nature which is not chargeable to tax under Section 45 of the Act.

The Bench elaborated that the assessee executed a development agreement to facilitate the assessee to construct and to share the profits from the transaction. When the assessee sold his land, the advantage which accrued from the agreement was also taken away sold away. Similarly, when the assessee in the agreement came across a threat of filing suit by the developer (another party to the development agreement), he paid the amount of compensation in consideration of turning down the suit by the developer. This payment of the amount to avoid litigation was held to be enough evidence for the existence of the ‘right to sue’, holding against the contention of the revenue.