Receipt for Relinquishment of ‘Right to Sue’ not Taxable: ITAT [Read Order]

Chartered Accountant - ITAT - Taxscan

The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the consideration received for the relinquishment of ‘Right to Sue’ does not attract income tax either under section 45 or section 28 (va) of the Income Tax Act, 1961.

The assessee entered into a development agreement dated 30.03.2007 by virtue of which a right in the property/land was created in favour of the assessee by the owner of the land. The department noted that despite development agreement entered into by the landlord, it has decided to sale the said land to other parties instead of continuing with development proposal of the said land as per the terms and conditions of the development agreement. It was therefore, held that the damages received from the potential purchaser for the relinquishment of ‘right to sue’ in the Courts of law for breach of development agreement is a taxable receipt.

After hearing both the sides, the Tribunal held that the receipt towards compensation in lieu of ‘right to sue’ is of capital nature which is not chargeable to tax under s.45 of the Act.

The Tribunal also observed that the consideration received for relinquishment of ‘right to sue’ does not fall under the provisions of Section 28(va) of the Act.

“We further find from the facts of the case that assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share in knowhow, patent, copyright, trademark, license etc. as specified under s.28(va) of the Act enacted for its taxability under the head of business income. Consequently, we are of the considered view that compensation received in lieu of ‘right to sue’ could not be regarded as revenue receipt. Therefore, we find merit in the appeal of the assessee,” the bench said.

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