Compensation received in lieu of surrendering ‘right to sue’ in a contract to be treated as capital receipt and not chargeable to tax as capital gains under section 45 of the Act – Mumbai bench of the Tribunal

In brief

The Mumbai bench of the Income-tax Appellate Tribunal (Tribunal) upheld¹ the decision of the Commissioner of Income-tax (Appeals) [CIT(A)] to delete the addition of compensation received by the taxpayer, in lieu of surrendering the ‘right to sue’ as a long-term capital gain under section 45 of the Income-tax Act, 1961 (the Act). The Tribunal concluded that the compensation is a capital receipt and not taxable as a long-term capital gain, as the ‘right to sue’ is not a transferable right under the Transfer of Property Act, 1882 (TOPA). The ruling was based on a co-ordinate bench order in the case of Virendra Bhavanji Gala², which was also supported by the Bombay High Court’s decision in the case of Abbasbhoy A. Dehgamwalla³.