No compensation can be claimed on account of ‘right to sue’ since such right is not transferrable; Sec 263 wrongly invoked

While allowing the appellant’s appeal, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that “once the AO has examined this issue threadbare relying upon the various judgments of the High Court which was cited before him accepting the claim, then PCIT cannot set aside the assessment order within the scope of u/s. 263 is not adjudicated as we have already held on merits that the judgment of the PCIT is incorrect in law.”

A Division Judge Bench of Justice Amit Shukla and Amarjit Singh (Accountant Member) observed that “Section 6 of the Transfer of Property Act clearly provides that “a mere right to sue cannot be transferred”, even if it is to be treated as “property” U/s.5 of the Transfer Property Act. Transfer of property means the act by which a person conveys a property to another and to transfer property is to perform such act. The mere right to sue may or may not be property but certainly it cannot be transferred as per law.”

Advocate Pradip Kapasi appeared for the Petitioner whereas Advocate Zeenia Handa appeared for the Respondent. 

The brief facts of the case were that the assessee is an individual, who had entered into an MOU with Aadi Properties LLP with the intention to book commercial space in a proposed project by M/s. Aadi Properties LLP on a plot of land. The amount paid by an assessee through a cheque drawn from the Bank of India is nearly 2.33% of the total consideration. Later on, the said project did not materialize and was aborted and accordingly, the builder cancelled the allotment returning the advance that was not deposited in the bank by the assessee. Subsequently, the assessee filed a suit in the Bombay High Court, demanding damages. A consent decree was issued by the court based on terms agreed upon by the parties. Under this consent decree, Aadi Properties LLP agreed to compensate for its failing to provide the commercial space, if the assessee would retain 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 ld. Assessing Officer (AO) issued notices from time to time inquiring about, the taxability of the compensation received under the consent decree. The Assessing Officer after considering the details and the judgments furnished by the assessee, accepted the income tax return and affirmed that the capital receipt of Rs. 7,65,26,000 was not eligible for taxation. The PCIT reviewed the issue of the taxability of the Rs. 7,65,26,000 compensation in his revisionary jurisdiction. In the show-cause notice, the PCIT stated that the AO’s assessment order was erroneous and prejudicial to the revenue’s interests as per clause (d) of Explanation 2 to Section 263.

After considering the submission, the Bench noted that damages shall be paid by Defendant to Plaintiff in lieu of Plaintiff’s right to sue.

The Bench pointed out that the relevancy of property may be transferred by plain reading of Section 6 of the Transfer of Property Act, “It has been categorically provided a mere right to sue cannot be transferred.”

Referring to the case CIT v. Vijay Flexible Containers [1990] 186 ITR 693/48, the Bench Reiterated that “there is no right then to claim the property but to be compensated for breach of an agreement to transfer the immovable property and in future. Once such a transfer cannot be obtained as the Decree for specific performance has been refused, then, the receipt of monetary sum cannot be taxed as claimed by the Revenue. “

The Bench stated that the impugned order of the PCIT canceling the assessment order solely relying on the judgment of M/s. Vijay Flexible Containers which is not applicable on the facts of the assessee’s case cannot be sustained and is hereby set aside and the order of the Assessing Officer accepting the claim is upheld.

Accordingly, the Bench allowed the assessee’s appeal.

Cause Title: Virendra Bhavanji Gala Vs. PCIT (Central) Mumbai [ITA No.1654/Mum/2023 / 2023-Enterslice-36-ITAT-Mum]

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Virendra-Bhavanji-Versus-PCIT