RAMESH SETH LEGAL HEIR OF SAMRATHMAL PHOOLCHAND SETH,MUMBAI vs. NATIONAL FACELESS APPEAL CENTRE, MUMBAI

Though several grounds have been raised, the principal controversy on merits is, whether the amount of ₹55,75,00,000 received pursuant to the Deed of Assignment executed in June 2008, under which the assessee assigned his rights, claims, benefits and entitlements arising out of and connected with Suit No. 783 of 1987 pending before the Hon’ble Bombay High Court, could be assessed in its entirety as “Income from other sources.” The assessee has also challenged the disallowance of expenditure amounting to ₹62,90,576. Besides these substantive grounds, certain legal grounds have been raised questioning the validity of the reassessment proceedings and the orders passed in relation to a deceased assessee. Since, for the reasons discussed hereinafter, the principal addition is being deleted on merits, the legal grounds are being left open and treated as academic in the present appeal.

The relevant facts are that a partnership firm in the name and style of M/s S.P. Building Corporation was constituted under a Deed of Partnership dated 30.01.1974 between late Shri Samrathmal Phoolchand Seth, Shri N.J. Gamadia and Shri Oomar Ahmad. A property bearing Plot No. 14, Mahalaxmi Estate, situated at Carmichael Road, Mumbai, was brought into the partnership by Shri N.J. Gamadia. Shri Oomar Ahmad retired from the firm on 02.08.1976, whereafter the firm continued with late Shri Samrathmal Seth and Shri Gamadia as its remaining partners. Disputes subsequently arose between them in relation to the dissolution of the firm and the ownership and control of the aforesaid property. Shri Gamadia instituted Suit No. 783 of 1987

During the subsistence of the aforesaid litigation, late Shri Samrathmal Seth, describing himself as proprietor of M/s S.P. Building Corporation, entered into an agreement dated 14.07.2006 with M/s Housing Development and Infrastructure Ltd. (“HDIL”). The aggregate consideration stipulated under the agreement was ₹69 crore, out of which ₹13.25 crore was to be paid by HDIL directly to the tenants and other persons, leaving a net consideration of ₹55.75 crore receivable by the assessee. The assessee accounted for the transaction in the financial year 2006– 07, following the mercantile system of accounting, and disclosed it in his return of income for the Assessment Year 2007–08 under the head “Capital gains.” Against the net consideration of ₹55.75 crore, the assessee adopted the cost of acquisition as on 01.04.1981 at ₹11.85 crore and, after indexation, claimed an indexed cost of ₹61,50,15,000, thereby returning a long-term capital loss of ₹5,75,15,000. It is, therefore, an admitted position that the transaction was not concealed from the Department; rather, the dispute pertains to its true legal character and the year in which its tax consequences, if any, arose.

A registered Deed of Assignment was thereafter executed in June 2008. The Assessing Officer examined the agreement dated 14.07.2006 and observed that it was merely an executory arrangement which enumerated the property, the agreed consideration and the respective obligations of the parties. According to him, the agreement was contingent upon the assessee settling the dispute with the legal heir of Shri Gamadia, resolving the claims of the tenants and occupants, making out a clear and marketable title, removing the encumbrances and ultimately executing the necessary development, sale or conveyance documents in favour of HDIL. He further observed that no possession was handed over under the agreement, a substantial part of the consideration was payable only upon the execution of the final documents and delivery of vacant and peaceful possession, and HDIL had retained the right to terminate the arrangement if the assessee failed to make out a marketable title. On this basis, the Assessing Officer held that the agreement dated 14.07.2006 did not result in the transfer of the land or any right therein in the financial year 2006–07 and that the amounts received until execution of the registered deed retained the character of advances.

The Assessing Officer then examined the Deed of Assignment executed in June 2008 and concluded that what was ultimately assigned to HDIL was not the immovable property as such, but the “actionable claim and/or chose in action,” together with all the rights, benefits, claims and entitlements arising out of and

The learned CIT(A) affirmed the assessment. He concurred with the Assessing Officer that the agreement dated 14.07.2006 did not result in any transfer and that the transaction crystallised only upon execution of the Deed of Assignment during the previous year relevant to the Assessment Year 2009–10. He further held that an actionable claim is an intangible movable property in the nature of a debt or beneficial interest which is not physically possessed and, therefore, according to him, it did not fall within the definition of a “capital asset.” From this premise, the learned CIT(A) concluded that the consideration received for assigning such a claim was liable to be assessed under the head “Income

Before us, the learned counsel for the assessee submitted that the consideration received from HDIL had an intrinsic and inseverable nexus with the assessee’s rights in the partnership property and the litigation concerning the said property and, therefore, the receipt was manifestly on capital account. It was contended that the mere existence of litigation did not convert the underlying proprietary or beneficial interest into a revenue receipt. Without prejudice, the learned counsel submitted that if the Revenue’s own characterization of the transaction was accepted, namely, that neither the land nor any completed interest therein had been transferred and that the assessee had merely relinquished the right to pursue or contest the pending litigation, then what was surrendered was, at the highest, a mere right to sue. Such a right, by virtue of section 6(e) of the Transfer of Property Act, 1882, is incapable of transfer and cannot be regarded as an actionable claim. Consideration received for giving up such a right is a capital receipt and cannot be brought to tax either as capital gains or as income from other sources. In support of these propositions, reliance was placed upon the judgments of the Hon’ble Bombay High Court in CIT v. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 (Bom), Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bom) and Sterling Construction & Investments v. ACIT (2015) 374 ITR 474 (Bom), as well as the decision of the Tribunal in DCIT v. Shelter Developers, ITA No. 3753/Mum/2023, order dated 18.02.2025. The learned

We have heard the rival submissions, perused the impugned orders and examined the material placed on record. The character of a receipt cannot be determined in isolation from the nature of the right which is parted with or the source from which it arises. Equally, the nomenclature assigned by the parties to an instrument, though relevant, cannot be conclusive of its legal or fiscal character. The true nature of the transaction must be gathered from the rights subsisting with the transferor, the obligations undertaken by the transferee and the legal effect of the document read as a whole. In the present case, the foundation of the assessment is not that the assessee had conveyed the land or delivered possession of an undisputed immovable property to HDIL. The Assessing Officer has, in fact, rejected that very proposition. His categorical case is that no transfer of the property took place under the agreement dated 14.07.2006, since the title remained disputed, possession was never handed over, the pending litigation had not been resolved and the conditions contemplated for execution of the development, sale or conveyance documents remained unfulfilled. According to the Assessing Officer himself, what the assessee eventually parted with under the registered Deed of Assignment was the right to contest the

Section 2(14) defines “capital asset” in terms of considerable amplitude as “property of any kind” held by an assessee, subject to the specific exclusions contained therein. A proprietary or beneficial right does not cease to be property merely because it is incorporeal, intangible or incapable of physical possession. The reasoning of the learned CIT(A) that an actionable claim cannot constitute a capital asset merely because it is an intangible movable property is, therefore, legally untenable. An actionable claim may represent a legally enforceable debt or an assignable beneficial interest and, depending upon its true nature and attributes, can constitute property. At the same time, a clear distinction has to be maintained between an actionable claim and a mere right to sue for unliquidated damages. Section 6(e) of the Transfer of Property Act specifically declares that a mere right to sue cannot be transferred. Thus, where the subsisting right is confined merely to approaching a Court and seeking damages or other relief in respect of an alleged breach or disputed claim, it is neither an actionable claim capable of assignment nor a transferable capital asset in the ordinary sense. The legal effect cannot be altered merely by describing such a right in the deed as an “actionable claim” or “chose in action.”

In DCIT v. Shelter Developers (supra), the Tribunal considered a comparable situation where the assessee had received consideration for withdrawing proceedings and relinquishing its claims in relation to disputed immovable property. After examining the decisions of the Hon’ble Bombay High Court, including Abbasbhoy A. Dehgamwalla and Sterling Construction &

When the facts of the present case are examined in the light of the aforesaid principles, the conclusion reached by the lower authorities cannot be sustained. The consideration of ₹55.75 crore was not received in the ordinary course of any recurring commercial activity, nor was it a return generated by the exploitation of an asset while retaining the underlying source. It was received once and for all against the assessee divesting himself of the entire bundle of rights, claims, benefits and entitlements which he asserted in relation to the partnership property and the pending civil suit. The source from which the claims emanated stood completely relinquished in favour of HDIL. If those rights constituted an assignable beneficial or proprietary interest in the partnership property, the consideration was for extinguishment or transfer of a capital right. If, as held by the Assessing Officer, the assessee did not possess any clear title or transferable interest in the property and merely held a right to

The further reasoning that, since the amount was not chargeable under the head “Capital gains,” it necessarily became taxable under the head “Income from other sources,” is equally fallacious. Section 56 is a residuary charging provision, but it is not a provision of unlimited amplitude capable of bringing every receipt within the tax net merely because it does not conveniently fall under another head. The anterior and indispensable requirement is that the receipt must first partake of the character of “income.” A capital receipt does not shed its capital character merely because its chargeability under section 45, or its computation under section 48, encounters a legal impediment. Nor can the residuary head be invoked to tax the gross capital value of the very source or right surrendered by the assessee. The heads of income under section 14 classify taxable income; they do not enlarge the scope of the charging provision so as to convert a receipt which is intrinsically capital into revenue income.

We may also observe that the assessee had disclosed the transaction in the return of income for the Assessment Year 2007–

Thus, having regard to the nature of the underlying dispute, the continued pendency of the civil suit, the absence of conveyance of any clear and marketable title or delivery of possession, the recitals and legal effect attributed by the Assessing Officer himself to the Deed of Assignment and the principles enunciated in the aforesaid decisions, we hold that the amount of ₹55,75,00,000 received by the assessee was a capital receipt and could not have been assessed in its entirety under the head “Income from other sources.” The conclusion of the learned CIT(A) that an actionable claim is outside the ambit of a capital asset merely because it is intangible, and that the consideration received for its assignment must consequently be taxed under section 56, is based upon an erroneous understanding of both the nature of

Once the addition has been deleted on the aforesaid substantive ground, it is unnecessary for us to adjudicate the subsidiary controversies as to whether the transaction accrued in the Assessment Year 2007–08 or the Assessment Year 2009–10, whether the rights assigned could otherwise be subjected to capital-gains tax, whether the cost of acquisition was capable of determination, whether the value of ₹11.85 crore adopted as on 01.04.1981 was justified, or whether indexation was admissible. These questions would arise only if the receipt were otherwise found chargeable as capital gains in the year under consideration. Since that is not the basis upon which the assessment has been framed and the gross receipt brought to tax under section 56 has been held to be unsustainable, these issues do not require any adjudication and are left open.

The remaining substantive ground relates to the disallowance of expenditure of ₹62,90,576. The assessee had shown interest income of ₹97,19,161 and claimed that the expenditure was incurred for earning such income. However, apart from pointing out that the expenditure claimed was less than the interest income earned, neither before the Assessing Officer nor before the learned CIT(A) was any cogent material furnished to establish the precise nature of the expenditure or its direct and proximate nexus with the earning of the interest income. The arithmetical fact that the

The assessee has also raised legal grounds challenging the validity of the reassessment proceedings, including the assumption of jurisdiction under sections 147 and 148 and the passing of the impugned order in relation to a deceased assessee. Since the principal addition of ₹55,75,00,000 has been deleted on merits, adjudication of these legal grounds would have no further bearing upon the substantive controversy decided by us. These grounds are, therefore, expressly left open and treated as academic in the present appeal. 20. In the result, the appeal of the assessee is partly allowed. Order pronounced on 7th September, 2026.