DCIT CENTRAL CIRCLE 8(4), MUMBAI, MUMBAI vs. KAUSHAL YASHWANT AGARWAL, MUMBAI

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These two appeals filed by Revenue are against the orders of Ld. CIT (A) 50, Mumbai, vide order nos. ITBA/APL/S/250/2024- 25/1071257832(1) and ITBA/APL/S/250/2024-25/1071256498(1), AY 2018-19

dated 16.12.2024 passed against the assessment orders by DCIT,
Central Circle-8(4), Mumbai, u/s. 147 r.w.s. 143(3) of the Income-tax
Act, 1961 (hereinafter referred to as the “Act”), dated 31.03.2023 for Assessment Year 2018-19 and by DCIT, NeAC, Delhi, u/s. 143(3) of the Act dated 23.03.2021. 2. Grounds taken by the Revenue are reproduced as under:
"1. Whether in the facts and circumstances of the case and in law, the Ld.
CIT(A) justified in holding that the amount of Rs. 7,19,52,144/- received by the assessee pursuant to the consent decree dated 10.07.2017, cannot be taxed under the head 'Capital Gain'?
2. Whether in the facts and circumstances of the case, the Ld. CIT(A) erred in law and in facts by appreciating the provisions of Section 6 of the Transfer of Property Act, 1882, which states that a "mere right to sue" cannot be transferred. In the present case, the right acquired by the assessee under the agreement to purchase immovable property is not merely a right to sue but a substantive right to have the immovable property conveyed to the assessee."

Income Tax Act. 4. Whether, in the facts and circumstances of the case and in law, the order of the Ld. CIT(A) is justified in holding that the judgment of the Hon'ble Bombay High Court in the case of CIT v. Vijay Flexible Containers, CIT v. Abbasbhoy A. Dehgamwalla, and the Hon'ble Gujarat High Court in the caseof Baroda Cement and Chemical Ltd. are not applicable to the case of the assessee”.

Sr. No.
Name of the Party from Aadi Properties Pvt Ltd.
Total Receipt
(In Rs.)
1
2
3
4
5
6

Ramesh Chheda
MahendraChheda
RasikChheda
KekinChheda
Virendra Gala
Kaushal Agarwal
Total
8,65,67,000
6,22,06,000
8,24,45,000
7,60,24,000
7,65,26,000
7,65,26,000
46,02,94,000

Assessing Officer noted that none of these individuals have offered the compensation amount to tax, which according to him was liable to be taxed under the head „capital gain‟ u/s.45 as it involves transfer as per Section 2(47) of the Act and the capital asset as defined u/s. 2(14).
Before the ld. Assessing Officer, it was stated by the assessee that the compensation was received in lieu of surrender of „right to sue‟
therefore, same is a capital receipt. Ld. Assessing Officer after noting the entire facts and background of the case and the judgment of the Hon‟ble Bombay High Court had taxed the compensation as long term capital gain.
5. Ld. CIT (A) deleted the said addition made by the ld. Assessing
Officer, relying upon the decision of the Coordinate Bench in the case of one of the individualsparty to the compensation that is in the case of Shri VirendraBhavanji Gala vs. PCIT in ITA No.1654/Mum/2023
dated 30.08.2023. Shri Virendra Gala iswho was one of the person covered by the consent order of the Hon‟ble Bombay High Court (listed at sl. No. 5 in the above table). The relevant observation of the ld.
CIT(A) reads as under:-
“19. As discussed above, it is an undisputed fact that the compensation received by the appellant is in lieu of the right to sue. In the facts of this case, the specific performance was not at all possible. Thus, the compensation received is not due to relinquishment of any rights in capital assets. The right to sue is not a transferable right as per the provisions of the Transfer of Property Act. Therefore, the compensation received is not liable to be taxed as per the provisions of Section 45 of the LT Act, as the conditions stipulated therein are not fulfilled. In view of the facts of the case and the decision of the Hon'ble ITAT in the case of Virendra Gala, as discussed above, the addition made by the AO of Rs.5,81,34,144/- is hereby deleted. Accordingly, the appeal on this ground is ALLOWED."
6. This issue stands covered by the decision of the Coordinate Bench in ITA Nos. 968, 1000 and 1001/Mum/2025, dated 23.04.2025 which are for the other three persons covered by the consent order of the Hon'ble High Court of Bombay that is parties listed at Sr.No. 1,2 and 3
AY 2018-19

in the above table, there being no material change in the relevant facts and applicable law. The observations and findings by the Coordinate
Bench in the said order are reproduced for ease of reference:
“It has been admitted by both the parties that this issue stands covered by the decision of the ITAT. First of all the relevant facts of the case which is pari-materia with the present cases has been discussed in detail by the Tribunal are as under:-
“3. The facts in brief are that the assessee is an individual, who had entered into an MOU with Aadi Properties LLP on 08/07/2010 with the intention to book commercial space to be developed and constructed in a proposed project by M/s. Aadi Properties LLP on a plot of land for consideration of Rs.10,75,00,000/-.
Accordingly, payment of Rs.25,00,000/- by cheque No.017447 drawn on bank of India dated
02/07/2010 was paid by the assessee. This amount of Rs.25,00,000/- was nearly 2.33% of the total consideration payable by the assessee. Later on, the said project did not materialize and was aborted and accordingly, the builder had cancelled the allotment returning the advance of Rs.25,00,000/- vide cheque dated 29/07/2014 which amount was not deposited in the bank by the assessee. The assessee then filed suit on 30/11/2015 before the Hon‟ble Bombay High Court, being suit
No.21/2016 for claiming damages, that an agreement sale u/s .4 of Maharashtra Ownership Flats Act (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act (MOFA) was entered for the suit premises and prayed for perpetual injunction restraining the Defendant from selling or dealing with, disposing of, alienating, encumbering, parting with possession or creating third party rights of any nature whatsoever in respect of the suit area or part thereof.
4. Aadi Property LLP contested the assessee's suit on the following grounds and expressed its inability to provide the agreed commercial space and refused to meet the claims of the assessee in the suit;

by seeking reference of the dispute in the Suit to Arbitration under the provisions of the Arbitration and Conciliation Act, 1996. 
claiming that the MOU was for finance purpose and not for sale of flats.

MOU was cancelled in 2014 by legal notice.

the money was returned on cancellation by cheque.

the plaintiff had failed to perform his obligations and there was No readiness or willingness on the part of the plaintiff to perform the contract.

the said MOU was not capable of specific performance.

the MOU was not stamped or registered and was admissible in evidence.

it was never planned to or possible to develop commercial premises.

that no case made out for specific performance by plaintiff of MOU,

the Plaintiff was estopped from claiming allotment of the suit premises.

claiming that the Suit was not maintainable.
AY 2018-19


suppression of material facts and circumstances by the Plaintiff.

the suit was not bonafide and was merely an afterthought.

claiming that the Plaintiff has failed to make out the case for the grant of ad-interim reliefs.
5. Thereafter, a consent decree dated 10/07/2017 was passed by the Hon‟ble Bombay High Court on the basis of consent terms filed by the parties. As per the consent decree an amount of Rs.7,65,26,000/- was agreed to be paid by the Aadi Properties LLP by way of damages for its inability to provide the commercial space and the assessee not waiving the „right to sue‟ as per Para 9 and 10 of the consent decree dated 10/07/2017 which reads as under:-
“9. In Course of the discussions and negotiations between the Parties, the Plaintiff released that due to the constant changes in the applicable laws governing planning,
FSI and other development accept the Defendant was forced to abort the Old
Project and the Defendant have aborted the Old Project and undertaken the development of the project, had made significant progress in the construction of the project which was in stark variance with the Old Project in which the Plaintiff had agreed to invest by way of allotment of 25,000 square feet (Saleable area) of the commercial premises therein and consequently, the contours of the Old Project by completely different from that of the Project as is presently envisaged. The Old Project was comprised of mostly commercial buildings whereas the Project is predominantly residential and very little commercial user. In fact, the location where the commercial premises were to be provided, residential buildings are being put up there. The Defendant, having made significant progress in the construction of the Project and also having created other party rights in the Project, it was realized that the original allotment of office space is not even constructed in the new plan. Since, specific performance of the allotment of 25000 square feet (Saleable area) of the commercial premises is not possible, damages in lieu of the Plaintiff's right to sue would thus be the only relief/ remedy that the Plaintiff would be eventually entitled in the caption suit. Considering that specific performance of the MOU is not possible, it has been agreed that damages shall be paid by the Defendant to the Plaintiff in lieu of the Plaintiff's right to sue."
"10. In accordance with the aforesaid discussions, the parties have agreed to mutually end amicably settle the aforesaid dispute and differences between them. It has been decided between the parties that the plaintiff is entitled to damages of Rs. 7,65,26000
(Rupees Seven crores sixty-five lakhs twenty-six thousand only) in lieu of the plaintiff's right to sue, in full and final settlement of all the plaintiff's claims under the captioned suit, the Notice of Motion in Commercial Division No. 179 of 2016 (converted from Notice of Motion of No. 205 of 2016), Notice of Motion in AY 2018-19

Commercial Division No. 180 of 2016 (converted from Notice of Motion No. 499 of 2016) and the MOU, and the amount of Rs.
25,00,000/- (Rupees Twenty Five Lakh only) paid by the Plaintiff to the Defendant on 08th July, 2010 under the MOU, shall also be refunded without interest by Defendant to the Plaintiff and is included in the aforesaid sum of Rs. 7,65,26,000/- (Rupees Seven
Crore Sixty Five Lakh Twenty Six Thousand only) payable by Defendant to the Plaintiff.”
8. In that case original assessment order was completed u/s. 143(3) accepting the returned income and the claim of the assessee that amount of compensation received is a capital receipt. Thereafter, a notice u/s.148 was issued and during the course of re-assessment proceedings after receiving all the explanations and documents, order u/s. 148A(d) was passed wherein it was concluded that assessee‟s case was not fit for issuance of notice u/s.148. However, ld. PCIT in his revisionary juri iction issued of notice u/s.263 on 02/03/2023 and the issue of taxability of receipt of compensation. The ld. PCIT has relied upon the judgment of the Hon‟ble Bombay High Court in the case of CIT vs. Vijay Flexi Containers reported in 186 ITR 692 and finally the ld. PCIT has set aside the assessment order to concede the aforesaid judgment.
Thereafter, the Tribunal had decided the issue on merits after detailed discussion of the facts and the various judgments including the judgment of the Hon‟ble Bombay High Court which has been referred by the department in the case of CIT vs. Vijay Flexi Containers (supra), the relevant observation reads as under:-
“11. We have heard both the parties at length and also perused the relevant finding given in the impugned order as well as various materials referred to before us at the time to hearing. To put the issue succinctly, whether the compensation received by the assessee as per the consent decree dated 10/07/2017 of the Hon‟ble Bombay High
Court which was based on the basis of consent terms filed by the parties, can be brought to tax or it is a capital receipt not chargeable to tax. As noted above in the consent decree of the Hon‟ble Bombay High
Court, in para 9, it has been clearly stated that since specific performance of allotment of 25,000 sq.ft (salable area) of the commercial premises is not possible, damages in lieu of the plaintiff‟s right to sue would thus be the only relief/ remedy that the Plaintiff would be eventually entitled in the caption suit. Considering that specific performance of the MOU is not possible, it has been agreed that damages shall be paid by the Defendant to the Plaintiff in lieu of the Plaintiff's right to sue. Para 10 also clearly states that it has been vested between parties that the plaintiff is entitled to damage of Rs.7,65,46,000/- in view of plaintiff‟s right to sue, full and final settlement of all the plaintiff's claims under the captioned suit.

(a) The chance of an heir-apparent succeeding to an estate, the chance of a relation obtaining a legacy on the death of a kinsman, or any other mere possibility of a like nature, cannot be transferred.
(b) A mere right of re-entry for breach of a condition subsequent cannot be transferred to anyone except the owner of the property affected thereby.
(c) An easement cannot be transferred apart from the dominant heritage. (d) An interest in property restricted in its enjoyment to the owner personally cannot be transferred by him.
(d) A right to future maintenance, in whatsoever manner arising, secured or determined, cannot be transferred
(e) A mere right to sue cannot be transferred
(f) A public office cannot be transferred, nor can the salary of a public officer, whether before or after it has become payable.
(g) Stipends allowed to military, naval, air-force and civil pensioners of the government and political pensions cannot be transferred.
(h) No transfer can be made (1) insofar as it is opposed to the nature of the interest affected thereby, or (2) for an unlawful object or consideration within the meaning of section 23 of the Indian Contract
Act, 1872 (9 of 1872), or (3) to a person legally disqualified to be transferee.
(i) Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate, under the management of a Court of Wards, to assign his interest as such tenant, farmer or lessee.

transferable, receipt of compensation is not liable to capital gains as claimed by tax authority.
Relevant extracts of the judgment

"right to receive compensation is statutory right, the right that a person acquires on the establishment of a breach of contract is at best a mere right to sue despite the definition of the expression capital asset' in the widest possible terms in s. 2(14), a right to a capital asset must fall within the expression property of any kind' and must not fall within the exceptions. Sec. 6 of the Transfer of Property Act which uses the same expression 'property of any kind in the context of transferability makes an exception in the case of a mere right to sue The decisions there under make it abundantly clear that the right to sue for damages is not an actionable claim.It cannot be assigned. Transfer of such a right is as much opposed to public policy as is gambling in litigation. As such, it will not be quite correct to say that such a right constituted a 'capital asset which in turn has to be 'an interest in property of any kind...

the right acquired in lieu thereof was only a mere right to sue, it cannot be accepted that the amount was received as consideration for the transfer of a 'capital asset, Le, right to the execution of a lease deed in terms of the 1945 agreement, during the previous year. In that view of the matter, no part of the amount was taxable as capital gains.”
14.1 Thus, the sequitur of the said judgment can be summarized in the following manner:- i. The right that a person acquires on the establishment of the Breach of Contract is a mere right to sue.
ii. Despite the definition of capital asset in the wildest possible terms in s. 2(14), a right to a capital asset must fall within the expression
'property of any kind'.
iii. S.6 of Transfer of Property Act, 1882 uses the same expression
'property of any kind' in the context of transferability of any property under that Act.
iv. The said S. 6 of Transfer of Property Act, 1882 makes an exception for 'a right to sue' while defining property of any kind.
v. Such right to sue for damages is held to be not an actionable claim and it cannot be assigned.
vi. Transfer of such a right to sue for damages is opposed to public policy as is gambling in litigation vii. It is not correct to say that such a right to such damages is a "Capital Asset" being on interest in property of any kind; viii. Both parties had filed their objections in the suit and but for the compromise, there would have been prolonged litigation and uncertainty about fate of litigation.
ix. The right to receive damages accrued on the date of consent decree only and not before.
15. In the case of the assessee also MOU was not capable of specific performance under the Specific Relief Act and was confirmed by the Hon‟ble Bombay High Court vide para 9 of the consent decree dated
10/07/2017 and it was decreed that the only right available to the AY 2018-19

assessee was the right to sue for damages and the compensation was paid under the decree towards the said right to sue.

the head capital gains. That could not have been taxed as such after the Assessee's right to obtain specific performance was extinguished when the Court refused to grant such a relief.

that the present case was similar to that of Abbasbhoy
A.
Dehgamwalla (supra). In this case this Court declared that the Plaintiff/Assessee has no right, title or interest in the immovable property. That specific performance is therefore clearly refused. The other observations of the Division Bench deciding the case of Abbasbhoy A.
Dehgamwalla (supra) and Vijay Flexible Containers (supra) need not be considered. We do not think that the Assessee had any right left or remaining in him to claim the immovable property, which is subject matter of the oral agreement. That right got extinguished once the specific performance was refused. Even if the refund of earnest money or compensation is the relief granted, it is apparent on a reading of the Specific Relief Act, 1963 that the Court has power to grant relief of possession, partition or refund of earnest money if any person sues for specific performance of a contract for the transfer of immovable property.
That power is to be found in section 22 of the Specific Relief Act, 1963. By section 21, the Court has a power to award compensation in certain cases and by sub-section (1) thereof, it is clarified that in a Suit for specific performance of a contract, the Plaintiff may also claim compensation for its breach, either in addition to, or in substitution of such performance. When such relief is claimed in substitution of performance, then, by virtue of sub-section (2) of section 21, the Court can award the Plaintiff compensation even if it decides the specific performance ought not be granted. However, there are specific provisions which the Plaintiff must comply with. Eventually, the juri iction to decree specific performance conferred in a Court is discretionary and it is not bound to grant such relief merely because it is lawful to do so (see section 20 of the Specific Relief Act, 1963).

The Tribunal was not justified in holding that the order passed by the Assessing
AY 2018-19

Officer under section 143(3) read with section 144
A was erroneous and prejudicial to the interest of the Revenue and, therefore, the Commissioner of Income
Tax was justified in exercising the juri iction under section 263 of the IT Act.
(ii)

The answer is in favour of the Assessee and against the Revenue by holding that the amount of compensation received by the Assessee/Appellant was not liable to capital gains tax.
(iii)

It is held that the Appellant's case was covered by the ratio of this Court in the case of Commissioner of Income
Tax v. Abbasbhoy A. Dehgamwalla and Ors. reported in (1992) 195 ITR 28. (iv)

Once we have answered the issue on merits against the Revenue and in favour of the Assessee, question No. 4 will not survive."
17. Thus, the Hon‟ble High Court have clearly explained the applicability of both the judgments where specific performance can be done and where it cannot be done and it is a mere right to sue and held that exercising power u/s.263 based on the decision of Vijay Flexi Containers (Bom) cannot be exercised where there is compensation is on account of right to sue. Hon‟ble Court has clearly highlighted the issue involved in both the judgments and under such circumstances the judgment of Vijay Flexi
Containers cannot be complied with.

was itself aborted. Since the property for which right in the property was claimed, was not in existence, the question of giving up the right in the property does not arise at all. Thus, the judgment of Viay Flexible
Containers is not applicable at all and therefore, the ld. PCIT has erred in law and on facts in setting aside the assessment order solely relying upon the judgment of M/s. Vijay Flexible Containers.

Held:
HC held that mere contract for sale of immoveable property does not create by itself any interest in or charge on the property under TOPA.
On breach of the contract, taxpayer had mere right to sue for damages which is not transferrable. Damages received cannot be said to be on account of relinquishment of any asset or extinguishment of right of specific performance under the contract of sale. Hence, damages not liable to capital gains.

Relevant extracts of the ruling are below:

... In Sidhrajbhai vs. State of Gujarat AIR 1963 SC 540, it was held that the word 'property' in Art. 19(1) must doubtless be extended to all those recognized types of interest which have the Insignia or characteristic of proprietary rights. We are to determine whether damages received by the assessee were in respect of transfer of a 'capital asset' There was a breach of contract and the assessee received damages in satisfaction thereof. He had a mere right to sue for damages. Assuming the same to be 'property' this could not be transferred under s. 6(e) of the Transfer of Property Act...........

The damages which were received by the assessee cannot be said to be on account of relinquishment of any of his assets or on account of extinguishment of his right of specific performance under the contract for sale………………………………………….

Under s. 5 of the Transfer of Property Act, transfer of property means an act by which a person conveys property to another and 'to transfer property' is to perform such act. A mere right to sue may or may not be AY 2018-19

property but it certainly cannot be transferred. There cannot be any dispute with the proposition that in order that receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a 'transfer' within the meaning of s. 45 r/w s. 2(47). Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500
received by the assessee as damages was not assessable as capital gains"

Held:

HC held that once there is a breach of contract and defaulting party not only refuse to perform his part of contract but also disposes of the subject-matter, the injured party has nothing left in the contract except right to sue for damages. A right to sue not being an actionable claim cannot be considered as capital asset and hence, there is no question of it resulted in transfer by extinguishment of taxpayer's right. Also, compensation received does not represent consideration for transfer as for computation under S.45 the taxpayer ought to have incurred cost. If the Revenue fails to show that the taxpayer had incurred a cost as in the present case, it would be impossible to compute the income chargeable to tax under the head 'capital gains' and what the Revenue would be charging would be the capital value of the asset and not any profit or gain. Therefore damages cannot be held to be chargeable as capital gains. Basis the above, damages were not liable to capital gains tax levy.

Relevant Extracts:

"......once there is a breach of contract and the defaulting party not only refuses to perform his part of the contract but also disposes of the subject- matter, the injured party has nothing left in the contract except the right to sue for damages......

a mere right to sue, whether arising out of tortious act or ex-contractual is not transferable. In Mulla's Transfer of Property Act, Seventhedn., we find the following statement:

"But a debt or actionable claim must be distinguished from a right to sue for damages. After breach of a contract for the sale of goods nothing is left but a right to sue for damages which cannot be transferred. But before breach the benefit of an executory contract for the sale of goods may generally be transferred and the buyer has the right sue for to the goods……………..

Since the transfer contemplated by s. 45 is one as a result whereof consideration has passed to the assessee or has accrued to him,
AY 2018-19

extinguishment of the right must relate to that 'capital asset', corporeal or incorporeal. It is, therefore, obvious that a transfer of a capital asset in order to attract liability to tax under the head 'capital gains must be transfer' as a result whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by s. 48
of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, there must be receipt of consideration for such extinguishment to attract liability to tax. Now, in legal parlance, the terms 'consideration' and 'compensation' or 'damages' have distinct connotations. The former in the context of ss. 45
and 48 would connote payment of a sum of money to secure transfer of capital asset; the latter would suggest payment to make amends for loss or injury occasioned on the breach of contract or tort. Both s. 45
and 48 postulate the existence of a capital asset and consideration received thereof.................................................

…………………………once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefore, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee's rights therein since such a transfer would be hit by s.
6(e) of the Transfer of Property Act...."

"...The asset referred to in s. 45 must be one in the acquisition whereof the assessee had incurred a cost. If the Revenue fails to show that the assessee had incurred a cost as in the present case, it would be impossible to compute the income chargeable to tax under the head
'capital gains' and what the Revenue would be charging would be the capital value of the asset and not any profit or gain..... The Tribunal was not justified in holding that the amount received by the assessee by way of damages for breach of contract of sale was chargeable to tax under the head 'Capital gains!"

Order is pronounced in the open court on 24th July, 2025 (Amit Shukla)
Accountant Member

Dated: 24th July, 2025

MP, Sr.P.S.
Copy to :
1
The Appellant
2
The Respondent
3
DR, ITAT, Mumbai
4
5
Guard File
CIT

BY ORDER,

(Dy./Asstt.