ITAT: Amount Paid Pursuant to Consent Decree in Suit for Specific Performance Cannot be Subjected to Capital Gains Tax

ITAT: Amount Paid Pursuant to Consent Decree in Suit for Specific Performance Cannot be Subjected to Capital Gains Tax

The Income Tax Appellate Tribunal (ITAT) Mumbai, by its coram comprising of G.S. Pannu (President) and Sandeep Singh Karhail (Judicial Member) have observed that where an amount is paid pursuant to a consent decree in a suit for specific performance, such amount cannot be subjected to capital gains tax.

The bench provided relief to Mahendra Corporation by ruling that the amount of Rs. 135 crores received by the assessee was not taxable under the head ‘capital gains.’ According to the Tribunal the amount, received as per consent decrees passed by the Bombay High Court, did not involve the transfer of any right, title, or interest in the property.

In the instant case, during the reassessment proceedings, the Assessing Officer (AO) examined the consent decree dated 28 January, 2011 and concluded that the assessee had relinquished its rights in the property ‘Villa Nirmala’ in favor of its partners.

The AO was of the view that this relinquishment resulted in capital gains for the assessee, which had not been declared for taxation.

The assessee argued that the property had been sold and conveyed to the tenants, and as a result, the assessee no longer had any rights in the property. The assessee stated that they only had the right to sue for compensation or damages.

The assessee asserted that the sum of Rs. 135 crore was agreed upon to settle the lawsuit filed by the assessee and was not related to any ownership rights in the property. The assessee pointed out that the right to sue does not qualify as a capital asset under Section 2(14) of the Income Tax Act and therefore, the gain or receipt in relation to the right to sue should not be subjected to taxation as capital gains.

However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the action of AO in treating the sum of Rs. 135 crore as long-term capital gains. The CIT(A) observed that the amount was received by the assessee as a result of the release and relinquishment of their rights, interests, and claims in the property ‘Villa Nirmala’, and not in exchange for the right to sue.

The ITAT on perusal of the agreement dated 20 December, 1974 between the assessee and the vendor noted that it was an Agreement to Sell, not a Sale Deed.

The bench appositely stated that an Agreement to Sell of an immovable property does not confer any right, title, or interest in the property itself. Instead, it grants the right to seek specific performance of the agreement.

The bench referred on the case Sterling Construction & Investments vs. Assistant Commissioner of Income-Tax (Inv.), Circle 21(1), Mumbai (2015), wherein the Bombay High Court had observed that once the suit for specific performance has been refused, any monetary sum received cannot be taxed as it is considered compensation for the breach of the contract.

The ITAT averting to the present case stated that, “Since in the present case also, pursuant to the consent decree in a suit for specific performance amount was paid, therefore, the said amount cannot be said to be liable to capital gains tax.”

The ITAT concluded that the amount of Rs. 135 crores received by the assessee pursuant to the consent decrees passed by the Bombay High Court were not in respect of the transfer of any right, title, or interest in the property, and therefore, cannot be taxed under the head ‘capital gains’ in the hands of the assessee.