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I-T - Relinquishment of right to sue is 'capital asset' and hence, not taxable: HC

By TIOL News Service

JAIPUR, DEC 06, 2017: THE ISSUE BEFORE THE BENCH IS - Whether relinquishment of right to sue is to be held as capital asset and hence, not taxable. YES IS THE VERDICT.

Facts of the case

The Assessee-company filed its return for the AY under consideration. During the assessment proceedings, the AO observed that the Assessee had entered into a litigation with one of its party who had entered into contract with Assessee. It was also observed that to put an end to the case, the Assessee had entered into a compromise with that party and accordingly, it had received a sum as compensation. The AO was of the view that the amount of compensation received by the Assessee falls in the ambit of sec. 28 (ii) and should be taxable. Accordingly, the AO made addition. On Assessee's appeal, the CIT(A) upheld the addition. On further appeal by Assessee, the Tribunal reversed the decision of the CIT(A) and allowed the appeal filed by the Assessee and held that relinquishment of right to sue is neither a capital asset nor taxable u/s 28 which provides specific types of receipt to be held taxable as business income.

High Court held that,

++ when the party has compromised and withdraw the litigation, if that compensation is received, it is always to be treated compensation. In our considered opinion, the Tribunal has not committed any error in allowing the appeal and we are in complete agreement with the view taken by the Tribunal. No case is made out for interference.

(See 2017-TIOL-2519-HC-RAJ-IT)