The assessee, an individual, assisted a Mexican cinema theatre operator in establishing its Indian operations in consideration of monthly remuneration and an agreed equity stake in the Indian entity. Upon the operator’s failure to honour these commitments, the assessee initiated multiple civil and criminal proceedings, which were ultimately resolved through a settlement under which the assessee received compensation of INR 33 crore for withdrawal of all pending claims. The assessee offered the said compensation to tax as long-term capital gains; however, the Assessing Officer sought to tax the amount as business income. On appeal, the assessee raised an additional ground before the CIT(A) contending that the compensation constituted a capital receipt not chargeable to tax, which was rejected, with the CIT(A) holding the receipt to be taxable as salary. The matter was thereafter carried in appeal to the Tribunal.
Before the Tribunal, the assessee argued, relying on judicial precedents, that a right to sue is a capital asset and that only such capital receipts as are specifically chargeable under the head “Capital Gains” can be brought to tax. It was further contended that the compensation was received on account of loss or sterilisation of a profit-earning apparatus and therefore constituted a capital receipt. Accepting these submissions and the settled legal position, the Tribunal held that the compensation received was a capital receipt and not liable to tax.
This ruling underscores that capital receipts are taxable only if they satisfy the conditions of chargeability prescribed therein. Where a capital receipt does not meet the requirements of chargeability under the head “Capital Gains,” and is not otherwise taxable under any other head of income, such receipt may remain untaxed. Accordingly, it is essential to carefully analyse the nature, source, and circumstances of each receipt to determine whether it is chargeable to tax under the Act.
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