August 2019

Section 37(1) Compensation received in lieu of extinction of right to sue is capital receipt not chargeable to tax

Chartered Accountants

10.  Chheda Housing Development Corporation vs. Addl. CIT (Mumbai)

Members: G.S. Pannu (V.P.) and Pawan Singh (J.M.)

ITA No.: 86/Mum./2017

A.Y.: 2012-13

Date of order: 29th May, 2019

Counsel for Assessee / Revenue: Dr. K. Shivaram and Rahul K. Hakkani / H.N. Singh and Rajeev Gubgotra


Section 37(1) Compensation received in lieu of extinction of right to sue is capital receipt not chargeable to tax



The assessee, a partnership firm, was engaged in the business of construction and development of property. During FY 2004-05, the assessee had entered into a memorandum of understanding (MOU) with one Mr. Merchant, the landowner, for the development of his land and paid the sum of Rs. 2.5 crores. In terms of the MOU, the parties had agreed to execute a joint development agreement and the landowner was to obtain the commencement certificate from the local authorities. However, the landowner did not provide the certificate. Besides, the assessee came to know that the landowner had transferred the development rights of the land to a company owned by his family.


The assessee filed a suit before the Bombay High Court seeking specific Performance of the MOU and to execute the joint development agreement. In the alternative, the assessee claimed damages for breach of contract. A criminal complaint was also filed alleging fraud. Litigation in various forums continued till 2011 when, through the intervention of a well-wisher, the parties agreed to a settlement. As per the terms of the settlement, the assessee agreed to withdraw the criminal complaint and the civil suit. The assessee also agreed not to create any third party right, title or interest in respect of the right created under the MOU. On execution of the cancellation deed in September, 2011, the assessee was paid Rs. 20 crores.


For the year under appeal, the assessee had filed a Nil return. The AO treated the receipt of Rs. 20 crores as income and taxed the same as long-term capital gain. The CIT(A), on appeal, confirmed the AOs order.


Before the Tribunal, the Revenue justified the orders of the lower authorities and contended that the right to execute the joint deve


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