Case: Sukhwant Singh v. Income‑tax Officer – [2023]
(Chandigarh Trib.)
Court/Authority: Income Tax Appellate Tribunal – Chandigarh Bench (ITA
No. 197/Chd/2019, AY 2012-13)
Law Type: Income-Tax (Head: Capital Gains)
Introduction
The Tribunal’s decision in the Sukhwant Singh case underscores a key principle in tax law: when an assessee receives money in exchange for giving up rights to purchase property, that payment may qualify as a “transfer” of a capital asset and accordingly fall under the head “Capital Gains”. This is distinct from treating such payment as “Income from Other Sources”.
Facts of the Case
- The
assessee entered into an agreement in 2005 to purchase a piece of
property, paying consideration of ₹14 lakhs.
- The
seller, however, did not execute the sale deed in favour of the assessee.
Eventually, in 2012 (relevant assessment year AY 2012-13), the seller
refunded ₹28 lakhs to the assessee as part of a settlement/compromise.
- In
his income-tax return for that year, the assessee treated the ₹14 lakhs
originally paid as cost of acquisition, claimed indexation benefit and
offered the gain under the head “Capital Gains”.
- The
Assessing Officer (AO) accepted the sale consideration of ₹28 lakhs and
the original purchase price of ₹14 lakhs, but assessed the difference (₹14
lakhs) as “Income from Other Sources” rather than capital gains. The first
appellate authority (CIT(A)) upheld this.
- On appeal, the Tribunal considered whether the payment of ₹28 lakhs was payment for relinquishment of rights and whether such relinquishment constituted transfer of a capital asset.
Decision of the Case
- The
Tribunal held that the payment received by the assessee was for
relinquishment of his rights to purchase the property (i.e., his
rights to buy the land were given up).
- These
rights were held by the Tribunal to qualify as a capital asset
(i.e., a right in a property agreement). Consequently, the payment for
relinquishment is a “transfer” of a capital asset.
- The
cost of acquisition for computing capital gains was determined to be the
amount initially paid (₹14 lakhs). The gain (₹28 lakhs – ₹14 lakhs) was
accordingly taxable under the head “Capital Gains”.
- Therefore,
the Tribunal held that treating the amount as “Income from Other Sources”
was incorrect — the correct head was “Capital Gains”.
Key Legal Principles & Take-aways
- Relinquishment
of Rights as Capital Asset Transfer – When an assessee gives up his
rights under an agreement to purchase property and receives compensation
for that relinquishment, such rights may constitute a capital asset and
its transfer attracts capital gains tax.
- Cost
of Acquisition – The original amount paid under the agreement can be
treated as the cost of acquisition for computing capital gains on
relinquishment.
- Correct
Tax Head Matters – Even though payment is received, characterisation
(Capital Gains vs Other Sources) depends on nature of transaction;
mis-classification may lead to incorrect tax treatment.
- Implications
for Tax-practice – Tax practitioners and taxpayers should assess
carefully whether payments received under settlement/compromise of
property purchase agreements constitute capital asset transfers or mere
receipts under other heads.
Conclusion
In the Sukhwant Singh case, the Tribunal clearly held that
payment for relinquishing a right to purchase property qualifies as a capital
asset transfer and must be taxed as capital gains. This decision is important
for both taxpayers and tax-professionals when dealing with settlement
agreements, refunds of consideration, and abandoned rights in property
transactions. Ensuring the correct head of income and cost of acquisition is
vital.
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