Compensation for Not Suing Is Capital Receipt—Not Taxable | ITAT

Case Details: Pankaj Inder Wadhwa vs. Income-tax Officer - [2025] 175 taxmann.com 144 (Mumbai-Trib.)

Judiciary and Counsel Details

• Saktijit Dey, Vice President & Bijayananda Pruseth, Accountant Member
• Vijay Mehta & Harsh Bafna for the Appellant.
• Rajendra Joshi, Sr. DR for the Respondent.

Facts of the Case

The assessee, an individual, along with other family members, was involved in the manufacturing and trading of packaging materials. A joint venture (JV) agreement was entered into between the assessee and a US-based firm. The JV agreement granted PACCESS India the exclusive right to conduct business in India.

Subsequently, the JV company’s packaging business was transferred to a new company, and the US-based firm was dissolved. The new company was later dissolved, and the assessee discovered that two entities were trying to carry on the packaging business without their consent. A suit was filed against the entities, seeking certain relief.

Later, the entities expressed their willingness to discuss the issue with the assessee and others for reaching an out-of-court settlement of the dispute. After discussion between the parties, a settlement agreement was executed, and the assessee received a certain amount.

The assessee treated the amount as a capital receipt and did not offer it as income. However, the Assessing Officer (AO) treated the amount as compensation against the termination of the business contract and taxed it. The CIT(A) upheld the AO’s order, and the matter reached the Mumbai Tribunal.

ITAT Held

The Tribunal held that the compensation received was not on account of the termination of the contract relating to any business carried on by the assessee or modification of the terms with the contract relating to any such business. The new party was never a part of the joint venture agreement, and the assessee never received any compensation from PACCESS, USA or PACCESS, LLC on account of termination of the JV Agreement or modification in conditions of the JV Agreement.

The compensation did not flow from the JV Agreement. The compensation/payment arose out of the settlement agreement. The settlement agreement was basically reached by the new party to avoid the legal consequences arising out of the suit filed by the assessee in the Delhi High Court. Therefore, the payment made was for not exercising the right to sue. This, in the Tribunal’s view, would fall in the category of a capital receipt.

List of Cases Referred to

• CIT v. Amar Dye Chem Ltd. [1994] 74 Taxman 254 (Bombay) (para 10)
• Asstt. CIT v. Jackie Shroff [2018] 97 taxmann.com 277/172 ITD 425 (Mumbai) (para 10)
• Bhojison Infrastructure (P.) Ltd. v. ITO [2018] 99 taxmann.com 26/173 ITD 436 (Ahmedabad – Trib.) (para 10)
• Chheda Housing Development Corpn. v. Addl. CIT [2019] 110 taxmann.com 56/179 ITD 154 (Mumbai) (para 10)
• Rajeshkumar Shantilal Patel v. ITO [2021] 127 taxmann.com 342 (Surat-Trib.) (para 10)
• CIT v. Kumararani Smt. Meenakshi Achi [2007] 158 Taxman 4/292 ITR 624 (Madras) (para 10)
• Virednra Bhavanji Gala v. PCIT [IT Appeal No. 1654 (Mum) of 2023, dated 30-8-2028] (para 10)
• Kettlewell Bullen and Co. Ltd. v. CIT AIR 1965 SC 65 (para 10)
• Geojit Investment Services Ltd. v. Jt. CIT, (OSD) [IT Appeal No. 16 of 2019] (para 10).