Tax if any on amout recovered through court litigation

Hi ,

There are two scenarios:

1. Capital Receipt- If the amount received by you is classified as capital receipt, then the same can be claimed as exempt as per the tax laws. This determination would involve analysis of the full case.

2. Capital Gain- Here, the invested value shall be indexed from the year 2001-2002 till the year in which amount was realised and then the same shall be compared with 5 lacs for computing income. And according, post indexation, there will be hardly any gains. It would result in loss. Hence no taxes on the same.

Thanks

Damini

Hi,

You can deduct 2.1 lakhs from the sum received and the remaining 2.9 lakhs will be taxable in the year of receipt.

Regards,

Nikhil.

As it is an lumpsum and one time payment, it may be treated as capital receipt and should not be taxable. I think Damini might be correct.

Meaning of Capital receipt/investment- As you have invested the amount in firm in 1995 for long term benefits (assuming) therefore it is Capital in nature.

Hi,

There is a case law- where the issue before the Bench is - Whether relinquishment of right to sue is to be held as capital asset. And the verdict goes in favour of the assessee.

So if you satifsied the below mentioned conditions- the receipt of Rs 5 Lakhs is capital receipt and not chargeable to Tax.

i. The entire compensation received by the appellant was in lieu of withdrawing the right to sue against the Party. Any agreed compensation received for withdrawing the right to sue is patently a capital receipt. The same is outside the purview and scope of taxation as Business or revenuer receipt as contemplated by the provisions of the I T Act.

ii. The compensation received by way of settlement agreement is wholly and exclusively in lieu of the assessee withdrawing all the cases filed against the Party.

Hi

Please mention the mode of investment in the firm for apt answers.

Based on the above facts, it can be inferred that the 5 lacs would be considered as a capital receipt not chargeable to tax. You may refer to Satyam case landmark ruling by AAR. Such relinquishment of right to sue can neither amount to capital gain nor considered as income from other sources.

Hi,

In order to ascertain whether it's a capital receipt or not, we will have to understand the nature of your initial investment in partnership firm and wordings from the settlement order.

Please feel free to call revert in case you need more clarity.

Sir- that was my opinion based on the facts given by you and I still stand by it. We will actually need to understand the nature of the receipts before deciding on the taxability.

I will be more than happy to stand corrected and if you get 100% exemption on the receipts.

Thanks and Regards,

Nikhil.

Hi,

Basis our complete analysis, since there was no asset acquired in this whole transaction and at the end of the litigation, the recovery could be made only for the own money realised. Hence it would be considered as capital receipt and the same shall not be taxable in the income tax return.

Thanks

Damini