Settlement Amount for Waiving Inheritance Claim: Whether Taxable as Capital Gains?

The Mumbai Bench of the Income Tax Appellate Tribunal in Shireen J. Dastur Vs ITO examined whether a sum of Rs. 15 crores received by a non-resident assessee for withdrawing a civil suit asserting inheritance rights in an immovable property was taxable as long-term capital gains, or whether it was a non-taxable capital receipt.

The dispute centred around the property known as “The Mount”, forming part of the estate of late Ms. Amba Wadia, and the assessee’s claims to a share in that estate by way of inheritance. The Tribunal ultimately held that the amount received by the assessee was for settling a mere right to sue, which is not a “capital asset” under Section 2(14) and, therefore, could not give rise to capital gains.

Background of the Dispute

Parties and Assessment Details

  • The assessee is a non-resident individual.
  • Assessment Year: 2018-19.
  • Assessment framed pursuant to directions of Dispute Resolution Panel-2, Mumbai under Section 144C(5) of the Income Tax Act 1961.
  • The assessee had filed a return of income declaring total income of Rs. 24,68,760 on 07.08.2018.

During the relevant year, the assessee received Rs. 15 crores from Sanjay Infraspace Pvt. Ltd., the purchaser of the property “The Mount”. The central controversy was whether this receipt should be taxed as capital gains, or treated as a non-taxable capital receipt, being compensation for giving up a disputed claim in a civil suit.

Origin of the Assessee’s Claim

  • Late Ms. Amba Wadia passed away on 02.02.1946, leaving behind a will and appointing executors and trustees to administer her estate.
  • One of the estate assets was the property “The Mount” at Little Gibbs Road, Malabar Hill, Mumbai.
  • The trustees of the will were in the process of selling “The Mount”.
  • The assessee, being one of the grandchildren of late Ms. Amba Wadia, claimed a right of inheritance in this property, leading to litigation within the family over the interpretation of the will.

The assessee filed Civil Suit No. 290 of 2016 before the Hon’ble Bombay High Court asserting her claimed share in “The Mount”. Another grandchild, Mr. Jehangir Wadia, filed Civil Suit No. 1932 of 2008 raising similar entitlement claims.

Payment by Purchaser and Withdrawal of Suit

Assessee’s Explanation Before the Assessing Officer

In the course of assessment proceedings, through a detailed written submission, the assessee explained:

  1. She was one of the legal heirs of late Smt. Amba Wadia.
  2. The trustees were negotiating with Sanjay Infraspace Pvt. Ltd. for sale of “The Mount”.
  3. The assessee and her sisters had lodged a claim to their alleged inheritance rights in the property.
  4. Sanjay Infraspace Pvt. Ltd., wishing to acquire the property free from any encumbrances or disputes, approached the assessee to withdraw all her claims and to withdraw the civil suit.
  5. As consideration for the unconditional withdrawal of all claims and non-pursuit of the civil suit, the purchaser paid the assessee Rs. 15 crores.
  6. The assessee specifically asserted:
    • She was not a vendor, nor a confirming party to the sale deed.
    • There was no transfer of a capital asset by her.
    • The amount received was not “income” and therefore was not disclosed in the return of income.

Her stand was that she had only given up a contested claim or an expectation to inherit, which did not constitute a capital asset capable of transfer.

Stand of the Assessing Officer and DRP

Assessment as Long-Term Capital Gains

The Assessing Officer rejected the assessee’s contention by relying on the broad definition of “transfer” in Section 2(47) of the Income Tax Act. The key points in the Assessing Officer’s reasoning were: