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Compensation for Relinquishment of Right to Sue Is a Capital Receipt Not Chargeable to Tax – Madras High Court August 5, 2026
Published in: Alerts
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The Madras High Court has held that compensation received for withdrawing a legal notice and relinquishing the right to sue is a capital receipt and is therefore not chargeable to tax under the Income-tax Act, 1961. The Court observed that while non-compete fees are taxable under Section 28(va), compensation received pursuant to other negative covenants arising out of business arrangements does not fall within the scope of the provision.
The Court noted that the taxpayers’ contractual right of first purchase (ROFP) constituted a valuable capital right, and that compensation received for giving up the right to enforce that contractual entitlement and withdraw legal proceedings was in the nature of a capital receipt rather than business income. Accordingly, the Court concluded that such compensation is not liable to tax.
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