A person who receives money after giving up rights to a disputed property may have to pay tax on the receipt. But how that money is classified can make a significant difference to the tax calculation.
In a ruling dated 14 September 2026, the Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that ₹1.5 crore received by a taxpayer for assigning his contractual and court-decree rights over land should be treated as capital gains, not income from other sources. The decision overturned a tax addition of ₹1.45 crore under the latter category, but did not make the receipt tax-free.
The ruling in Hanumanprasad Lalchand Gupta vs Deputy Commissioner of Income Tax, ITA No. 1514/Ahd/2025, highlights why the nature of the rights surrendered matters when determining the tax treatment of money received from a property dispute.
How a 1992 land deal led to a ₹1.5 crore payout
Gupta entered into an agreement on 28 April 1992 to purchase land in Moti Bhoiyan village in Gujarat. After the original sellers failed to perform their obligations, he filed a civil suit in 1994.
In October 2006, a civil court directed the execution of a registered sale deed and delivery of possession. However, further appeals and legal proceedings prevented the decree from being executed.
In March 2015, Gupta assigned his contractual rights, rights under the court decree and pending litigation relating to the land through a registered deed of assignment for ₹1.5 crore.
He declared the net proceeds as long-term capital gains in his return and claimed an exemption under Section 54F of the Income Tax Act, 1961, which provides a tax exemption on eligible long-term capital gains invested in a residential house, subject to specified conditions.
The assessing officer took a different view. Since Gupta neither held registered title to the land nor had physical possession of it, the officer considered the rights transferred to be merely a right to litigate, rather than a capital asset. After allowing expenses of ₹5.32 lakh, the officer treated ₹1.45 crore as income from other sources. The first appellate authority upheld the addition, prompting Gupta to approach the tribunal.
Why did ITAT classify the receipt as capital gains?
The tribunal examined whether Gupta’s rights under the original purchase agreement and court decree qualified as a capital asset under Section 2(14) of the Income Tax Act and whether their assignment constituted a transfer under Section 2(47).
It relied on earlier Bombay High Court rulings, including CIT vs Tata Services Ltd. and CIT vs Vijay Flexible Containers, which recognised that contractual rights to obtain conveyance of immovable property can constitute capital assets.
The tribunal held that Gupta had acquired an enforceable right to obtain the land under the agreement and court decree. The fact that the sale deed had not been executed did not, by itself, turn those rights into a mere right to sue.
Consequently, the ₹1.5 crore consideration was taxable under the head ‘Capital Gains’ rather than ‘Income from Other Sources’. The tribunal set aside the ₹1.45 crore addition under the latter head and directed the assessing officer to assess the receipt as capital gains in accordance with the law.
Does this mean the ₹1.5 crore payout is tax-free?
No. The ruling concerns the correct head of income, not a blanket exemption from tax.
Gupta had also claimed ₹22.67 lakh as indexed cost of improvement and ₹99.97 lakh as a Section 54F exemption. The tribunal sent both issues back to the assessing officer for fresh examination of the supporting documents and eligibility conditions. It did not grant either claim outright.
Separately, the tribunal upheld an addition of ₹44.81 lakh relating to gains from shares of Kappac Pharma, which the tax department had treated as unexplained income arising from alleged transactions. The tribunal found that the surrounding circumstances, including the off-market purchase, unusual price and volume movements, and lack of a credible investment rationale, supported the addition despite the taxpayer’s documentary records.
For taxpayers, the distinction is important. Money received for transferring contractual rights to property may be treated differently from compensation for a mere right to sue for damages. The tax outcome also depends on the acquisition cost, eligible expenses, applicable exemptions and evidence supporting the claim.
The ruling does not mean that every settlement arising from a dispute qualifies as capital gains. The nature of the rights transferred and the facts of each transaction remain crucial.