TMI Blog2011 (1) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... hich held that the amount received by the assessees is a capital receipt and not a capital gain and as such not exigible to tax under the head, capital gains. 2. As the question involved in both these appeals are one and the same and respondents are father and son, they are taken up for consideration together and disposed of by this common order. 3. The assessee, Hasanand Shobraj, the father, filed return of income for the asst. yr. 1998-99 on 13th Aug., 1998 declaring an income of Rs. 2,74,000 and long-term capital gains of Rs. 7,820. His son, Anil Kumar, filed a return of income for the asst. yr. 1998-99 on 13th Aug., 1998 declaring the total income of Rs. 3,15,562. Their returns were processed under s. 143(1)(a) of the IT Act, 1961 (for short, hereinafter referred to as the 'Act'), on 10th Jan., 1999 and 19th Jan., 1999 respectively. While processing the return, it was seen that both the father and son had received Rs. 3,75,000 from Smt. Vasundhara Filliozat and Sri Pierre Sylvain Filliozat. This amount was claimed to have been received as a settlement outside the Court, in respect of the residential property for the purchase of which the father and son had jointly enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessees received Rs. 3,75,000 for giving up their right in the said property. Therefore it attracts capital gain tax. To earn this amount, the assessees had made an investment of Rs. 50,000 each, by way of advance. That is the cost of investment made in the year 1992. Therefore he proceeded to compute the long-term capital gains and imposed tax. 6. Aggrieved by the said order of the AO, both the assessees preferred an appeal before the CIT(A) Mysore. The appellate authority on reappreciation of the entire material on record and after taking into consideration the judgments of the various High Courts, held that the sum of Rs. 3,75,000 received by each of the assessees is a capital gain and is exigible to levy of long-term capital gains tax and dismissed the appeals. 7. Aggrieved by the said order, both the assessees preferred appeals before the Tribunal. The Tribunal held that, it is an settled law that the contract of purchase of property does not create an interest in immovable property. In the case of a breach of contract, the assessee is entitled to damages. The assessee had a mere right to sue for damages. Under s. 6(e) of the Transfer of Property Act, a mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal was in total error in interfering with the order which was strictly in accordance with law. 11. Per contra, the learned counsel appearing for the assessees though did not dispute the facts, contended that the cost of the right which was given up by the assessees is not determinable. In the absence of such determination, it is incorrect to say that what is paid is a compensation for giving up the right as a capital asset and consequently, the difference in the amount is a capital gain exigible to tax. 12. Both the learned counsel have relied on the judgments of various High Courts on the point. 13. Before we answer these substantial questions of law, it is necessary to look into the views expressed by the various High Courts in this country, which will be helpful in answering the aforesaid substantial questions of law. 14. Before referring to the aforesaid decisions, it is necessary to look into a few definitions which would be helpful in answering the substantial questions of law. 15. Sec. 2(14) of the Act defines what a 'capital asset' means. It reads thus:- "'capital asset' means property of any kind held by an assessee, whether or not connected w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of s. 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation:- For the purposes of this sub-section, the expression 'insurer' shall have the meaning assigned to it in cl. (9) of s. 2 of the Insurance Act, 1938 (4 of 1938)." However, ss. 2(29A) and 2(29B) defines what a 'long-term capital asset' and 'long-term capital gain' means, which reads thus:- "2(29A) 'long-term capital asset' means a capital asset which is not a short-term capital asset; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also assignable. Therefore, a right to obtain conveyance of immovable property, was clearly 'property' as contemplated by s. 2(14). The mere fact that ultimately the earnest money was to be treated as a part of the purchase price, the balance of which was to be paid on the completion of sale, did not detract from the fact that the immediate consideration for the execution of the agreement of sale was the payment of earnest money. Therefore, this was clearly a case which squarely fell within s. 45 and the assessee had made a profit or gain arising from the transfer of the capital asset which was the right to obtain a sale deed in respect of immovable property. Therefore, the entire amount of Rs. 5,00,000, being the difference between the amount of Rs. 5,90,000 received by the assessee and Rs. 90,000 originally paid by the assessee as earnest money, would be capital gain in the hands of the assessee. Therefore, it is liable to capital gain tax. The assessee would, however, be entitled to a deduction of Rs. 14,115 on account of legal and other expenses transferred to by the ITO." 18. Again the Bombay High Court in the case of CIT vs. Vijay Flexible Containers (1990) 81 CTR (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court in its decree. Unlike compensation payable by the State when it acquires a citizen's land under the Acts such as the Land Acquisition Act where the right to receive compensation is statutory right, the right that a person acquires on the establishment of a breach of contract is at best a mere right to sue. Despite, the definition of the expression 'capital asset' in the widest possible terms in s. 2(14), a right to a capital asset must fall within the expression 'property of any kind' and, must not fall within the exceptions. Sec. 6 of the Transfer of Property Act which uses the same expression 'property of any kind' in the context of transferability makes an exception in the case of a mere right to sue. The decisions thereunder make it abundantly clear that the right to sue for damages is not an actionable claim. It cannot be assigned. Transfer of such a right is as much opposed to public policy as is gambling in litigation. As such, it will not be quite correct to say that such a right constituted a 'capital asset' which in turn has to be 'an interest in property of any kind'. The question of the assessee's right under the agreement of 1945 being converted or substituted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration under the deed of assignment. Therefore, it cannot be said that the assessee had acquired rights under the agreement of sale without having had to incur any cost simply because the cheque for Rs. 5 lakhs was returned to it unencashed by the vendor. The amount of Rs. 5 lakhs it received less from the assignee because instead of being paid to it, it was directly paid to the vendor by the assignee in view of the assignor having been returned the earnest amount by the vendor. Thus, the Tribunal was right in holding that the claim of the assessee that it did not incur any cost in acquiring the rights under the said agreement was not acceptable. It is a settled legal position that the Court can give relief on the ground of subsequent impossibility when it finds that the whole purpose or the basis of the contract has frustrated by the inclusion or occurrence of an unexpected event or change of circumstances which were not contemplated by the parties on the date of the contract. In the instant case, it is evident that the assessee not only did not rescind the contract but proceeded to assign its benefits and liabilities which it had incurred under the contract in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a settled legal position that in the case of sale of immovable property, there is a presumption against time being of the essence of the contract and mere fixation of the period within which the contract has to be performed, does not make the time the essence of the contract. Therefore, it cannot be said that there was no assignment made by the assessee. Once it is held that there is no frustration of the contract and that there was cost of acquisition of the rights of the contract, the assessee would be liable for tax on capital gains in respect of sum received by it in consideration of the assignment of the contract." 21. Similarly, the Indore Bench of the Madhya Pradesh High Court in the case of CIT vs. Smt. Laxmidevi Ratani and Ors. (2005) 198 CTR (MP) 336 : (2008) 296 ITR 363 (MP) dealing with a case of giving up a right to claim specific performance of a contract in lieu of consideration received in terms of the compromise between the parties, held as under:- "The expression 'property of any kind' used in s. 2(14) is of wide import. When this expression is read along with expression defined in s. 2(47)(ii), i.e., extinguishment of any rights therein, there is no hes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said to be on account of relinquishment of any of his assets or on account of extinguishment of his right of specific performance under the contract for sale. Under s. 5 of the Transfer of Property Act, transfer of property means an act by which a person conveys property to another and 'to transfer property' is to perform such act. A mere right to sue may or may not be property but it certainly cannot be transferred. There cannot be any dispute with the proposition that in order that receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a 'transfer within the meaning of s. 45 r/w s. 2(47). Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by the assessee as damages was not assessable as capital gains." 23. From the aforesaid judgments it is clear that the right to obtain a conveyance of immovable property falls within the expression 'property of any kind' used in s. 2(14) of the Act and consequently it is a capital asset. It is because the expression 'property of any kind' is of wide import. When this express ..... X X X X Extracts X X X X X X X X Extracts X X X X
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