TMI Blog1985 (12) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... re, entitled to seek compensation for the breach of the contract from Messrs K.C.P. Limited. In about April, 1971, that is, during the previous year relevant to the assessment year 1972-73, the assessee and Messrs K.C.P. Limited settled the claim for a sum of Rs. 1,40,000 and the latter paid the said amount to the former in full and final settlement of all claims arising ex contractu on account of the breach of the contract. The assessee, relying on the decision of the Supreme Court in CIT v. Vazir Sultan Sons [1959] 36 ITR 175 and Divecha (P.H.) v. CIT [1963] 48 ITR 222, claimed that the receipt was a non-recurring capital receipt and being casual, was not liable to tax. The Income-tax Officer, while agreeing that it was in the nature of a capital receipt, held that the payment resulted in extinguishment of the assessee's right to acquire the subject-matter, an intangible asset, and was, therefore, covered by section 2(47) read with section 45 of the Income-tax Act, 1961 (for short " the Act "), and was liable to tax as short-term capital gain. In appeal, the Appellate Assistant Commissioner held that the agreement did not bring into existence any capital asset or any right in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in sections 53, 54, 54B, 54D, 54E and 54F, are made chargeable to income-tax under the head " Capital gains " and such income is to be deemed to be the income of the previous year in which the transfer took place. Section 48 provides the machinery for computing income chargeable under the head " Capital gains ". It provides that such income shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly or exclusively in connection with such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. In other words, from the full value of the consideration received or accruing on the transfer of the capital asset, the amounts stated in (i) and (ii) above have to be deducted and the balance becomes chargeable to income-tax as capital gains and must, therefore, be treated as the income of the previous year in which the transfer took place. The two basic requirements to be satisfied are : (i) there must be a transfer of a capital asset; and (ii) profits or gains must have arisen from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be transferred. Clause (e) with which we are concerned states that " a mere right to sue cannot be transferred ". This clause also underwent a change by the Amending Act 2 of 1900. Before its amendment, it provided that "a mere right to sue for compensation for a fraud or for harm illegally caused cannot be transferred The underlined words were deleted with a view to widening the scope of the clause. Lastly, section 130, as it now stands, provides that an actionable claim can be transferred only by an instrument in writing signed by the transferor. The contention of the assessee is that on the breach of the contract by Messrs K.C.P. Limited and the sale of the subject-matter to a third party, the only right which survived in the assessee was a right to sue for one or more of the reliefs available on the breach of contract. This right was not an actionable claim within the meaning of section 3, Transfer of Property Act, since it could not be said to be a debt or a beneficial interest in movable property not in the possession of the assessee. It was a mere right to sue which could not be transferred by virtue of section 6(e) referred to earlier. In any case, assuming without ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underlined words has brought into sharp focus the distinction between property and a mere right to sue. Before the amendment, only the right to sue for damages arising out of a tortious act fell within the ambit of the said clause. The right to sue arising ex contractu, therefore, did not fall within the mischief of the clause even if it were a mere right to sue. After the amendment a mere right to sue, whether arising out of tortious act or ex contractu, is not transferable. In Mulla's Transfer of Property Act, seventh edition, at page 68, we find the following statement: " But a debt or actional claim must be distinguished from a right to sue for damages. After breach of a contract for the sale of goods nothing is left but a right to sue for damages which cannot be transferred. But before breach the benefit of an executory contract for the sale of goods may generally be transferred and the buyer has the right to sue for the goods. (Emphasis supplied). This statement lends support to the view that once a contract for the sale of movables is broken and the subject-matter thereof is disposed of by the defaulting party, the only right which survives in the injured party is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Khan v. Rughoonath Pershad [1871] 14 Moore's Indian Appeals 41, the Privy Council was required to construe section 205 of Act VIII of 1859, which used the words " and all other property whatsoever, movable or immovable ". These words would indicate that scarcely any kind of property was exempt from its operation. While construing this provision, Lord justice James, who spoke for the Privy Council, observed [1871]14 MIA 49: " The 205th section uses the word 'property', not claim or right. mere right of suit is not property, but a, title to recover future property. " In Abu Mahomed v. S. C. Chunder [1909-10] ILR 36 Cal 345, the facts were that Messrs Ebrahim Haji Sulaiman Company had under a contract dated December 2, 1904, purchased from S. C. Chunder 2,25,000 gunny bags for delivery in equal portions during the months of January to May, 1905, each month's delivery to be considered a separate contract. Delivery was duly given of the January and February portions, but there was a default so far as the March instalment was concerned causing damage to Messrs. Ebrahim Haji Sulaiman Company. Subsequently, the purchasers became insolvent and the firm's estate vested in the of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or delivery during the month of March, was " at an end " ; and all that the buyer was to do was to sue the seller for damages for breach of the contract, which the seller had failed to perform. Proceeding further, the learned judge stated ([1909-10] ILR 36 Cal at 352): " The question really resolves itself into this : was this right to recover damages for the breach of contract which could no longer be fulfilled, an actionable claim or merely a right to sue. In my opinion, it was merely a right in the buyer to sue for such damages as he might be able to prove he had sustained .... If that were so, then that right could not be passed under the assignment, by virtue of the provisions of section 6 of the Transfer of Property Act, clause (e), and, moreover, the assignment does not purport to pass anything more from the buyer than the actionable claims to which he was entitled. Then, if the definition of 'actionable claim ', given in the Transfer of Property Act, is looked at, it is clear, I think, that a right to sue for damages-unascertained damages, consequent upon a breach of contract, does not fall within that definition. " The learned judge, therefore, came to the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in movable property. This decision is clearly binding on us. Chagla C.J. had an occasion to consider this aspect of the law in Iron Hardware Co. v. Shamlal Bros., AIR 1954 Bom 423. The learned Chief justice observed as under (at p. 425): " It is well settled that when there is a breach of contract, the only right that accrues to the person who complains of the breach is the right to file a suit for recovering damages. The breach of contract does not give rise to any debt and, therefore, it has been held that a right to recover damages is not assignable because it is not a chose-in-action. An actionable claim can be assigned, but in order that there should be an actionable claim, there must be a debt in the sense of an existing obligation. But inasmuch as a breach of contract does not result in any existing obligation on the part of the person who commits the breach, the right to recover damages is not an actionable claim and cannot be assigned." Proceeding further, the learned Chief justice stated (at p. 425): " In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this position is made amply clear by the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred." (Emphasis" supplied). Quoting the statement of law enunciated by Chagla C.J., which is extracted earlier, the Supreme Court stated (at p. 1273): " This statement in our view represents the correct legal position and has our full concurrence." It would seem well-settled from the above discussion that after there is a breach of contract for sale of goods, nothing is left in the injured party save the right to sue for damages or specific performance which cannot be transferred under section 6(e) of the Transfer of Property Act since it is mere right to sue and not an actionable claim. Counsel for the Revenue, however, placed considerable reliance on three decisions: (i) Rajah Bahadur Narasingerji Gyanagerji v. Raja Panugandi Parthasaradhi Rayanim Garu, AIR 1921 Mad 498; (ii) Bana Gopal v. P. K. Banerji, AIR 1949 All 433; and (iii) Benumetcha Gangaraju v. Veluri Gopala Krishnamurthi, AIR 1957 AP 190. So far as the Madras case is concerned, the question which arose was whether the three plaintiffs, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtor in the property, it must be taken to have assumed that the property was not a mere right to sue for damages. After the attachment thereof, it was put to auction sale and was purchased by three plaintiffs. Since it was permitted to be attached, it was held to be something more than a mere right to sue for damages which could not otherwise have been attached under section 60 of the Code of Civil Procedure. The court, therefore, held that the right to get a reconveyance was property of a valuable kind which could be attached and sold under the Code notwithstanding the amendment of the Transfer of Property Act. Read in this background the observations on which counsel for the Revenue relies only mean that what was attached and sold was not a " mere " or " bare " right to sue and was, therefore, transferable, notwithstanding section 6(e) of the Transfer of Property Act. The facts of the Allahabad case reveal that the applicants had entered into a contract with two brothers, Sham Behari Lal and Kunj Behari Lal, on December 29, 1939, for the purchase of twenty-five bales of gunny bags, the date of delivery having been fixed as January 25, 1940. The applicants failed to take deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person has a disposing power which he may exercise for his own benefit ". The definition of the word " property " being inclusive was rightly held to be not exhaustive. The court then proceeded to consider the different senses in which the word " property " was used and after quoting from Salmond on jurisprudence, it held that the word " property" cannot be confined to material objects, it must include rights in and over that object. These jure in re aliena were held to be "property " of the person owning them, though the material object is owned by another. In that sense " benefits arising out of a contract " stood included in the term " property ". The court then observed: " The right to claim damages for breach of contract is one of the benefits of a contract. " The learned judge then made the following observations in paragraph 14 of the judgment : " A claim for damages on account of breach of contract is a right arising out of contract and is an obligation qua the person who is guilty of breach and his property." With respect, this observation does not seem to be consistent with the view of Chagla C.J. extracted earlier wherein he said that a person who commits a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act is " at an end ". But, with respect to the learned judge, the question of exercise of the remedial right to sue for damages can arise only when the antecedent right is denied and is rendered unenforceable.The view expressed in Abu Mahomed's case[1909-10] ILR 36 Cal 345, has been approved by the Supreme Court in Raman Iron Foundry, AIR 1974 SC 1265, wherein their Lordships observed (para. 9 at p. 1273): " The only right which the party aggrieved by the breach of the contract has is the right to sue for damages ". The Supreme Court has also approved the view that it is not an actionable claim and, therefore, cannot be transferred. On the same line of reasoning and for the reason that the case did not arise under the Insolvency Act, the Allahabad High Court did not approve the decisions which were based on the ratio in Abu Mahomed's case, AIR 1974 SC 1265, including the decision of the Bombay High Court in Hirachand's case, AIR 1923 Bom 403. Needless to say that the ratio of Abu Mahomed's case was later approved by Chagla C.J. and the Supreme Court in the aforementioned cases without specific reference thereto. With respect, therefore, it is not possible to accept the line of reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by section 45 is one as a result whereof consideration has passed to the assessee or has accrued to him, extinguishment of the right must relate to that " capital asset ", corporeal or incorporeal. It is, therefore, obvious that a transfer of a capital asset in order to attract liability to tax under the head " Capital gains " must be a " transfer " as a result whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by section 48 of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, there must be receipt of consideration for such extinguishment to attract liability to tax. Now, in legal parlance, the terms " consideration " and " compensation " or " damages " have distinct connotations. The former in the context of sections 45 and 48 would connote payment of a sum of money to secure transfer of a capital asset; the latter would suggest payment to make amends for loss or injury occasioned on the breach of contract or tort. Both sections 45 and 48 postulate the existence of a capital asset and the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, there would be no question of deduction of cost of acquisition of that capital asset under section 48, clause (ii), and the full value of consideration would be brought to tax. The Calcutta High Court took a contrary view in CIT v. Anglo India jute Mills Co. Ltd. [1981] 129 ITR 352. It held that on a conjoint reading of sections 45 and 48 of the Act, it is clear that if the assessee has not spent or laid out anything for acquiring the capital asset, the transfer of such capital asset cannot yield anything by way of capital gains. In CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, the Supreme Court specifically disapproved of the view expressed by this High Court in the case of Mohanbhai Pamabhai [1973] 91 ITR 393. The Supreme Court held that the charging section and the computation provisions together constitute an integrated code and when there is a case to which the computation provisions cannot apply at all such a case must be taken as not intended to be covered by the charging section ; otherwise, the situation would be that while a given income falls within a charging section, there is no computation machinery provided therefor. After referring to the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness income or as set-off against other income, respectively, under section 12B of the Indian Income-tax Act, 1922. The High Court held that the payment was in substance to avoid the obligation to purchase the property and was not in any sense loss arising from the sale, exchange, relinquishment or transfer of capital asset. In conclusion, the court observed (at p. 80): " By no stretch of imagination, in our judgment, can compensation or damages paid for failing to carry out a contract to purchase a property be regarded as a loss arising from sale, exchange, relinquishment or transfer of a capital asset within the meaning of section 2(4A) of the Income-tax Act. " These observations lend support to the submission that payment by way of compensation or damages is distinct from consideration paid for complying with the contract. Counsel for the Revenue, however, placed reliance on three decisions: (i) CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj); (ii) CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom) and (iii) CIT v. Shantilal P. Ltd. [1983] 144 ITR 57 (SC). In the first case, the assessee company had purchased machinery and had given it on hire to a third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not by way of compensation or damages for breach of contract. This decision is, therefore, not an authority for the proposition that payment of compensation or damages for breach of contract would also attract the application of section 45 of the Act. In the last case, Shantilal P. Ltd. [1983] 144 ITR 57 (SC), the assessee had contracted to sell 200 kg. of folic acid within three months to Messrs. Medical Service Centre at the rate of Rs. 440 per kg. In the meantime, the rates of folic acid shot up to Rs. 2,000 per kg. The assessee, therefore, did not perform the contract. Messrs. Medical Service Centre filed a suit and the dispute was referred to arbitration. As a result of arbitration, the assessee was required to pay Rs. 1,50,000 by way of compensation to Messrs. Medical Service Centre. The assessee claimed it as a business loss. The Income-tax Officer rejected the claim and held the transaction to be speculative under section 43(5) of the Act. In appeal, both the Appellate Assistant Commissioner and later the Tribunal reversed the decision and upheld the assessee's plea. In a direct reference to the Supreme Court, that court held that a transaction under which compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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