TMI Blog2023 (6) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... red into the settlement with the purchaser there was a relinquishment of the asset. Relinquishment under law does not merely mean withdraw from, desert, abandon, to cease to hold, adhere to , as assumed by Ld. AO. The judgment he has relied to understand the term relinquishment in CIT vs. Rasiklal Maniklal (HUF) [ 1989 (3) TMI 3 - SUPREME COURT] was in regard to the question where the assessee in the case had received certain shares of the company upon amalgamation. While we are dealing with rights in regard to the transactions concerning immovable properties. Relinquishment in case of immovable property is a way of enlargement of the share or shares of the co-owners of the same rights. Despite the definition of expression capital asset in the widest possible terms in section 2(14), right to a capital asset must fall within the expression property of any kind in the context of transferability. Relinquishment of the asset or the extinguishment of any rights therein of a right in regard immovable property, to fall under definition of Transfer u/s clauses (i) or (ii) of Section 2(47) of the Act, should be of a right or an interest which is alienable and otherwise which can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AO ). 2. The assessee is a firm having income from Business or Profession. The assessee filed return of income on 30.09.2013 declaring an income of Rs.46,89,452/-. The case was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) of the Act dated 03.09.2014 was issued and duly served upon the assessee. Subsequently, notice u/s 142(1) along with questionnaire was issued on 31.08.2015 and served upon the assessee. 2.1 During the year under consideration, the assessee has received Rs.20,40,00,000/- in a settlement in the court, which the assessee has claimed as non - taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio. 2.2 The assessee vide letter dated 09.10.2015, filed the following sequence of events which led to the receipt of Rs. 20,40,00,000/-: SEQUENCE OF EVENTS (i) 19.04.2004: The assessee firm (LESSEE), took on lease the entire property comprising of Easement Floor, Ground Floor, First Floor, Second Floor, Third Floor and Terrace, with parking area, on Plot bearing No. 73 Ring Road, Lajpat Nagar, New Delhi, (LEASED PROPERTY), (approx area 22,000 sqft), from one Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ANDHARI INFRASTRUCTURES PVT LTD., 177-F, Industrial Area Phase I, Chandigarh, for a consideration of Rs Six crores. The sale deed was registered with The Sub Registrar V, New Delhi, as document No. 15980 in Book No 1 Volume No. 5492 at pages 1 to 192. The LESSOR did not. (iii) 26.09.2006 : The assessee firm (LESSEE) then instituted suit No. CS(OS) No. 1863 of 2006, before The High Court of Delhi, at New Delhi, For Pre-emption and/or for specific performance Of Agreement to sell and for permanent Injunction . A copy of the suit filed is listed at Pages 40 to 47 of these submissions. Mr. Parvinder Singh Chopra (LESSOR) and M/s Kandhari Infrastructures Pvt Ltd were made the two Defendants. M/s Kandhari Infrastructures Pvt Ltd, as Owner of The LEASED PROPERTY, also filed a Civil Suit No CS (OS) No 101 of 2007 before The Delhi High Court, against the assessee firm, seeking decree of ejectment / possession of the property as also arrears of rent, damages and mesne profits. (iv) 06.08.2007:The Hon'ble Delhi High Court, passed an interim order in CS (OS) No101 of 2007,And required the assessee firm to hand over possession of The LEASED PROPERTY to M/s Kandhari Infrastructu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as per the provisions of Section 2(47) of The Income Tax Act, 1961 becomes meaningless and inappropriate. (iii) It would be incorrect and against law to hold that the amount of Rs. 20,40,00,000/- received by the assessee from M/s Kandhari Infrastructures Pvt Ltd. should be treated as Long Term Capital Gain arising from such transfer, chargeable to tax in the hands of the assessee firm. The assessee further submitted that : Kind attn. is drawn to the following salient and important issues : (i) The premises in question viz 73, Ring Road, Lajpat Nagar, New Delhi stood transferred on 13.10.2015, when the LESSOR Sh. Parvinder Singh sold the property under a registered deed to M/s Khandhari Infrastructures (P)Ltd. (ii) On 13.10.2015, Sh. Parvinder Singh (LESSOR) ceased to be the owner of the premises M/s. Khandhari infrastructures(P) Ltd. became the new owner of the premises, and continues to remain so as on date of the submissions. The assessee firm was neither the owner nor the Transferor or the Transferee of the premises. The assessee firm was not a party and was not associated in any manner with the transfer of the property. The assessee firm was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transfer u/s 2(47) of the Act Ld. AO went on to observe that use of words relinquishment of rights in section 2(47) of the Act include right of pre-emption or first right of purchase. He observed that this is an additional right upon the assessee and is distinct and separate from the assessee s tenancy rights. Thereafter, considering the clauses of lease deal in favour of the assessee and the litigation initiated by the assessee in the form of suit for specific performance/ for pre-emption, the Ld. AO observed that assessee has given up all its right by virtue of settlement agreement. Ld. AO observed that, the withdrawal of the suit which was filed for the enforcement of the right of pre-emption by the assessee as part of settlement agreement shows that when the assessee gave up all its rights as part of the said agreement, it also relinquished its right of pre-emption which was the premises for the suit. Ld. AO also considered the issues framed by Hon ble Delhi High Court in the suit instituted by the assessee to conclude that since it was an enforceable right it was a capital asset. 2.8 Thereafter based on the sequence of events, litigation and settlement, the Ld. AO con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept a contention that it has been paid Rs. 20 crore voluntarily and not in connection for extinguishment of preemptive right to purchase or surrender of tenancy right. The contention that such a huge and disproportionate amount was paid just like that voluntarily is not acceptable. This flies in the face of common sense. The question then remains is what was the compensation for. The AR has preferred to prevaricate the issue. (See his submission dt 9/6/2017 discussed at para 5.5.33 infra) Law of evidence mandate that when the best evidence is not produced, the issue has to be decided against the appellant. (b) Be that as it may, the contention of the AO that such a high compensation was for pre-emptive right to purchase also is not plausible. It could be for a host of factors and the entirety of facts are close to the chest of the appellant which is kept under cover. The fact remains that the right of lease in perpetuity was relinquished and the consideration also attributable to it. Furhter, the transfer of tenancy right is exigible to capital gain tax, without doubt. (c) In any case, the appellant has not submitted the basis of consideration of Rs. 20.4 cr. receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned C1T (A) has further erred in initiating proceedings u/s 271(l)(c) of the Act despite the fact such proceedings had been initiated by the AO and were pending for adjudication before him. 7. That the learned CIT (A) has failed to appreciate that there could have been no double jeopardy and as such, the initiation of proceedings under section 271(l)(c) of the Act was wholly unwarranted and untenable in law. 5. Heard and perused the record. 5.1 On behalf of the assessee, primarily the contention of Ld. Sr. Counsel was that Ld. Tax Authorities below have fallen in error in not understanding the nature of right of pre-emption. It was submitted that this right is a mere right to sue and cannot be considered to be transferable asset. Ld. Sr. Counsel took the Bench through sequence of events and documents reflecting various litigations and transactions of settlement to submit that Ld. Tax Authorities below have fallen in error in considering the amount received under settlement to be capital gains. He referred to the judgment of Hon ble Delhi High Court in CIT vs. J. Dalhu 1985 20 taxman 86 Delhi to submit that mere right to sue may or may not be property but it certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs. 20.4 cr. Received by it. The onus to prove that it is capital receipt not liable to be taxed has also not been discharged. Even otherwise, such contentions are bound to fail in view of the discussion made above. (d) The upshot of the entire discussion is that the appellant has transferred valuable rights (capital asset) of pre-emptive right to purchase and also right to lease in perpetuity. It is liable to be exigible to capital gain for the entire amount of Rs. 20.40 cr. The same is held penalty proceedings u/s 271(1)(c) is to be initiated for furnishing of inaccurate particulars leading to concealment of taxable income. 6.1 He has submitted that the Ld. Counsel of the appellant has taken a contrary position to the earlier position taken by the appellant, that the appellant did not had a pre-emptive right rather the appellant had the right to sue for breach of clause 13 of the lease deed dated 19.04.2004. Ld. DR has distinguished the judgements relied by Ld. Sr. Counsel by submitting that the question for examination, before the Hon ble Supreme Court in the case of Bishan Singh and Ors. Vs. Khazan Singh and Ors.[Civil Appeal no. 255 of 1954] dated 20.05.1958 (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be enforced at the present day. In our opinion the law of pre-emption creates right which attaches to the property and on that footing only it can be enforced against the purchaser. 6.4 Ld. DR contended that the Hon ble Supreme Court in this case has conclusively held that the benefit as well as burden of the right of pre-emption runs with the land and can be enforced by or against the owner of the land for the time being which is contrary to the argument of the Ld. Counsel that the right for pre-emption is right in personam i.e. right against the person. 6.5 Referring to Hon ble Patna High Court judgement in the case of Sheo Kumar Dubey vs. Smt. Sudama Devi and Anr. AIR 1962 Pat 125 he submitted that in this judgement both the judgment of Hon ble Supreme Court i.e. in the case of Bishan Singh and Ors. Vs. Khazan Singh and Ors. and in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others has been discussed. Ld. DR pointed out that the Hon ble High Court in para 11 of the judgment has stated as under: The decision of the Privy Council in Sheo-baran Singh v. Kulsumunnissa, AIR 1927 PC 113, though not directly in point, lends considerable support t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unhampered by any right of the pre-emptor and in such circumstances there could be no justification for enforcing the right of pre-emption against the purchaser on grounds of justice, equity and good conscience on which grounds alone the right could be enforced at the present day. In our opinion the law of pre-emption creates a right which attaches to the property and on that footing only it can be enforced against the purchaser. 6.6 Ld DR submitted that further, there are numerous judgments of Hon ble Supreme Court and various High Courts wherein it has been held that the transfer of lease hold rights and lease in perpetuity constitute a transfer and liable to tax on capital gains. Some of the Judgments have been examined by Ld.CIT(A) in para 5.26 of his order on page 75. 7. Now after giving thoughtful consideration to the matter and the submissions, at the outset it is necessary to mention as to what Hon ble Supreme Court of India in Audh Bihari Singh v. Gajadhar, AIR 1954 SC 417 pointed out about the sources of right of pre-emption. Hon ble Supreme Court has classified the sources to; 1st Rule of common law; 2nd custom; 3rd personal law; 4th statute and 5th contract. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , where a custom of pre-emption exists, each village community has a custom of pre-emption which varies from the Mahomedan Law of pre-emption and is peculiar to the village in its provisions and its incidents. A custom of pre-emption was doubtless in all cases the result of agreement amongst the shareholders of the particular village, and may have been adopted in modern times and in villages which were first constituted in modern times. It is not necessary for our present purpose to pursue this discussion any further. Since the establishment of British rule in India the Muhammadan Law ceased to be the general law of the land and as pre-emption is not one of the matters respecting which Muhammadan Law is expressly declared to be the rule of decision where the parties to a suit are Muhammadans, the Courts in British India administered the Muhammadan Law of pre-emption as between Muhammadans entirely on grounds of justice, equity and good conscience' Here again there was no uniformity of views expressed by the different High Courts in India and the High Court of Madras definitely held that the law of pre-emption, by reason of its placing restrictions upon the liberty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndee allowing the claimant of a superior or equal right being substituted in his place. (Emphasis supplied) 9. In a Constitution Bench decision of Hon ble Supreme Court in Radhakisan Laxminarayan Toshniwal v Shridhar Ramchandra Alshi 1960 AIR 1368, it dealt with the question whether a suit for pre-emption could be filed prior to execution of the sale deed and held thus: 13. ...The right to pre-empt the sale is not exercisable till a preemptible transfer has been effected and the right of pre-emption is not one which is looked upon with great favour by the courts presumably for the reason that it is in derogation of the right of the owner to alienate his property. It is neither illegal nor fraudulent for parties to a transfer to avoid and defeat a claim for pre-emption by all legitimate means... (Emphasis supplied) 15 The right of pre-emption is a preferential right to acquire the property by substituting the original vendee. The transfer or sale of an immovable property is a condition precedent to the enforceability of the right. The right of pre-emption is attached to the property and only on that footing can it be enforced against the vendee. Though the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n came from the Hon ble High Court as there was settlement. Ld. AO has erroneously concluded at page no. 12 of the order that Hon ble High Court of Delhi has recognized the Assessee s right of pre-emption. While infact mere framing of issue during the hearing of suit cannot be considered to be recognition of the right of assessee. 13. When the aforesaid classification of right of pre-emption is considered very apparently right of pre-emption said to be held by assessee firm does not fall under any of the aforesaid classifications. Specially referring to right of pre-emption arising out of contract amongst sharers in a village, it is not to be confused with the contract arising out of a promise and acceptance followed by due consideration in terms of The Indian Contract Act, 1872, which regulates the lease deed contract between the assessee firm as lessee and the owner of premises, the lessor. Judgement which Ld. Sr. Counsel has referred of Hon ble Allahabad High Court in Jhagru Rai vs. Basdeo Rai and Ors. AIR 1924 Allahabad 400 was in regard to contract arising out of Wajib-ul-arz. The same is a contract amongst the co-sharers of the village land and not regulated by principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee s Right of Pre-emption does not cease to exist with the sale of the property. The assessee retains the right to avail the first offer of purchase even if he has refused it earlier. 16. What this Bench construes from this clause 13 is that the lessee merely had a right to offer of the purchase of the premises. The Clause 13, nowhere indicates the intention that on sale of the premises, the lessee will have right to follow the purchaser and get himself to be substituted in place of purchaser, as otherwise is the remedy in case of right of pre-emption. At page no. 21 of the paper book there is a letter dated 19.09.2005 which shows that the lesser being aggrieved by the default in the payment of rent intended to sell the property and therefore, in terms of clause 13 offered the assessee to purchase the property by giving consent in 15 days. Assessee seems to have not accepted the offer. 17. At the same time, Clause 13 makes it apparent that in the event of transfer of the premises by the lessor to a third party, the lesser was under obligation to ensure that the purchaser continues to recognize the obligations, encumbrances and liabilities created under the lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at page no. 52-53 of the paper book. 20. What is important is that under this settlement agreement dated 29.05.2012 assessee had also agreed to remove all its asset/goods in terms of order dated 06.08.2007 passed in Civil suit no. 101/2007, filed by the purchaser seeking possession. It can be observed that by order dated 06.08.2007, Hon ble Delhi High Court had directed assessee to surrender physical and vacant possession. There is the report of Advocate cum Local Commissioner appointed in Civil suit no. 101/2007, available at page no. 41-42 of the paper book, which shows that the assessee has handed over the possession of the premises to the representative of the purchaser. 21. Ld. AO has also failed to appreciate these facts and has erroneously concluded page no. 14 that : As is evident from the above extract of the Settlement Agreement, the assessee only handed over vacant possession of the property as part of the Settlement Agreement and had retained possession till then by way of the assets/ goods kept there. Further, it is by way of the Settlement Agreement entered into 22.05.2012 that the assessee ceased to have any claim/right/interst in the property. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion right under the aforesaid classification and characteristics of the right of pre-emption but it was out of his preferential right of purchase under Clause 13, as a lessee and therefore, assessee had sought a decree of specific performance of contract. 25. In this context, it can be appreciated that the title of Civil suit CS (OS) No. 1863/2006 by assessee was suit for pre-emption and/or for specific performance of agreement to sell and injunction . There in the suit, Assessee had sought following reliefs in para no. 11, available at page no. 17-18 of the paper book :- 11. That the Plaintiff prays that this Honble court may be pleased to pass decree in favour of the Plaintiff and against the defendants. i) for pre-emption and / or specific performance of the agreement of sale of property No. 73, Ring Road, Lajpat Nagar - III, New Delhi for a sale consideration of Rs.6 Crores, by directing and commanding the defendants to execute and register Sale Conveyance Deed of property No. 73, Ring Road, Lajpat Nagar - 111, New Delhi in favour of the Plaintiff; ii) for permanent injunction, restraining the Defendants from, in any manner, dealing with, alienating, sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the property and the release deed would operate to enlarge that right. The share cannot be released in favour of one who has no rights in the property as co-owner. In regard to right of relinquishment in immovable property Hon ble Supreme Court of India in Kuppuswamy Chettiar vs A.S. P. A. Arumugam Chettiar, 1967 AIR 1395, has recognized the aforesaid by approving Judgement of Bombay High Court in Hutchi Gowder v. Bheema Gowder (1959 (2) M.L.J. 324;) where in it was held that A release deed can only feed title but cannot transfer title and another observation in S. P. Chinnathambiar v. V. R. P. Chinnathambiar (1953 2 M.L.J. 387, 391), Renunciation must be in favour of a person, who had already title to the estate, the effect of which is only to enlarge the right. Renunciation does not vest in a person a title where it did not exist. 29. Despite the definition of expression capital asset in the widest possible terms in section 2(14), right to a capital asset must fall within the expression property of any kind in the context of transferability. Relinquishment of the asset or the extinguishment of any rights therein of a right in regard immovable property, to fall und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase of land is not a right of property. It is settled law that a contract to purchase a property does not create an interest in immovable property'. . .. (p. 874) 31. That being the state of affairs, the questions framed by ld. AO with regard to nature of right of assessee in the premises by way of right of pre-emption are not of any consequence. Ld. Tax authorities have fallen in error in construing the clause 13 to be a right of pre-emption and then going ahead to make addition on basis of transfer of this right of pre-emption by assuming it to be right relinquished under the settlement. Assessee may have also fallen in error in claiming it as a right to pre-emption but settlement terms and conditions establish that the reference to right to sue in the settlement is not established to be right to sue for a particular remedy of enforcement of pre-emption right which was already lost after vacating the premises. Ld. AO has erred to concluded that consequent to the payment of Rs. 20,40,00,000/-, M/s. Kandhari Infrastructures Pvt. Ltd. was free from the suit instituted by the assessee for the enforcement of assessee s right of pre-emption. M/s. Kandhari Infrastr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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