9911796707
TMI Blog2023 (6) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Parvinder Singh Chopra (LESSOR), vide lease deed executed at New Delhi on the 19th day of April, 2004, on a monthly lease amount of Rs.9,00,000/- effective from 01.06.2004. Copy of the lease deed is filed at Pages ...to.... of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Infrastructures Pvt Ltd. The Hon'ble Court also appointed a Local Commissioner. (v) 25.04.2012 : The Hon'ble Court referred both the above suits to Meditation. Sh K VENKATRAMAN, Advocate, was appointed as the Mediator. Several meetings were held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 not also a beneficiary to the consideration exchanged on the transfer of the property between the BUYER and the SELLER. Rs. 20,40,00,000 received by the assessee firm is not therefore against the transfer of the premises. The provisions of section 2(14), 2(47) and other rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considered it as relinquishment of asset for the purpose of clause (i) of section 2(47) of the Act. Ld. AO observed that if a person either gives up, abandons and surrenders interest of that person in a property but the property in which interest is relinquished continues to exist and continues to be ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 certainly cannot be 'transferred' within the meaning of section 45 r.w.s. 2(47) of the Act. He also relied following judgments to submit that the pre-emption being 'Right in Personam' could not have been transferred:- * CIT vs. J. Dalmia: [1984] 149 ITR 215 (Delhi)Baroda * Cement & Chemicals Ltd. vs. CIT : [1986] 158 ITR 636 (Gujrat) * CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (supra) was to decide that out of many claimant of the Right to pre-emption on certain property under Punjab Pre-emption Act, who has the superior right or all have equal right. The other question before the Hon'ble Court was to decide whether this right is modified or otherwise enlarged by the provision of the Act. So, the subject matter before the Hon'ble Apex Court was not to examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 to the view that the customary right of pre-emption is a right annexed to the land and not a mere personal right. The entire controversy now has been set at rest by their Lordships of the Supreme Court in AIR 1954 SC 417, wherein the view taken by the Allahabad High Court that it was not a mere personal right but an incident annexed to the land has been accepted as correct. In order to appreciate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 will be relevant to reproduce what Hon'ble Constitutional Bench observed in regard to the aforesaid classification; "The Privy Council has said in more cases than one, that the law of pre-emption was introduced in this country by the Muhammadans. There is no indication of any such conception in the Hindu Law and the subject has not been noticed or discussed either in the writings of the Smriti write ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 of transfer of property, could not be regarded to be in consonance with the principles of justice, equity and good conscience(2). Hence the right of pre-emption is not recognised in the Madras Presidency at all even amongst Muhammadans except on the footing of a custom. Rights of pre-emption have in some provinces like Punjab, Agra and Oudh been embodied in statutes passed by the Indian Legislature and where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 right is recognised by law, yet it can be rendered imperfect by the vendor when he transfers the property to another person who also has a superior right to the plaintiff pre-emptor" 10. Also relevant is to keep in mind is that practice of Pre-Emption is held to be inconsistent with Constitutional Scheme and modern idea and reliance can be placed on the judgment in Smt. Vijayalakshmi Vs. B. Himantharaja Chetty, AIR 1996 SC 2146, where Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Indian Contract Act. So we need to consider the various facts arising from the record to analyze if there was a legal right of pre-emption at all. 14. To understand the nature of right of the assessee under the lease deed clause 13 of the lease deed dated 19/4/2004 ( Page 10 of PB) is relevant and worthy to be reproduced here as follows; "13. That in case the LESSOR intends to sell the premises, first priority of purchase of the premises shall be gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deed in favour of the lessee, including the return of security amount paid by the lessee. It signifies that parties merely intended that in case the offer of purchase is not accepted by the lessee in that case also certain rights of assessee under the lease deed will be protected and recognized by the purchaser. However, once right to offer was not exercised against the lessor, the assessee firm as lessee could not have enforced the same against the purchaser. Only rights pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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." 22. The Bench is of considered view that in any circumstances once the possession is parted away by the assessee no right of pre-emption actually survived in terms of principles of law of pre-emption enunciated above. Hon'ble Supreme Court of India in Rikhi Ram & Ors. Vs. Ram Kumar and Ors AIR 1975 (SC) 1869 while dealing with the preemptory right of a tenant has held that preemptor who claims the right to preempt the sale, on the date of sale must continue to possess that right till the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, selling or encumbrancing the property' no. 73, Ring Road, Lajpat Nagar - III, New Delhi and iii) award costs of the suit to the plaintiff and against the Defendants; iv) Grant such other or further relief as may be deemed fit and proper in the facts and circumstances of the case." 26. The relief sought in the suit makes it clear that there was no relief of substitution in the sale deed executed in favour of the purchaser ( M/s. Kandhari Infrastructures Pvt. Ltd.), as should ordinarily be sought i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 be monetized. Based on the aforesaid observations the Bench is of considered opinion that the Ld. AO has fallen to conclude at page 27 of the assessment order as follows :- "In the instant case of the assessee, a) The right being considered a 'capital asset' is the "Right of Pre-emption" and not the "Right to sue for damages". b) The civil suit instituted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 Infrastructures Pvt. Ltd. also became the sole and absolute owner of the property which was now free from all encumbrances. The injunction of this company restraining it from transferring, alienating or computing encumbrances of the property no longer stood. It now had the right of either use the property or sale, alienate transfer it according to its ledger. 32. The Bench is of opinion that there was no determination of nature of rights of assessee by the Civil Courts so no opinion for that end against the assessee can be made. There was no encum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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