TMI Blog1979 (2) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ase properties known as, (1) Alexandra Terrace, and (2) Albion Place for a total price of Rs. 11,50,000. The purchase was to be completed within about four months ; this, however, was subject to various conditions mentioned in the agreement. The agreement provided for payment of earnest money in the sum of Rs. 1,50,000 which was duly paid. It is also common ground between the parties that on 15th October, 1946, the assessee-company paid a further sum of Rs. 1,50,000 to the vendor by way of earnest money. Thus the total amount paid as and by way of earnest money came to Rs. 3 lakhs. As mentioned earlier, the agreement for sale stipulated a period of four months for completing the sale on payment of the balance amount of price after verifying the vendor's title to the properties. The assessee-company, however, was not satisfied regarding the clear title of the vendor and lengthy and protracted correspondence, therefore, ensued between the respective solicitors, in which it was contended on behalf of the assessee-company that the title was not clear and a converse contention was raised on behalf of the vendor. The matters dragged on in this manner till 1957. Although it is the admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable to agree with this view because the sale agreement if at all stipulates the earnest money of only Rs. 1,50,000 and not Rs. 3 lakhs and even so there is nothing in it to suggest that the initial payment of Rs. 1,50,000 would be forfeited in case the sale is not put through. Moreover, if the titles to the property were not clear, then the assessee itself had an actionable claim against the sellers by virtue of clause 7. It is also open to doubt whether the payment of Rs. 1,50,000 or Rs. 3 lakhs did bring into existence any capital assets belonging to the assessee within the meaning of section 12B. In any case the loss cannot be said to have arisen in the previous year because the agreement clearly stipulated the sale to be completed within four months of its execution. The whole transaction dates as far back as the year 1946 and it has by no means been established that the loss arose in the previous year alone. On these considerations, the same shall be ignored. It is pertinent to note that the order of the ITO suggests the clear position, which is also borne out by the statement of case submitted to us, that the claim was in respect of the earnest money of Rs. 3 lakhs (or R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase the properties and to allow the sum of Rs. 3,00,000 to be forfeited by the sellers. 3. The ITO failed to appreciate that the appellants in their own interest allowed the forfeiture of Rs. 3,00,000 rather than indulge in litigation with the sellers and be mulcted in costs. 4. The ITO erred in holding that because the agreement to purchase was made in 1946 the loss could not be said to arise in the previous year relating to the assessment year in question ........" When the AAC considered the matter, he accepted the submission advanced before him on behalf of the assessee that the matter squarely fell within s. 12B of the Indian I.T. Act, 1922, and a capital loss had resulted to the assessee from the transaction. In his opinion, however, this capital loss had not arisen during the year of account. He took the view that it had arisen in the year 1946 and on this limited plea he rejected the appeal of the assessee. It may be mentioned that in the appeal before the Tribunal, which was obviously at the instance of the assessee, the departmental representative had to concede immediately that the view of the AAC as to the year in which the loss accrued was totally erroneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its mind to the claim on merits and it was expressly conceded on behalf of the revenue that the loss, if any, accrued to the assessee in the assessment year in question and not in 1946, as stated by the AAC. Even otherwise the Tribunal found the position quite clear and observed that there can be no doubt that the AAC was totally wrong in the view that he took that the loss had accrued in 1946, and not in the year of account. The Tribunal has in paras. 7 and 8 of its appellate order considered the question as to whether a capital loss had been suffered by the assessee and, further, whether this fell within what was provided by s. 12B of the Indian I.T. Act, 1922. It held in the first instance that by entering into an agreement of purchase with the vendor in 1946, the assessee had acquired a valuable right, viz., a contractual right to purchase the two properties for a stated price. It observed further that this was an assignable right. In its view the assessee had relinquished the said right by consenting to the mutual cancellation of the agreement for sale. According to the Tribunal by so doing the assessee could be considered to have relinquished the said capital asset within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corresponding provision under the Act of 1922, a capital asset means property of any kind. The contractual right of such purchaser to obtain title to immovable property for a price, which right is assignable, will be required to be considered both as property and therefore a capital asset. We have expressed similar views in an earlier income-tax reference decided in this very session by us, viz., I.T. Reference No. 10 of 1970 (CIT v. Tata Services Ltd., decided on 16th January, 1979) [1980] 122 ITR 594 (Bom). Mr. Joshi then submitted that if the right of the assessee under the contract of sale, viz., the right to purchase the said properties and obtain conveyance thereof from the vendor is to be considered to be property, then no capital gain or loss can be said to arise from a subsequent giving up of that right and extinction or abrogation thereof ; and for this purpose he relied on certain observations in CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 (Bom). The argument was that if the right to purchase is assigned to a third party, then there may be a capital gain (or loss). On the other hand, according to Mr. Joshi, if the right is given up and the vendor is relieved f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the claim of the vendor that they became entitled to forfeit the earnest money or at least a substantial part thereof, viz., Rs. 2,90,000, out of Rs. 3,00,000, was acquiesced in by the assessee-company and such acquiescence in forfeiture cannot be equated with a loss arising from the relinquishment of a valuable capital asset as understood by the Tribunal. It becomes necessary in these circumstances to understand the various aspects involved in the concept of forfeiture of an advance or earnest money. The true legal position as regards forfeiture of earnest money of a defaulting purchaser has been indicated by the Supreme Court in a number of cases, but reference may be made to two of them only which are indicated in Pollock and Mulla's Indian Contract Act, 9th Edn. In Shree Hanuman Cotton Mills v. Tata Aircraft Ltd., AIR 1970 SC 1986, the Supreme Court has laid down several principles regarding earnest money. According to the Supreme Court : " (1) It must be given at the moment at which the contract is concluded. (2) It represents a guarantee that the contract will be fulfilled or, in other words, ' earnest ' is given to bind the contract, (3) It is part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said two letters. Before dealing with this argument, we may now briefly advert to the correspondence with has been annexed as annexs. " A " to " A-4 " respectively. Annexure " A " is the letter dated 25th October, 1957, from the Joint Education Adviser to the Govt. of India to the Secretary, Board of Management of the Bombay Properties of the Indian Institute of Science, and the addressee may be presumed to be the successor of the original vendor. This will be borne out by the subject-matter of the letter. By this letter Government's concurrence is indicated to the proposal that the contract of sale of the two Byculla properties entered into with the assessee-company could be cancelled but on the condition that the Sterling Investment Corporation will forfeit the entire amount of Rs. 3,00,000 paid by it as earnest money. We then have letters dated 11th December, 1957, and 12th December, 1957, exchanged between the respective attorneys of the vendor and the assessee-company. The letter dated 11th December, 1957, is addressed by the attorneys of the assessee-company to the attorneys for the vendor. The letter sets out in para. 1 thereof the contention of the client (the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opposite side to which it is sent, particularly if the proposal contained in the letter does not fructify into a final agreement. Where letters are produced before a Tribunal or a court and are made part of the statement of case, there is no restriction whatever on the Tribunal or the court in looking at the letters. Further, if the letters are analysed, they fall into two parts ; the first part contains the legal contentions of the party as to what had transpired and the respective answers of the opposite party, and the later part of the letters deals with the proposal for settlement. Fairly looked at, the inscription " without prejudice " can have reference only to the proposal which is contrary to the express legal contentions found in the earlier part of the letters. On both footings, therefore, there is no substance whatsoever in the plea. Mr. Dastur, however, submitted---and there is some force in this contention---that these two letters which were exchanged between the legal advisors of the parties in October, 1957, cannot be utilised to interpret the agreement ultimately entered into which is contained in the two letters dated 18th August, 1958, and 19th August, 1958, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is amount as having been forfeited by the vendor. It is pertinent to point out in this connection that the Tribunal has expressly mentioned that the correspondence has been produced very selectively before it. If it had been urged on behalf of the assessee-company that there had been no forfeiture but a bilateral cancellation of the contract resulting in certain pecuniary consequences, then the Tribunal would have been required to give a finding as to the nature of the retention (by the vendor) and for this finding the Tribunal would have required the entire correspondence between the parties to be brought on record. It is surely not to be permitted to an assessee to keep back the entire correspondence except the few letters produced before the Tribunal, and to proceed before the ITO, the AAC and the Tribunal on a specific footing and then in this court to change front altogether and argue a totally different case. This cannot be permitted to be done. Further, it would appear to us that the assessee-company had properly accepted that this amount was forfeited by the vendor, and this position would be made clear when the earlier letters are referred to. We are not concluded by wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Rs. 3,00,000 but of Rs. 2,90,000 therefrom and giving up by the two parties of all other claims against each other. Thus the vendor gives up the claim for specific performance or damages and the purchaser gives up their claim for return of any part of the amount of Rs. 2,90,000 which is to be retained by the vendor, or interest thereon and for other amounts. There are no other rights which can now arise inasmuch as it is expressly provided in the bargain that the contract is mutually cancelled. This is all that the bargain means and it is not inconsistent with the earlier claim of the vendor that they had become entitled to forfeit the amount of earnest money. The claim of forfeiture will certainly be a claim made by the vendor who would have with him the earnest money or deposit or advance. At the initial stage and in case where the controversy subsists, it will be a unilateral claim which will be resisted by the other side. We may, however, envisage a case---and the present case is one---where the opposite side, viz., the purchaser concedes to the said claim fully or substantially or in part, agreeing further that on such concession being made and a bargain being struck a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument which was urged by Mr. Dastur at the fag end of the discussion, and that was based on the fourth proviso to sub-s. (2) of s. 12B. The said fourth proviso reads as follows : " Provided further that where the capital asset was on any previous occasion the subject of negotiations for its sale, exchange, relinquishment or transfer, any option or other money received and retained by the assessee in respect of such negotiations shall be deducted in computing the actual cost to him of such asset. Mr. Dastur submitted that as far as the vendor was concerned, if it were to subsequently sell these properties or either of them, then the proviso would come into operation and would result in a deduction of the actual cost of the asset which the vendor were to subsequently sell. In his submission, the vendor then would be required in case of such later sale to pay capital gains on the amount of Rs. 2,90,000 which in the view that we have taken might not be available as capital loss to the assessee-company. It was submitted that this would be an inequitable view of the matter and the proviso would indicate a proper approach which was required to be adopted, viz., that the amount w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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