2004 (4) TMI 63 - HC - Income Tax

Capital gains tax - By entering into a deed of cancellation, the assessee relinquished the right, which he acquired under the first agreement, accepting a sum of Rs. 6,00,000 from the owner of the land - whether the amount of Rs. 6,00,000 received by the assessee from the vendor cannot be treated as capital gains in the hands of the assessee - With regard to the contention that there was no cost of acquisition incurred by the assessee for obtaining the rights under the agreement, and consequently there could be no capital gains assessable, it is to be noted that at the time of agreement of sale the assessee paid Rs. 40,000. - Only by paying the said amount the assessee acquired the right to get the sale deed executed in his favour. - Now that we have come to the conclusion that the assessee incurred Rs. 40,000 for acquiring the right to acquire the sale deed, the contention of assessee that there is no cost of acquisition and so there could be no assessment of capital gain on the transfer of the capital asset falls to the ground.

Issues Involved:

1. Whether the amount of Rs. 6,00,000 received by the assessee from the vendor can be treated as capital gains.
2. Whether there was a transfer of property by the assessee that would make him liable for assessment under capital gains.
3. Whether the cost of acquisition was incurred by the assessee for acquiring the right in the property.

Issue-wise Detailed Analysis:

1. Treatment of Rs. 6,00,000 as Capital Gains:

The core issue was whether the Rs. 6,00,000 received by the assessee from the vendor could be treated as capital gains. The court examined the agreements and relevant provisions of the Income-tax Act, particularly sections 2(14) and 2(47). The court noted that the assessee had entered into an agreement to purchase land, which he later relinquished for a sum of Rs. 6,00,000. The court concluded that the right, title, and interest acquired under the agreement of sale fell within the definition of "capital asset" under section 2(14). The relinquishment of this right was considered a "transfer" under section 2(47), making the amount received subject to capital gains tax.

2. Transfer of Property and Liability for Capital Gains:

The court addressed whether the assessee had transferred any property that would make him liable for capital gains tax. The court referred to the definition of "transfer" in section 2(47) of the Income-tax Act, which includes the sale, exchange, relinquishment, or extinguishment of any rights in a capital asset. The court found that by entering into the deed of cancellation and allowing the vendor to sell the property to any person, the assessee had relinquished his right to specific performance. This relinquishment was deemed a transfer, thus attracting capital gains tax.

3. Cost of Acquisition:

The assessee contended that there was no cost of acquisition incurred for the right in the property, and thus, no capital gains could be assessed. The court examined the payment of Rs. 40,000 made by the assessee at the time of the initial agreement as the cost of acquisition. The court cited precedents, including CIT v. Tata Services Ltd. and CIT v. Vijay Flexible Containers, where similar payments were considered the cost of acquisition. The court concluded that the Rs. 40,000 paid by the assessee constituted the cost of acquisition, and therefore, the capital gains were assessable.

Conclusion:

The court dismissed the appeal, holding that the Rs. 6,00,000 received by the assessee was subject to capital gains tax. The court found that the assessee had transferred a capital asset by relinquishing his right to specific performance and that the cost of acquisition was the Rs. 40,000 paid at the time of the initial agreement. The appeal was dismissed with no costs.

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