2011 (1) TMI 1159 - HC - Income Tax

Long-term capital gain - assessees entered into an agreement to purchase the immovable property and paid Rs. 1, 00, 000 as advance amount. It is the cost of acquisition. They filed a suit for specific performance of the agreement of sale. It is thereafter under an agreement entered into between them and the purchasers they gave up their right to sue for specific performance in lieu of a payment of Rs. 7, 50, 000 Held that - amount received by them for giving up the right of specific performance i.e. to give up their right in a capital asset constitutes capital gains they are entitled to deductions as per s. 48 both regarding the investment made as well as the expenditure incurred and only after such deduction the amount arrived at would be exigible to capital gains tax.

Issues Involved:
1. Whether the amount received for giving up the right to specific performance of an agreement to sell can be treated as a transfer and brought to capital gains tax.
2. Whether, when there are two possible views, the one favorable to the assessee should be adopted.

Detailed Analysis:

Issue 1: Capital Gains Tax on Compensation for Giving Up Right to Specific Performance
The Revenue challenged the Tribunal's order, which held that the amount received by the assessees was a capital receipt and not a capital gain, and thus not taxable under capital gains. The assessees had entered into an agreement to purchase a residential property and paid an advance. When the vendor sold the property to another party, the assessees filed a suit for specific performance. A settlement was reached outside the court, where the assessees received compensation for withdrawing the suit.

The Assessing Officer (AO) held that the compensation received was for giving up their right in the property, thus attracting capital gains tax. This decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the Tribunal reversed this, stating that the right to sue for damages is not a capital asset under Section 2(47) of the Income Tax Act, as it is not transferable under Section 6(e) of the Transfer of Property Act.

Upon appeal, the High Court analyzed various judgments and statutory definitions:
- Section 2(14) of the IT Act defines 'capital asset' as property of any kind, excluding certain items.
- Section 2(47) defines 'transfer' to include sale, exchange, relinquishment, or extinguishment of rights in a capital asset.

The Court referred to judgments from various High Courts, including:
- CIT vs. Tata Services Ltd.: Held that a right to obtain a conveyance of immovable property is a capital asset.
- CIT vs. Vijay Flexible Containers: Held that giving up the right to specific performance in lieu of damages is a transfer of a capital asset.
- CIT vs. Abbasbhoy A. Dehgamwalla: Distinguished that a right to sue for damages is not a capital asset.

The High Court concluded that the right to specific performance is a capital asset. Giving up this right in exchange for compensation constitutes a transfer, attracting capital gains tax. The compensation received by the assessees for relinquishing their right to specific performance should be considered capital gains, subject to deductions under Section 48 of the IT Act.

Issue 2: Adoption of Favorable View to Assessee
The Tribunal had held that when two views are possible, the one favorable to the assessee should be adopted. The High Court, however, emphasized that the statutory definitions and judicial precedents clearly indicate that the right to specific performance is a capital asset and its relinquishment is a transfer. Therefore, the favorable view principle does not apply when the law is clear.

Judgment:
1. The appeals by the Revenue were allowed.
2. The Tribunal's orders were set aside.
3. The matter was remitted back to the AO to compute the capital gains in accordance with the law and the Court's observations, particularly considering Section 48 for deductions.
4. Each party was to bear its own costs.

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