1984 (10) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Computation of capital gains with reference to the sum received by the assessee.
2. Justification of the Tribunal's decision on the amount to be considered for capital gains.
3. Legally enforceable agreement between the assessee and Shri Ponnurangam.

Summary:

1. Computation of Capital Gains:
The primary issue was whether capital gains can be computed with reference to Rs. 1,20,000 received by the assessee. The Tribunal found that the assessee disclosed only Rs. 1,15,000 for the purpose of capital gains, arguing that the remaining amount was paid to Ponnurangam under an agreement.

2. Justification of the Tribunal's Decision:
The Tribunal held that the capital gain should be computed by considering only Rs. 1,20,000, which was actually received by the assessee from the land acquisition authorities, not Rs. 2,20,220, which was the total compensation awarded. The Tribunal accepted the assessee's version that Rs. 1,05,220 was paid to Ponnurangam in pursuance of an understanding arrived at after a legal notice dated March 6, 1972. This was considered a case of diversion under an overriding title, not merely an application of income after receipt.

3. Legally Enforceable Agreement:
The Tribunal found that the agreement of sale dated June 4, 1971, was a bona fide one and enforceable, thus creating a legal right for Ponnurangam to the compensation amount over and above the consideration payable to the assessee. The Tribunal rejected the Revenue's argument that the agreement became void due to frustration u/s 56 of the Contract Act. It was held that the doctrine of frustration did not apply as the probability of acquisition was within the contemplation of the parties.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the capital gains should be computed only by taking into account the sum of Rs. 1,20,000 actually received by the assessee. The court found that it was a case of diversion of income under an overriding title before it reached the assessee, and not a mere application of income after receipt. The agreement between the assessee and Ponnurangam was legally enforceable and did not become frustrated due to the acquisition of the land. All three questions were answered in the affirmative, in favor of the assessee and against the Revenue.