2005 (2) TMI 913 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 7,34,000 received by the assessee was a capital receipt not exigible to capital gains tax due to no transfer of property within the meaning of Section 2(47) of the IT Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Whether the amount of Rs. 7,34,000 received by the assessee was a capital receipt not exigible to capital gains tax due to no transfer of property within the meaning of Section 2(47) of the IT Act, 1961.

Facts of the Case:
The assessee, along with another partner, was involved in a firm that entered into a contract to purchase immovable property. Due to the seller's non-performance, the firm filed a suit for specific performance, which was dismissed. On appeal, a compromise was reached where the seller agreed to pay Rs. 14,85,001 as consideration or damages. The Assessing Officer (AO) treated this amount as capital gains, which was upheld by the CIT(A) but overturned by the Tribunal, which relied on the Supreme Court's decision in Vania Silk Mills (P) Ltd. v. CIT.

Tribunal's Decision:
The Tribunal held that the receipt of Rs. 14,85,001 could not be taxed as capital gains because it did not involve a transfer of property as defined under Section 2(47) of the IT Act.

Revenue's Argument:
The Revenue argued that the Tribunal's reliance on Vania Silk Mills was misplaced as the Supreme Court had subsequently disapproved this view in CIT v. Mrs. Grace Collis and Ors. The Revenue cited the Bombay High Court's decisions in CIT v. Vijay Flexible Containers and Tata Services Ltd., which held that rights under an agreement to purchase property are capital assets and their relinquishment is a transfer.

Assessee's Argument:
The assessee relied on the Delhi High Court's decision in CIT v. J. Dalmia and two Supreme Court decisions, contending that the right to claim damages was not a capital asset and thus not subject to capital gains tax.

High Court's Analysis:
The High Court examined the definition of "capital asset" under Section 2(14) and "transfer" under Section 2(47) of the IT Act. It noted that the right to obtain conveyance of immovable property is property and a capital asset. The Court referenced the Bombay High Court's decisions in Tata Services Ltd. and Vijay Flexible Containers, which held that such rights are assignable and their relinquishment constitutes a transfer.

Key Judgments Referenced:
1. Tata Services Ltd.: The Court held that a right to obtain conveyance of immovable property is a capital asset and its assignment for consideration constitutes a transfer.
2. Sterling Investment Corporation Ltd.: The Court held that the contractual right to purchase immovable property is a capital asset, and its relinquishment results in capital gains.
3. Vijay Flexible Containers: Affirmed that the right under an agreement to purchase property is a capital asset and its relinquishment constitutes a transfer.

Conclusion:
The High Court concurred with the Bombay High Court's view that the right to claim specific performance and its subsequent relinquishment for consideration is a transfer of a capital asset. The Court disagreed with the Tribunal's reliance on Vania Silk Mills, noting that this decision had been disapproved by the Supreme Court in CIT v. Mrs. Grace Collis. The High Court held that the amount of Rs. 7,34,000 was a capital receipt exigible to capital gains tax as it involved the transfer of property within the meaning of Section 2(47) of the IT Act.

Final Judgment:
The High Court answered the question in favor of the Revenue and against the assessee, holding that the amount of Rs. 7,34,000 is a capital receipt exigible to capital gains tax.