1979 (1) TMI 26 - HC - Income Tax

Capital Asset Capital Gains Cost Of Acquisition Earnest Money Immovable Property Movable Property

Summary

Issues Involved:
1. Whether the transaction that brought the assessee Rs. 5 lakhs involved the transfer of a capital asset and gave rise to capital gains under the Income-tax Act, 1961.
2. Whether a deduction should be allowed for the detriment suffered by the assessee at Rs. 66 per square yard on the entire area while computing capital gains.

Issue-Wise Detailed Analysis:

1. Transfer of Capital Asset and Capital Gains:
The primary issue was whether the transaction resulting in the assessee receiving Rs. 5 lakhs involved the transfer of a capital asset, thereby giving rise to capital gains under the provisions of the Income-tax Act, 1961. The court examined the agreement of sale dated 31st July 1961, between the assessee and Anandji Haridas, where the assessee paid Rs. 90,000 as earnest money for a residential plot. The vendor later informed that the sub-division of the plot was not granted, leading to the purported cancellation of the agreement, which the assessee did not accept. Eventually, the assessee agreed to assign its rights under the agreement to M/s. Advani and Batra for Rs. 5,90,000.

The court held that under the agreement of sale, the assessee had a right to obtain a conveyance of the immovable property, which is considered "property" under Section 2(14) of the Income-tax Act. This right was relinquished or assigned in favor of M/s. Advani and Batra, and the consideration received was for this relinquishment or assignment. Therefore, the transaction involved the transfer of a capital asset as defined under Section 2(47) of the Act, resulting in capital gains.

2. Deduction for Detriment Suffered:
The second issue was whether a deduction should be allowed for the detriment suffered by the assessee at Rs. 66 per square yard on the entire area while computing capital gains. The Tribunal had directed the Income-tax Officer to allow a deduction based on the difference between the agreed purchase price and the market value of the land. However, the court found this approach erroneous.

The court referred to the decision in Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC), where the Supreme Court allowed the deduction of depreciation in the value of shares while computing capital gains. However, the court noted that in the present case, the entire capital asset, which was the right to obtain a sale deed, was transferred, and there was no question of depreciation or partial transfer as in Kapadia's case. The assessee had paid Rs. 90,000 as earnest money, which was the cost of acquiring the right to obtain a sale deed. The transfer of this right for Rs. 5,90,000 resulted in a capital gain of Rs. 5,00,000, after deducting the earnest money and legal expenses.

Conclusion:
The court answered the first question in the affirmative, confirming that the transaction involved the transfer of a capital asset and gave rise to capital gains. The second question was answered in the negative, disallowing the deduction for the detriment suffered. The assessee was liable to pay capital gains tax on the amount received, with a deduction allowed only for legal and other expenses. The assessee was ordered to pay the costs of the reference.