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2023 (6) TMI 334 - AT - Income TaxNature of receipts due to settlement in the court - Right of Preemptive/right of first priority of purchase of the premises - capital gain - transfer u/s 2(47) - assessee has claimed it as non-taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio - whether falls under the definition of Capital Asset u/s 2(14)? - AO considered the date of lease deed 19.04.2004 to be the date of acquisition of capital asset, as there was no cost of acquisition of the right of pre-emption the cost of acquisition of the capital asset was taken as Nil. HELD THAT - As right of assessee to have the offer for purchase cannot be considered to be a Capital asset for the purpose of Section 2(14) - This right arising out of covenant in the lease deed has no semblance of a property as its alienation, transfer or relinquishment was not possible independently at the will of assessee. It was incidental to prospective sale by the lessor. It was merely contingent right. AO has fallen in error in concluding that when assessee entered into the settlement with the purchaser there was a relinquishment of the asset. Relinquishment under law does not merely mean withdraw from, desert, abandon, to cease to hold, adhere to , as assumed by Ld. AO. The judgment he has relied to understand the term relinquishment in CIT vs. Rasiklal Maniklal (HUF) 1989 (3) TMI 3 - SUPREME COURT was in regard to the question where the assessee in the case had received certain shares of the company upon amalgamation. While we are dealing with rights in regard to the transactions concerning immovable properties. Relinquishment in case of immovable property is a way of enlargement of the share or shares of the co-owners of the same rights. Despite the definition of expression capital asset in the widest possible terms in section 2(14), right to a capital asset must fall within the expression property of any kind in the context of transferability. Relinquishment of the asset or the extinguishment of any rights therein of a right in regard immovable property, to fall under definition of Transfer u/s clauses (i) or (ii) of Section 2(47) of the Act, should be of a right or an interest which is alienable and otherwise which can be monetized. In any case such a right for specific performance of the covenant to have priority of purchase is a mere right to sue. It is not a property and it cannot be transferred. Section 6(e) of the Transfer of Property Act specifically makes it a exception to types of transfer. As a matter fact what is reflected in the preface to the settlement arrived in mediation is that the amount received by the assessee under the settlement was to make the premises free of litigation and avoid costs of protracted civil litigation. Once the assessee had already parted with the possession of premises in favour of purchaser, in furtherance of the orders of Hon ble High Court, in the suit filed by the purchaser then any cloud over the title and rights of purchaser due to pending two suits made the property loose its prospective value. Aforesaid consideration in the mind of purchaser to buy peace and make the property clean on cost to pay Rs. 20,40,00,000/- may have any other incidence of taxability, but certainly not a Capital Gains. AO himself has considered the cost of acquisition of the so called right of pre-emption to be Nil. Thus, the computation provisions fail, therefore, capital gains could not have been calculated. This too establish that a mere right to sue in regard to immovable property cannot be subject to Income Tax under the head Capital Gains as restricted by Section 6(e) of the Transfer of Property Act 1882, laying that a mere right to sue cannot be transferred. Decided in favour of assessee.
Issues Involved:
1. Whether the amount of Rs. 20,40,00,000/- received by the assessee is taxable as Long Term Capital Gain. 2. Whether the right of pre-emption/right of first priority of purchase of the premises is a "Capital Asset" under Section 2(14) of the Income Tax Act, 1961. 3. Whether the relinquishment of the right of pre-emption falls under the definition of "Transfer" under Section 2(47) of the Income Tax Act, 1961. 4. Computation of Capital Gain. 5. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961. Summary: Issue 1: Taxability of Rs. 20,40,00,000/- as Long Term Capital Gain The assessee received Rs. 20,40,00,000/- in a court settlement, claimed as non-taxable, and credited it directly to the partners' capital accounts. The Assessing Officer (AO) treated this amount as Long Term Capital Gain, arguing that the right of pre-emption/right of first priority of purchase is a "Capital Asset" under Section 2(14) of the Income Tax Act, 1961, and its relinquishment is a "Transfer" under Section 2(47) of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the amount received was for relinquishing the right of pre-emptive purchase and the right to perpetual lease. Issue 2: Right of Pre-emption as a "Capital Asset" The AO concluded that the right of pre-emption falls under the definition of "Capital Asset" as per Section 2(14) of the Act. The CIT(A) agreed, holding that the right of pre-emption and the right to perpetual lease are valuable rights (capital assets) and their transfer is exigible to capital gain tax. Issue 3: Relinquishment as "Transfer" The AO argued that the relinquishment of the right of pre-emption is a "Transfer" under Section 2(47) of the Act. The CIT(A) supported this, stating that the assessee's relinquishment of these rights under the settlement agreement constituted a transfer, making the amount received taxable as capital gains. Issue 4: Computation of Capital Gain The AO considered the date of the lease deed (19.04.2004) as the date of acquisition of the capital asset, with no cost of acquisition, making the cost of acquisition Nil. The date of transfer was taken as 31.05.2012, with the sale consideration being Rs. 20,40,00,000/-. Issue 5: Penalty Proceedings under Section 271(1)(c) The CIT(A) initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars leading to the concealment of taxable income. The assessee contended that the initiation of these proceedings was unwarranted and untenable in law. Judgment: The Tribunal held that the right of pre-emption under the lease deed was not a "Capital Asset" as defined under Section 2(14) of the Act. It was merely an enforceable contract right contingent on the sale of the premises by the lessor and did not create any alienable or transferable interest. The Tribunal concluded that the amount received by the assessee was not for the transfer of a capital asset but was to make the premises free of litigation and avoid costs of protracted civil litigation. Consequently, the amount was not taxable as capital gains. The appeal of the assessee was allowed, and the orders of the lower tax authorities were quashed.
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