2001 (8) TMI 299 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of Rs. 2,90,000 as capital gains.
2. Validity of the compensation received for breach of contract as capital gains.
3. Definition and transfer of 'capital asset' under sections 2(14) and 2(47) of the Income-tax Act.
4. Cost of acquisition for the right to obtain a sale deed.
5. Applicability of the Supreme Court's decision in Vania Silk Mills (P.) Ltd. v. CIT.

Issue-wise Detailed Analysis:

1. Assessment of Rs. 2,90,000 as Capital Gains:
The assessee contested the assessment of Rs. 2,90,000 as capital gains, arguing that the compensation received for breach of contract should not be liable to capital gains tax. The Commissioner (Appeals) upheld the assessment, leading to the present appeal before the Tribunal.

2. Validity of the Compensation Received for Breach of Contract as Capital Gains:
The assessee received Rs. 6,00,000 as compensation for canceling an agreement to purchase property. The contention was that this compensation should not be considered as capital gains since there was no transfer of any property or right. The Tribunal noted that the deed of cancellation explicitly stated that the payment was for relinquishing the right to specific performance, thereby constituting a transfer of a capital asset.

3. Definition and Transfer of 'Capital Asset' under Sections 2(14) and 2(47) of the Income-tax Act:
The Tribunal examined whether the right to obtain a conveyance of immovable property constituted a 'capital asset' under section 2(14) and whether relinquishing this right amounted to a 'transfer' under section 2(47). It was concluded that the right to obtain a conveyance is indeed a 'capital asset' and that relinquishing this right constitutes a 'transfer,' thus attracting capital gains tax.

4. Cost of Acquisition for the Right to Obtain a Sale Deed:
The assessee argued that there was no cost of acquisition for the right to obtain the sale deed, citing the Supreme Court's decision in CIT v. B.C. Srinivasa Setty. However, the Tribunal found that the payment of Rs. 40,000 as advance constituted the cost of acquisition. This was supported by precedents where earnest money paid was considered the cost of acquiring the right to obtain a sale deed.

5. Applicability of the Supreme Court's Decision in Vania Silk Mills (P.) Ltd. v. CIT:
The assessee relied on the Supreme Court's decision in Vania Silk Mills, arguing that the extinguishment of a right due to destruction is not a transfer. However, the Tribunal distinguished this case, noting that the right in question was not extinguished due to destruction but was relinquished voluntarily. Therefore, the Supreme Court's decision was deemed inapplicable.

Conclusion:
The Tribunal upheld the assessment of Rs. 2,90,000 as capital gains, affirming that the compensation received for relinquishing the right to obtain a sale deed constituted a transfer of a capital asset. The cost of acquisition was determined to be Rs. 40,000, and the appeal by the assessee was dismissed.