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TMI Blog2011 (1) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 143(1)(a) of the IT Act, 1961 (for short, hereinafter referred to as the 'Act'), on 10th Jan., 1999 and 19th Jan., 1999 respectively. While processing the return, it was seen that both the father and son had received Rs. 3,75,000 from Smt. Vasundhara Filliozat and Sri Pierre Sylvain Filliozat. This amount was claimed to have been received as a settlement outside the Court, in respect of the residential property for the purchase of which the father and son had jointly entered into an agreement with one Sri Paramananda G. Hemdev. The said property is stated to have been ultimately sold to Smt. Vasundhara Filliozat and Sri Pierre Sylvain Filliozat by the vendor, contrary to the agreement entered into with the assessees. The total amount paid for this settlement is said to be Rs. 7,50,000, which was shared equally by both the assessees. Each of the assessees claimed their share of Rs. 3,75,000 as capital gain and claimed that the same is not exigible to tax. With a view to examine the taxability or otherwise of this amount, the assessment of both the assessees was taken for scrutiny with the prior approval of the CIT. In response to the hearing notices, Sri. H.V. Prasad, ITP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain and is exigible to levy of long-term capital gains tax and dismissed the appeals. 7. Aggrieved by the said order, both the assessees preferred appeals before the Tribunal. The Tribunal held that, it is an settled law that the contract of purchase of property does not create an interest in immovable property. In the case of a breach of contract, the assessee is entitled to damages. The assessee had a mere right to sue for damages. Under s. 6(e) of the Transfer of Property Act, a mere right to sue cannot be transferred. Therefore it cannot be said to be a capital asset under s. 2(47) of the IT Act, for the purpose of transfer. Therefore the Tribunal held, that as the assessee had a mere right to sue, which cannot be transferred, the amount received for relinquishment of the right under the contract of sale, cannot be construed as a capital asset and the difference in the amount realized by them does not constitute capital gains and therefore it is not exigible to tax, Therefore they set aside the order passed by the AO as well as the appellate authority and allowed the appeal. 8. Aggrieved by this order of the Tribunal the Revenue is under appeal. 9. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of law, it is necessary to look into the views expressed by the various High Courts in this country, which will be helpful in answering the aforesaid substantial questions of law. 14. Before referring to the aforesaid decisions, it is necessary to look into a few definitions which would be helpful in answering the substantial questions of law. 15. Sec. 2(14) of the Act defines what a 'capital asset' means. It reads thus:- "'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include:- (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes:- (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art." Sec. 2(47) defines what 'transfer' means in relation to a capital asset, as under:- "'transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of s. 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation:- For the purposes of this sub-section, the expression 'insurer' shall have the meaning assigned to it in cl. (9) of s. 2 of the Insurance Act, 1938 (4 of 1938)." However, ss. 2(29A) and 2(29B) defines what a 'long-term capital asset' and 'long-term capital gain' means, which reads thus:- "2(29A) 'long-term capital asset' means a capital asset which is not a short-term capital asset; 2(29B) 'long-term capital gain' means capital gain arising from the transfer of a long-term capital asset;" Similarly, ss. 2(42A) and 2(42B) defines what 'short-term capital asset' and 'short-term capital gain' means. It reads as under:- "(42A) 'short-term capital asset' means a capital asset held by an assessee for not more than (thirty-six) months immediately preceding the date of its transfer; (42B) 'short-term capital gain' means capital gain arising from the transfer of a short-term capital asset." 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had made a profit or gain arising from the transfer of the capital asset which was the right to obtain a sale deed in respect of immovable property. Therefore, the entire amount of Rs. 5,00,000, being the difference between the amount of Rs. 5,90,000 received by the assessee and Rs. 90,000 originally paid by the assessee as earnest money, would be capital gain in the hands of the assessee. Therefore, it is liable to capital gain tax. The assessee would, however, be entitled to a deduction of Rs. 14,115 on account of legal and other expenses transferred to by the ITO." 18. Again the Bombay High Court in the case of CIT vs. Vijay Flexible Containers (1990) 81 CTR (Bom) 29 : (1990) 186 ITR 693 (Bom), dealing with the case of a suit for specific performance of the agreement where a consent decree was passed in favour of the assessee for a certain sum, where he gave up his right to claim specific performance, held as under:- "Having regard to the statutory provisions and the authorities cited above, it cannot be said that the right acquired under an agreement to purchase immovable property is a mere right to sue. The assessee acquired under the said agreement for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, must not fall within the exceptions. Sec. 6 of the Transfer of Property Act which uses the same expression 'property of any kind' in the context of transferability makes an exception in the case of a mere right to sue. The decisions thereunder make it abundantly clear that the right to sue for damages is not an actionable claim. It cannot be assigned. Transfer of such a right is as much opposed to public policy as is gambling in litigation. As such, it will not be quite correct to say that such a right constituted a 'capital asset' which in turn has to be 'an interest in property of any kind'. The question of the assessee's right under the agreement of 1945 being converted or substituted by another right which can be said to be a 'capital asset' does not therefore, arise. In the next place, the right to sue for damages for breach of contract no doubt is capable of maturing into a right to receive damages for breach of contract. But that happens only when the damages claimed for breach of contract are either admitted or decreed and not before." 20. The Gujarat High Court in the case of Rustom Spinners Ltd. vs. CIT (1992) 103 CTR (Guj) 142 : (1992) 198 1TR 351 (Guj) dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the Tribunal was right in holding that the claim of the assessee that it did not incur any cost in acquiring the rights under the said agreement was not acceptable. It is a settled legal position that the Court can give relief on the ground of subsequent impossibility when it finds that the whole purpose or the basis of the contract has frustrated by the inclusion or occurrence of an unexpected event or change of circumstances which were not contemplated by the parties on the date of the contract. In the instant case, it is evident that the assessee not only did not rescind the contract but proceeded to assign its benefits and liabilities which it had incurred under the contract in favour of the assignee by a deed of assignment. Under the agreement the 'purchaser' was defined to mean as the assessee or his successors and assigns and, therefore, under the original agreement itself it was envisaged that the purchaser could assign his rights and liabilities in favour of an assignee. Neither the vendor nor the assessee ever treated the contract as having been frustrated by virtue of the interim orders which were operative on the date on which the deed of assignment was executed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee would be liable for tax on capital gains in respect of sum received by it in consideration of the assignment of the contract." 21. Similarly, the Indore Bench of the Madhya Pradesh High Court in the case of CIT vs. Smt. Laxmidevi Ratani and Ors. (2005) 198 CTR (MP) 336 : (2008) 296 ITR 363 (MP) dealing with a case of giving up a right to claim specific performance of a contract in lieu of consideration received in terms of the compromise between the parties, held as under:- "The expression 'property of any kind' used in s. 2(14) is of wide import. When this expression is read along with expression defined in s. 2(47)(ii), i.e., extinguishment of any rights therein, there is no hesitation in holding that giving up of right to claim specific performance by the assessee to get conveyance of immovable property in lieu of receiving consideration resulted in extinguishment of right in property thereby attracting the rigour of s. 2(14) r/w s. 2(47). In other words, the action on the part of assessee in giving up her right to claim the property and instead accepting the money compensation was a clear case of relinquishment of a right in the property resulting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition that in order that receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a 'transfer within the meaning of s. 45 r/w s. 2(47). Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by the assessee as damages was not assessable as capital gains." 23. From the aforesaid judgments it is clear that the right to obtain a conveyance of immovable property falls within the expression 'property of any kind' used in s. 2(14) of the Act and consequently it is a capital asset. It is because the expression 'property of any kind' is of wide import. When this expression is read along with the expression defined in s. 2(47)(ii) i.e., 'extinguishment of any rights therein', the giving up of a right of specific performance by the assessee to get conveyance of immovable property in lieu of receiving consideration, results in the extinguishment of the right in property, thereby attracting the rigor of s. 2(14) r/w s. 2(47). Giving up of a right to claim specific performance by conveyance in respect to an immovable property, amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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