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TMI Blog2004 (4) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... price of his choice. As a consideration for this, the assessee was paid a sum of Rs. 6,00,000, apart from refunding the advance of Rs. 40,000 to the assessee. The assessee filed returns of income for the assessment year 1990-91 admitting a total income of Rs. 2,70,150 including Rs. 2,59,000 as capital gains. The assessee had returned the capital gains on the sum of Rs. 6,00,000 received from the said Krishnamurthy. In the assessment, the Assessing Officer computed the capital gains at Rs. 2,90,000 after allowing deduction for Rs. 5,000 as amount spent on March 31, 1989, towards enforcing the deal of purchase. The assessee then took up the matter in appeal with the plea that the amount received as compensation for breach of contract was not liable to be assessed as capital gains. There was also a contention that in any case there could be no assessment as capital gains as there was no cost of acquisition incurred by him. The Commissioner of Income-tax took the view that the assessee had acquired a legal right as per the earlier agreement dated April 3, 1986, and so the amount received for giving up that right is liable to capital gains tax. The aggrieved assessee thereafter took u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting liability to capital gains tax. On the question of cost of acquisition, learned counsel contended that the assessee had incurred a cost of Rs. 40,000, which was paid to the vendor at the time of making up the agreement on April 3, 1986, and that the said sum paid as advance is the actual cost of acquisition. According to learned counsel for the Revenue, the appeal is devoid of merit and liable to be dismissed. The question that arises for consideration is as to whether the amount of Rs. 6,00,000 received by the assessee from the vendor cannot be treated as capital gains in the hands of the assessee. Before we proceed to the relevant provisions in the Act and the Rules referred to, we deem it necessary to quote the relevant paragraphs in the two agreements. Clause No. 2 and clause No. 6 in the agreement dated April 3, 1986, read as under: "2. The consideration for sale shall be Rs. 2,00,000 (rupees two lakhs only) which shall be paid as under: (a) Rs. 40,000 (rupees forty thousand only) has been paid as and by way of advance; (b) Rs. 1,60,000 (rupees one lakh sixty thousand only) shall be paid at the time of execution and registration of the sale deed. 6. Both the vendo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05, it was held that there was no reason why that word should not be given a liberal and wide connotation and should not be extended to those well-recognised types of interests which had the insignia or characteristic of proprietary right. (ii) The Constitution Bench in Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325; AIR 1970 SC 640, ruled as under: "In its normal connotation 'property' means the 'highest right a man can have to anything, being that right which one has to lands or tenements, goods or chattels which does not depend on another's courtesy: it includes ownership, estates and interests in corporeal things, and also rights such as trade marks, copyrights, patents and even rights in personam capable of transfer or transmission, such as debts; and signifies a beneficial right to or a thing considered as having a money value, especially with reference to a transfer or succession, and to their capacity of being injured'. The expression 'undertaking' in section 4 of Act 22 of 1969 clearly means a going concern with all its rights, liabilities and assets-as distinct from the various rights and assets which compose it. In Halsbury's Laws of England, third edi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny kind'. Thus, any right which can be called property will be included in the definition of 'capital asset'. A contract for sale of land is capable of specific performance. It is also assignable. Therefore, in our view, a right to obtain conveyance of immovable property, was clearly 'property' as contemplated by section 2(14) of the Income-tax Act, 1961." (iv) The next ruling that can be usefully referred to is the one reported in CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bom). In that case, the assessee a firm entered into an agreement with a person to purchase the property at a particular rate. The assessee also paid a sum of Rs. 17,500 as earnest money. As the vendor failed to perform his part of the contract, the assessee was constrained to file a suit for specific performance of the agreement for sale, or in the alternative, for damages for its breach. Consent terms were arrived at in the suit and a decree was passed in favour of the assessee for the sum of Rs. 1,17,500 and interest. The question arose whether that amount received by the assessee was a capital asset. A Division Bench of the Bombay High Court held that under the agreement to purchase the property, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mere giving up of the right to claim specific performance by conveyance to him of immovable property does not give rise to a capital gain for the purpose of income tax. Learned counsel also submitted that this ruling was not considered by the Bombay High Court in the ruling reported in CIT v. Vijay Flexible Containers [1990] 186 ITR 693. We do not see any substance in the submission of counsel for the assessee. The Supreme Court in that ruling clearly explained the peculiar characteristics of "goodwill" and also pointed out that when goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain and that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain; but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence. (b) The next ruling referred to by learned counsel for the assessee is the one reported in CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198 (SC). In that case the respondent held shares in one company of the face value of Rs. 100 each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns tax was attracted under section 45 by transfer and not merely by extinguishment of rights howsoever brought about. The court held that the extinguishment of right not brought about by transfer was outside the purview of section 45. Learned counsel appearing for the assessee in this case would contend that in this case also there was an extinguishment of right because under the second document as it only cancelled the earlier document and that this ruling would advance the case of the assessee. We are not inclined to accept this submission. The assessee had a right to claim for specific performance of the agreement and he readily gave that up for a consideration. (d) In Travancore Rubber and Tea Co. Ltd, v. CIT [2000] 243 ITR 158 (SC), the assessee was a plantation company, engaged in the business of growing rubber and tea. In 1975, it entered into three agreements with three purchasers for sale of old rubber trees. Each of the purchasers paid a certain amount by way of earnest money and another purchaser by way of advance in respect of the respective agreements. Ultimately, those three persons committed default and the company had to sell it to third party, but at a loss. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour. At this juncture, we may refer to the observation in the decision of the Bombay High Court in CIT v. Tata Services Ltd. [1980] 122 ITR 594, where it is observed as under: "The assessee had paid at the time of the execution of the agreement of sale Rs. 90,000. He had then acquired a right to obtain a sale deed. When he gave up that right or assigned it in favour of M/s. Advani and Batra, he received Rs. 5,90,000 and Rs. 90,000 was treated as refund of consideration. Therefore, actual cost to the assessee of the right to obtain the sale deed on the date of the agreement of sale was Rs. 90,000." Even in the other case referred to in CIT v. Vijay Flexible Containers [1990] 186 ITR 693, the Bombay High Court held that the capital asset had been acquired at a cost of Rs. 17,500 paid as and by way of earnest money. In that case also the court observed as follows: "We may, at this stage, also deal with the further argument that there was no consideration for the acquisition of the capital asset. In our view, this court was right in the view that it took that the payment of earnest money under the agreement for sale was the cost of acquisition of the capital asset." Now that we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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