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TMI Blog2019 (7) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of M/s Star Habitat Pvt Ltd. The assessee received compensation of ₹ 20 Crore consisting of refund of the amount paid by assessee to the owners in pursuance of the said Development Agreement dated 24th March, 2005 read with supplementary agreement dated 25th March, 2005 along with interest, towards loss of profit/ liquidated damage for loss of opportunity to develop the property and sale of flats in the open market and towards the cost of litigation only. Therefore, in view of the ratio of decisions of CIT Vs J Dalmia [ 1984 (5) TMI 32 - DELHI HIGH COURT] , Bombay High Court in CIT Vs Abbasbhoy A. Dehgamwalla [ 1991 (4) TMI 38 - BOMBAY HIGH COURT] , Hon ble Supreme Court in Saughtra Cement Ltd [ 2010 (7) TMI 11 - SUPREME COURT] and Jackie Shroff [ 2018 (9) TMI 1006 - ITAT MUMBAI] and Bhojison Infrastructure (P ) Ltd [ 2018 (9) TMI 1239 - ITAT AHMEDABAD] the amount received by the assessee in excess of advance is on account of compensation for extinction of its right to sue the owner, the receipt is a Capital receipt not chargeable to tax. Since the assessee has not received the amount in excess of advance in the course of his business it must be construed as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claimed the receipt of ₹ 20 Crore as capital receipt not chargeable to tax. The assessee received the said compensation under agreement for relinquishing his right to sue in a development agreement dated 20.04.2004. The Assessing Officer treated the receipt of ₹ 20 Crore as income and taxed the same as Long Term Capital Gain (LTCG). On appeal before the ld. CIT (A), the action of Assessing Officer was confirmed. Thus, further aggrieved by the order of ld. CIT (A), the assessee has filed the present appeal before us. 3. We have heard the submission of both the parties and have gone through the orders of authorities below. We have also deliberated on various case law relied by lower authorities as well as by representative of the parties. Though, the assessee has raised multiple grounds of appeal, however, in our considered view, the core issue involved in this case whether the receipt of compensation is a capital receipt within the meaning of section 2(47) of the Act or capital gain and liable to tax as long term capital gain (LTCG). The ld. authorized representative (AR) of the assessee submits that assessee is a partnership firm engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abitat. After a prolong negotiations the owners of said land failed to execute Joint Development Agreement on one pretext of the other. On 17.05.2005 the assessee issued a legal notice to the owner of the land that some excavation work was being carried out on the land which was the subject matter of MOU with assessee. The owner on the receipt of the legal notice denied the existence of the MOU and claimed that amount of ₹ 2.50 Crore was received by them for working capital for business purpose. The owner of the land Mohammed Husain Merchant for first time disclosed that much before the execution of MOU, the land was transferred to M/s Star Habitat, wherein his son is director. The assessee immediately filed a Civil Suit No. 1796 of 2005 before High Court of Bombay for seeking the relief for Specific Performance of the MOU and to execute the joint development agreement, seeking the declaration that the agreement dated 22/01/2004 executed in between land owner and M/s Star Habitat is not binding on the assessee and in alternative the assessee claimed damage for breach of contract. The assessee also filed Criminal Complaint against the land owner, co-owner Tanveer Merchant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of executing the MOU have no right to do so as they have already transferred the land to M/s Star Habitat Private Ltd. The MOU was void -ab-initio, the assessee had never got right to claim specific performance. By entering into deed of cancellation, the assessee surrendered his right to sue against the owner as well as the persons who entered in agreement with the owner. There was no assignment of said right to third party by assessee which is clear from the fact that original MOU was cancelled and third-party had to deal independently with the owner as per cancellation deed. The property / asset was never transferred to the assessee. Therefore, the compensation received by assessee under the deed of cancellation was in respect of damages for breach of contract which cannot be taxed as Capital Gain. The learned AR further argued that right to sue is a right in persona, which is not assignable as per section 6(e) of Transfer of Property Act, thus the amount received by way of compensation in cancellation deed is not chargeable to tax under section 45 of Income tax act. 7. In support of his submission the learned AR of the assessee relied upon the following d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uit No. 2180 of 2004. 8. On the other hand the learned AR for the revenue supported the order of lower authorities. The ld. DR for the revenue further submits that the word capital gain means property of any kind held by the assessee. The right to execute the Joint development right of immovable property falls within the expression of property of any kind as used in section 2(24) and consequently is a capital asset. And giving up a right of specific performance as claimed by the assessee amounts to relinquishment of capital asset. Therefore, there was a transfer of capital asset under the provision of the Income tax Act. The ld DR prayed for confirming the order of the ld CIT(A) and to dismiss the appeal of assessee. 9. We have considered the rival submissions of the parties and have gone through the orders of the authorities below. We have also deliberated on various case laws relied by the lower authorizes and the ld. AR for the assessee and the various documentary evidences filed by the ld. AR for the assessee. During the assessment the assessing officer noted that the assessee paid advance tax of ₹ 3.00 Crore during the relevant fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up the right to shown as claimed by assessee. As per cancellation deed, the compensation was paid to the assessee for loss of profit, liquidated damage, for loss of opportunity, to develop the property and sale of flat in open market. The Assessing Officer concluded that by no stretch of imagination can any part of compensation be considered as liquidated damage. The initial investment of assessee of ₹ 2.50 Crore whopped 800%. The Assessing Officer also concluded that contractual rights obtained under the contract of sale are a valuable right and considered as property. The contractual right of purchaser to obtain title to immovable property or development right there on for a price is capable of specific performance. It is also assignable. Therefore, a right to obtain conveyance of immovable property or development right is clearly property as prescribed by section 2(14) of the Act. The Assessing Officer further strengthen his conclusion by referring that extinguishment of any right, giving up of a right of specific performance by the assessee, to get development right of immovable property, in lieu of receiving a consideration resulting in extinguishment of right in prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot give rise to any debt and therefore a right to recover damages is not assignable because it is not a chose-in-action. For actionable claim to be assigned, there must be a debt in the sense of an existing obligation to consider it to be an actionable claim. It is the case of assessee that the assessee had a mere right to sue which is neither a capital asset within the meaning of Section 2(14) of the Act nor is capable to being transferred and therefore not chargeable under s.45 of the Act. 10.1 The essence of long list of judicial pronouncements cited on behalf of assessee is that Section 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 opposed to public policy as it tantamount to gambling in litigation. Hence, such a right to sue does not constitute a capital asset which in turn has to be an interest in property of any kind . Despite the definition of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporeal or incorporeal. It is, therefore obvious that a transfer of a capital asset in order to attract liability to tax under the head Capital gains must be a transfer as a result whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by s. 48 of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, there must be receipt of consideration for such extinguishment to attract liability to tax. Now, in legal parlance, the terms consideration and compensation or damages have distinct connotations. The former in the context of ss. 45 and 48 would connote payment of a sum of money to secure transfer of a capital asset; the latter would suggest payment to make amends for loss or injury occasioned on the breach of contract or tort. Both ss. 45 and 48 postulate the existence of a capital asset and the consideration received on transfer thereof. But, as discussed earlier, once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court, Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already exists. The Court in the first place must decide that the defendant is liable is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant. It would appear from the above observations that on breach of contract the defaulter does not incur any pecuniary liability nor does the injured party becomes entitled to any specific amount, but he only has a right to sue and claim damages which may or may not be decreed in his favour. He will have to prove (i) that the opposite party had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to utilize the land for construction and for sharing of profits. This right/advantage accrued to the assessee was sought to be taken away from the assessee by way of sale of land. The prospective purchaser as well as the defaulting party (owner) perceived threat of filing suit by developer and consequently paid damages/compensation to shun the possible legal battle. The intrinsic point with respect to accrual of right to sue has to be seen in the light of overriding circumstances as to how the parties have perceived the presence of looming legal battle from their point of view. It is an admitted position that the defaulting party has made the assessee a confirming party in the sale by virtue of such development agreement and a compensation was paid to avoid litigation. This amply shows the existence of right to sue in the perception of the defaulting party. Thus, the existence of right to sue could not be brushed aside. 12. We shall now advert to the claim of the Revenue that amount received towards relinquishment of such right is purely a revenue receipt. In this regard, we notice that the compensation was not received as a result of terminati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital or revenue has frequently engaged the attention of the Courts but it has not been possible to lay down any single criterion as decisive in the determination of the question. Time and again, it has been reiterated that answer to the question must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. In Rai Bahadur Jairam Valji s case (supra), it was observed thus : The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark [1935] 3 ITR (E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset, i.e., the cement plant, which would obviously lead to delay in coming into existence of the profit-making apparatus, rather than a receipt in the course of profitearning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit-earning source, not in the ordinary course of their business, in our opinion, was a capital receipt in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (i) and (ii) extracted in Para 1 (supra) and hold that the amount of ₹ 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt. 13. The Hon ble Delhi High Court in CIT Vs J. Dalmia [1984] 149 ITR 215/[1985] 20 Taxman 86 (Delhi), wherein th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest from 30-1-1959 up to the date of the consent decree. In the assessment for the assessment year 1970-71 the Income Tax Officer (ITO) held that the assessee had an enforceable right as a result of acceptance of his offer by the Union of India in 1945 and the said right was acquired back by the Government of India on payment of ₹ 2,52,000 in the year 1969. The ITO, therefore, held that the amount of ₹ 2,52,000 was taxable as capital gains in the assessment year 1970-71. The assistant appellate Commissioner (AAC) held that the assessee had no capital asset and the amount of ₹ 2,52,000/- could not be treated as capital gains. As regards the interest awarded to the assessee, the AAC held that it was rightly taxed in the year in question. The Tribunal upheld the AAC s order. On further appeal to Hon ble Bombay High Court it was held that it is a trite law that income can be held to accrue only when the assessee acquires a right to receive the income. Unlike compensation payable by the State when it acquires a citizen s land under Acts such as Land Acquisition Act where the right to receive compensation is statutory right, the right that a person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment of rights therein. Since it was not a transfer the amount received thereon was not chargeable to tax under the head capital gains . 17. Further Hon ble Calcutta High Court in CIT v. Ashoka Marketing Ltd. 26 Taxman 215 (Cal.) the assessee entered into an agreement for purchase of certain property. In the event of default by the vendor a sum of ₹ 1 lakh was payable to the assessee by way of liquidated damages. The vendor failed to complete the transaction as there was a prior mortgage of the property with the Uttar Pradesh Government and it was not possible for the assessee to purchase the property. It was held that for the transaction there was no element of cost for receiving the compensation of ₹ 1 lakh. Accordingly, it was held that as there was no element of cost involved in the acquisition of damages received and, hence, it could not be treated either as capital gain or as a revenue receipt. 18. Further the coordinate bench of Mumbai Tribunal in ACIT Vs Jackie Shroff (supra) held that amount received by assessee as compensation for withdrawing a criminal case against accused who forged his signature for sale of shares, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts right to sue the owner, the receipt is a Capital receipt not chargeable to tax. Since the assessee has not received the amount in excess of advance in the course of his business it must be construed as capital receipt and not business receipt. 21. The case law of Hon ble Madras High Court in K.R.Srinath Vs ACIT (supra) relied by assessing officer is not applicable on the facts of the present case. In K.R. Srinath (supra) it was held that the amount received as consideration for giving up right of specific performance which was acquired under agreement to sale, is liable to capital gain tax. However, in the case in hand the right of assessee was in dispute as the owner of the land has already transferred such right to third party. Rather the original agreement was cancelled. 22. In CIT Vs Tata Services Ltd (supra) the right, title and interest was assigned by the assessee to third party. The right, title and interest of the assessee was not in dispute, however, the assessee in the present case was litigating for creation of his right in the property. 23. Similarly in CITVs Vijay Flexible Containers (supra) the right, title and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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