SECTION 2(14)/INCOME-TAX ACT

[2005] 147 TAXMAN 642 (MP)

HIGH COURT OF MADHYA PRADESH, INDORE BENCH

Commissioner of Income-tax*

v.

Smt. Laxmidevi Ratani

A.M. SAPRE AND ASHOK KUMAR TIWARI, JJ.

INCOME-TAX REFERENCE NO. 59 OF 1996

FEBRUARY 21, 2005

Section 2(14), read with section 2(47), of the Income-tax Act, 1961 - Capital gains - Capital asset - Assessment year 1987-88 - Whether giving up of right to claim specific performance by an assessee to get conveyance of immovable property, in lieu of receiving consideration, would result in extinguishment of right in property and it would thereby attract rigour of section 2(14), read with section 2(47) - Held, yes

FACTS

The assessee-firm entered into a contract to purchase certain immovable property at Rs. 1,05,000. The agreement was not carried out by the seller and, hence, the assessee-firm filed a suit for specific performance of contract against the seller which was dismissed. However, subsequently, the parties compromised and the seller agreed to pay certain sum as damages to the assessee. The Assessing Officer treated the receipt of the said amount to be in the nature of capital gains and taxed it accordingly. On appeal, the Commissioner (Appeals) upheld the view of the Assessing Officer. On further appeal, the Tribunal held that the receipt in question could not be regarded and/or taxed as capital gains as defined under section 2(47) and, thus, it deleted the addition made by the Assessing Officer.

On reference :

HELD

The expression ‘property of any kind’ used in section 2(14) is of wide import. When the said expression is read along with the expression defined in section 2(47)(ii), i.e., extinguishment of any rights therein, there is no doubt that giving up of right to claim specific performance by an assessee to get conveyance of immovable property in lieu of receiving consideration resulted in extinguishment of right in property thereby attracting the rigour of section 2(14), read with section 2(47). In other words, the action on the part of the assessee in the instant case in giving up its right to claim the property and instead accepting the money compensation was a clear case of relinquishment of a right in the property resulting in transfer as defined in section 2(47). When the Legislature in its wisdom defines a particular type of transaction to be in the nature of transfer for taxing purpose, then the effect has to be given to such transaction to be in the nature of transfer as defined. The reading of definition of transfer under section 2(47) clearly indicates that the intention of Legislature is to include several kinds of transaction to be falling in the category of transfer for the purpose of bringing them in income-tax net under the Act. [Para 14]

In view of the above, the Tribunal was not justified in holding the amount in question as capital receipt not exigible to capital gains tax as no transfer of any property was involved within the meaning of section 2(47). Instead, it was to be held that the said amount was a capital receipt exigible to capital gains tax as it involved transfer of property within the meaning of section 2(47). [Para 19]

CASES REFERRED TO

Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647/59 Taxman 3 (SC) [Para 4], CIT v. Vijay Flexible Containers [1980] 186 ITR 693/48 Taxman 86 (Bom.) [Para 6], CIT v. Mrs. Grace Callis [2001] 248 ITR 323/115 Taxman 326 (SC) [Para 6], CIT v. J. Dalmia [1984] 149 ITR 215/[1985] 20 Taxman 86 (Delhi) [Para 6], Swami Motor Transports (P.) Ltd. v. Sankaraswamigal Mutt AIR 1963 SC 864 [Para 6], Ram Baran Prasad v. Ram Mohit Hazra AIR 1967 SC 744 [Para 6], CIT v. Tata Services Ltd. [1980] 122 ITR 594/[1979] 1 Taxman 427 (Bom.) [Para 8], Venkateshwara Aiyyar v. Kollor Illath Raman Namubdhri AIR 1917 Mad. 358 [Para 8], CIT v. Sterling Investment Corpn. Ltd. [1980] 123 ITR 441/[1979] 1 Taxman 396 (Bom.) [Para 9], CIT v. Rasiklal Maneklal (HUF) [1974] 95ITR 656 (Bom.) [Para 9], Ahamad G.H. Ariff v. CWT [1970] 76 ITR 471 (SC) [Para 14], CIT v. Mrs. Grace Collis [2001] 248 ITR 323/115 Taxman 326 (SC) [Para 18].

R.L. Jain and Ku. V. Mandlik for the Appellant. S.C. Bagadia and D.K. Chhabra for the Respondent.

ORDER

Per Sapre, J. - This is an Income-tax Reference made under section 256(1) of the Income-tax Act at the instance of Commissioner of Income-tax (Revenue) by the Tribunal in R.A. Nos. 248, 249 and 250/Ind/92, dated 13-9-1996 which arise out of ITA Nos. 1100, 1040 and 1041/Ind/91, decided on 27-7-1998 to answer following question of law :—

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding the amount of Rs. 7,34,000 as capital receipt not exigible to capital gains tax as no transfer of any property was involved within the meaning of section 2(47) of the Income-tax Act, 1961?"

2. Facts stated in the statement of case drawn by the Tribunal need to be taken note of to answer the question referred.

3. The assessee, Smt. Laxmi Devi, Natani and one Shri Murlidhar Totla were the partners of one Firm - M/s Indian Pharmaceuticals. The firm had entered into a contract to purchase certain immovable property from Smt. Ratan Bai Tongia for Rs. 1,05,000. An agreement to that effect was entered into between the parties on 25-9-1970. The agreement was not carried out by the seller and hence, assessee (firm) was compelled to file a suit for specific performance of contract against the owner of the property in civil court. This civil suit was dismissed by the Civil Court (7th ADJ, Indore) on 27-11-1976. An appeal was filed in High Court. It is in this appeal, parties to the appeal i.e. parties to the agreement entered into a compromise on 12-5-1986. In terms of compromise, the owner/vendee agreed to pay to assessee (purchaser) a sum of Rs. 14,85,001 as what is called consideration or damages. Accordingly, the appeal was disposed of in terms of compromise.

4. For the assessment year 1987-88, the Assessing Officer treated the receipt of Rs. 14,85,001 to be in the nature of capital gains in the hands of assessee and accordingly taxed it. In appeal filed by the assessee, the CIT(Appeals) upheld the view of Assessing Officer and accordingly, dismissed the appeal. However, in further appeal to Tribunal by the assessee, the Tribunal allowed the appeal and while placing reliance on the law laid down by Supreme Court in the case of Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 6471 amongst others, held that the receipt in question i.e. Rs. 14,85,001 cannot be regarded as and/or taxed as capital gains as defined under section 2(47) of the Act in the hands of assessee. In other words, in the opinion of Tribunal the transaction in question which resulted in payment of Rs. 14,85,001 did not attract capital gains. In this view, the Tribunal deleted the addition of the sum which Assessing Officer had brought to tax as capital gains to assessee in the year in question. It is against this view of the Tribunal, the Commissioner of Income-tax prayed for a reference to be made to this Court. However, Tribunal having declined to make the reference in the first instance, the Revenue came to this court under section 256(2) of the Act. This Court allowed the application made by the Commissioner of Income-tax under section 256(2) of the Act and directed the Tribunal to refer the question mentioned supra. This is how this reference is made to this Court by the Tribunal.

5. Heard Shri R.L. Jain, learned senior counsel with Ku. V. Mandlik, learned counsel for the Revenue and Shri S.C. Bagadia, learned senior counsel with Shri D.K. Chhabra, learned counsel for the assessee.

6. Placing reliance on the decision rendered by Bombay High Court in the case of CIT v. Vijay Flexible Containers [1980] 186 ITR 6932 learned counsel for Revenue contended that the question referred to this Court has to be answered in favour of Revenue. It was also his submission that the view taken by the Tribunal was based upon the law laid down by Supreme Court in the case Vania Silk Mills (P.) Ltd. (supra) and since the same has been subsequently disapproved by the Supreme Court in the later case in CIT v. Mrs. Grace Collis [2001] 248 ITR 3231 and hence, the question has to be answered in favour of Revenue and against the assessee. In reply, learned counsel for the assessee placing reliance on the decision in CIT v. J. Dalmia [1984] 149 ITR 2152 (Delhi) , contended that the question referred should be answered in favour of assessee. Learned counsel also placed reliance on two decisions of Supreme Court in the case of Swami Motor Transports (P.) Ltd. v. Sankaraswamigal Mutt AIR 1963 SC 864 and Ram Baran Prasad v. Ram Mohit Hazra AIR 1967 SC 744 and contended that the view taken by Tribunal is in conformity with the law laid down in these cases calling on upturning by this Court.

7. Having heard learned counsel for the parties and having perused record of the case, we are inclined to answer the question in favour of revenue and against the assessee.

8. The question referred to this court came up as the judicial debate shows for the first time directly before Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 5943. In this case, assessee had entered into an agreement with "A" to purchase land and had paid earnest money. "A" was reluctant to complete the conveyance ultimately, a tripartite agreement was entered into between the assessees, "A" and "X" where under the assessee transferred and assigned in favour of "X" its right, title and interest under the agreement and received the sum of Rs. 5,00,000 as consideration and a further sum of Rs. 90,000 being the refund of earnest money. The question before the Court in reference was whether the transaction which brought to the assessee, the sum of Rs. 5,00,000 involved the transfer of a capital asset and gave rise to capital gain. The court noted the definition of capital asset and transfer under the Income- tax Act. It noted that a contract for the sale of land was capable of specific performance and was assignable and in this behalf, relied upon the old Madras High Court’s judgment reported in Venkateshwara Aiyyar v. Kallor Illath Raman Namubdhri AIR 1917 Mad. 358. It concluded that a right to obtain conveyance of immovable property was property as contemplated by section 2(14) of the Income-tax Act. It held that the amount of Rs. 5,00,000 had been received by an assessee as consideration for assigning its rights under the agreement which fell within the wide definition of "capital asset" in the Income-tax Act. It also held that the earnest money paid by assessee to "A" was the consideration for which the property under the agreement had been acquired :—

9. The decision in the case of Tata Services Ltd.’s case (supra) was followed by Bombay High Court in CIT v. Sterling Investment Corpn. Ltd. [1980] 123 ITR 4411. This was a case where the assessee had entered into an agreement to purchase immovable property and had paid earnest money. Matters dragged on. Ultimately, an agreement was reached and only the sum of Rs. 10,000 was returned to the assessee. The assessee claimed before the tax authorities that it has lost the balance of the earnest money that it had paid and that this was a capital loss. This court was called upon on a reference to decide whether this was correct. It considered the definition of "capital asset" under the Income-tax Act and held that the contractual right of the purchaser to obtain title to immovable property for a price, which right was assignable, had to be considered to be "property" and, therefore, a "capital asset". In this behalf, reference was made to the judgment in the case of Tata Services Ltd. (supra). The court rejected the argument that if the right to purchase was given up and the vendor was relieved of his obligation, there would be no capital gain. The court approved of what had been said in the case of CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 (Bom.), in regard to the essential features of a transaction of relinquishment, namely, that the property in which the interest was relinquished continued to exist; it continued to be owned by some person or persons even after the transaction of relinquishment and the interest of the person relinquishing his interest in the property was given up or abandoned or surrendered. The court held that the loss to the assessee which had arisen out of the forfeiture of the earnest money that had been paid by it was not allowable as a capital loss.

10. The aforementioned two decisions then came up for examination again third time before Bombay High Court in the case of Vijay Flexible Containers (supra). In this case, the assessee firm entered into an agreement with D for purchase of an immovable property. The assessee paid Rs. 17,500 as earnest money. Subsequently, the assessee had 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. 1,75,000 and interest. The said sum was received by the assessee during the course of the previous year relevant to the assessment year 1972-73. The Income-tax Officer held that the right that the assessee had acquired under the agreement for sale was a capital asset. Upon the extinguishment of that right, the assessee had received the sum of Rs. 1,17,500. Deducting the cost of acquisition of the capital asset in the amount of Rs. 17,500 and expenses and legal charges in the sum of Rs. 17,904, the Income-tax Officer found the capital gain to be Rs. 82,086. The Tribunal, however, held that the amount was not assessable as capital gains.

11. On a reference to High Court, the question was answered in favour of Revenue and against an assessee S.P. Bharucha (as His Lordships then was a Judge of Bombay High Court and later CJI) speaking for the Bench affirmed the view taken by Bombay Bench in aforementioned two cases i.e. Tata Services Ltd.’s case (supra) and Sterling Investment Corpn. Ltd.’s case (supra). The learned Judge after examining the question in the context of the definition contained in S.2(14) and S.2(47) of the Income-tax Act coupled with the provisions of Transfer of Property Act contained in S.6 and S.54 ibid and the cases relied upon held as under :

"Having regard to the statutory provisions and the authorities which we have cited above, we cannot, with respect, agree 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 sale the right to have the immovable property conveyed to him. He was, under the law, entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right. What he acquired under the said agreement for sale was, therefore, property within the meaning of the Income-tax Act and, consequently, a capital asset. When he filed the suit in this court against the vendors, he claimed specific performance of the said agreement for sale by conveyance to him of the immovable property and, only in the alternative, damages for breach of the agreement. A settlement was arrived at when the suit reached hearing at which point of time the assessee gave up his right to claim specific performance and took only damages. His giving up of the right to claim specific performance by conveyance to him for the immovable property was a relinquishment of a capital asset. There was, therefore, a transfer of a capital asset within the meaning of the Income-tax Act. 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." (p. 699)

12. We respectfully concur with the aforesaid principle of law laid down by Bombay High Court in Vijay Flexible Containers (supra) while answering the question referred to this court in favour of Commissioner of Income-tax and against an assessee. Indeed, facts of the case involved in the present case and the one which were subject-matter of Vijay Flexible Containers (supra) are so identical that there is no room for finding out any distinguishing feature so as to take contrary view. Apart from this, learned counsel for the assessee could not point out any subtle distinction on legal issues to persuade us from differing with the view taken in Vijay Flexible Containers’ case (supra) except to place reliance on the decision rendered by Delhi High Court and other two decisions of Supreme Court to which we will deal at a later stage.

13. In our considered opinion, the question referred to us can also be answered against an assessee in the light of definition of "capital assets" as defined in section 2(14) read with definition of word "Transfer" as defined in Section 2(47) ibid. They read as under :

"S.2(14) - ‘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, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.

Explanation. - For the purposes of this sub-clause, ‘jewellery’ includes—

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;]

[(iii) agricultural land in India, not being land situate—

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;]

[(iv) 6 -1/2 per cent Gold Bonds, 1977, [or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government;]

[(v) Special Bearer Bonds, 1991, issued by the Central Government;]

[(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government;]

Section 2(47) ["transfer", in relation to a capital asset, includes,—

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;] [or]

[(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation. - For the purposes of sub-clauses (v) and (vi), immovable property" shall have the same meaning as in clause (d) of section 269 UA;]’

14. The expression ‘property of any kind’ used in section 2(14) is of wide import. When we read this expression along with expression defined in section 2(47)(ii) i.e., extinguishment of any rights therein, we have no hesitation in holding that giving up of right to claim specific performance by an assessee to get conveyance of immovable property in lieu of receiving consideration resulted in extinguishment of right in property thereby attracting the rigour of section 2(14) read with section 2(47) ibid. In other words, the action on the part of an 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 in transfer as defined in section 2(47) ibid. When the Legislature in its wisdom defines a particular type of transaction to be in the nature of transfer for taxing purpose, then the effect has to be given to such transaction to be in the nature of transfer as defined. The reading of definition of transfer under section 2(47) ibid, clearly indicate that the intention of Legislature is to include several kinds of transaction to be falling in the category of transfer for the purpose of bringing them in income-tax net under the Income-tax Act. Indeed, while interpreting the word transfer as defined in section 2(47). Their Lordships of Supreme Court in the case of Ahamad G.H. Ariff v. CWT [1970] 76 ITR 471 has held :

"... a term of the widest import and signifying every possible interest which a person can clearly hold or enjoy."

15. Learned counsel for the assessee placing reliance on three decisions in Swami Motor Transports (P.) Ltd.’s case (supra), Ram Baran Prasad’s case (supra) and J. Dalmia’s case (supra) with vehemence contended that view taken by Delhi High Court which stood upheld by Supreme Court where SLP filed arising out of the said decision was dismissed (189 ITR 122 Statute) has to be preferred as against the Bombay High Court. According to learned counsel, since it is based on two decisions of Supreme Court namely Swami Motor Transports (P.) Ltd.’s case (supra) and Ram Baran Prasad’s case (supra), this Court must follow Delhi view in preference to Bombay view rendered in Vijay Flexible Containers’ case (supra). With respect we cannot accept this submission.

16. Careful perusal of decision rendered by Delhi High Court in the case of J. Dalmia (supra) would indicate that it is distinguishable on facts. Indeed, it has been said so by Their Lordships of Delhi High Court when their Lordships examined the facts of the case before them and the facts of first Bombay case i.e. Tata Services Ltd (supra) later upheld in Vijay Flexible Container’s case (supra). While repelling the submission of learned counsel for the Revenue who had placed reliance on Tata Services case (supra), Their Lordships observed and in our opinion rightly as follows :—

"We are, therefore, left with the question as to whether the right to claim damages in the instant case is a "property of any kind" and thus a "capital asset" under section 2(14) of the Act. The further question as to whether there was a transfer of such a "capital asset" would arise only if the right to claim damages is held to be a ‘capital asset’. But, again, it will have to be examined if such a right could be transferred. Relying on the decision of the Bombay High Court in CIT V. Tata Services Ltd. [1980] 122 ITR 594, it was contended by Shri Wadhera, learned counsel for the Revenue, that any right which can be called property will be included in the definition of "capital asset" and that a contract for the sale of land is capable of specific performance and is also assignable, and he referred to section 15 of the Specific Relief Act, 1963. Therefore, according to Shri Wadhera a right to obtain conveyance of immovable property is clearly a ‘property’ as contemplated by section 2(14) of the Act. This argument overlooks the fact that the right to specific performance had been specifically given up by the assessee, J. Dalmia, and what was left was a mere right to sue for damages. In the Bombay case, there was an agreement to purchase a residential plot and the purchaser had paid Rs. 90,000 as earnest money. The vendor was, however, in breach of the agreement, as he wanted to sell this property to a third party at a higher price. Finally, there was a tri- partite agreement between the purchaser (the assessee), the vendor and the third party, and the purchaser was returned the earnest money as well as paid a sum of Rs. 5,00,000 being the amount of consideration for the transfer and assignment of his right, title and interest under the contract for sale. It was held that the amount of Rs. 5 lakhs was received by the assessee as consideration for assigning his rights under the agreement and these rights, which had been assigned, clearly fell within the definition of "capital asset". It will thus be seen that the facts of this case are quite different and the authority does not help Shri Wadhera...." (p. 219)

17. So the basic question that fell for consideration before the Delhi High Court in the case of J. Dalmia (supra) was, whether right to claim damages in that case is a property of any kind. It is this question which was answered in favour of assessee. So far as the case before us is concerned, the facts of the case are identical with the facts of both the cases of Bombay High Court, referred supra. In this view of the matter, we cannot place reliance on the ratio laid down by Delhi High Court for answering the question either way. On the other hand, law laid down by Supreme Court in aforementioned two cases was relied upon by Bombay High Court while answering the question in favour of Revenue. It is for this reason; we do not wish to deal with the citation of learned counsel in detail.

18. As taken note of supra, the Tribunal while answering the question in favour of assessee had placed reliance on the view taken by Supreme Court in the case of Vania Silk Mills (P.) Ltd. (supra) for holding that right to claim specific performance of contract does not create any right in the property and as a consequence does not result in transfer of interest in the property within the meaning of section 2(14) read with section 2(47) ibid. The view so taken by the Supreme Court in the case of Vania Silk Mills (P.) Ltd. (supra) no longer hold to be a good law and stands disapproved by the Supreme Court in later decision rendered in the case of CIT v. Mrs. Grace Collis [2001] 248 ITR 3231 in following words :—

"We have given careful thought to the definition of "transfer" in section 2(47) and to the decision of this court in Vania Silk Mills Pvt. Ltd.’s case [1991] 191 ITR 647. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression "extinguishment of any rights therein" to such extinguishment on account of transfers or to the view that the expression "extinguishment of any rights therein" cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. To so read the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer." (p. 330)

19. In view of foregoing discussion, we answer the question referred to us in favour of Commissioner of income-tax (Revenue) and against an assessee. In other words, we answer the question by holding that Tribunal was not justified in holding the amount of Rs. 7,34,000 as capital receipt not exigible to capital gains tax as no transfer of any property was involved within the meaning of section 2(47) of the Income-tax Act. Instead, we hold by answering the question that amount of Rs. 7,34,000 is a capital receipt exigible to capital gains tax as it involved transfer of property within the meaning of section 2(47) of the Income-tax Act. No costs.

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