Commissioner Of Income-Tax, Bombay City I v. Tata Services Ltd.

Chandurkar, J.:— Reference made in this case at the instance of the revenue with regard to question No. 2 and at the instance of the assessee with regard to question No. 1, arises out of a transaction of assignment of the rights of the assessee under an agreement of sale dated 31st July, 1961. By this agreement, the assessee had entered into an agreement with one Seth Anandji Haridas to purchase a residential plot at 29D, Doongarsey Road, Malabar Hill, Bombay, and had paid Rs. 90,000 as earnest money. The agreement was in respect of 5,000 sq. yds. out of a larger plot and the price fixed was at, the rate of Rs. 175 per sq. yd. The balance of the purchase price was to be paid on the completion of the purchase. The purchase was to be completed within six months from the date of the agreement and after the expiration of the said period of six months, by a 15 days' notice to be given in writing, time could be made the essence of the contract. It was the responsibility of the vendor to obtain the necessary permission from the municipal or other public authorities, for the subdivision of the main plot admeasuring 7,012 square yards and the necessary costs for applying for and obtaining the said sub-division including the architect's fees were to be borne by the vendor only. It was stipulated that if the permission for the said sub-division was not obtained on any account whatsoever, the vendor would be entitled to cancel the agreement, upon which the earnest money deposited was to be refunded to the purchaser without any interest and thereupon the parties were not to have any other claim against each other. One of the clauses of the agreement provided that, on the completion of the sale, the vendor should put the purchaser or his nominee or nominees in vacant and peaceful possession of the premises. It appears that the vendor informed the assessee that the subdivision of the plot had not been granted by the municipal corporation and, therefore, it was not possible to complete the sale and the vendor had reluctantly, therefore, to treat the agreement as cancelled. This was not accepted by the assessee whose solicitors expressed readiness to have the matter completed and to work for obtaining the necessary order for sub-division. There were talks between the parties, the conclusions were confirmed by the letter of the assessee's solicitors dated 16th April, 1963, wherein it was stated that the value for the superstructure on the land was fixed at Rs. 2,25,000 in place of Rs. 2,43,000 and the sale was agreed to be completed within three months from 16th April, 1963, time being of the essence of the contract. In this letter dated 16th April, 1963, the break-up of the total cost of the land amounting to Rs. 16,43,800 was given and there was a note added at the bottom that: “The present market price of land in the Malabar Hill area is reported to be about Rs. 300, even higher, per square yard.” This settlement was, however, repudiated by the vendor and the assessee then threatened to file a suit. It, however, appears that the vendor had decided to sell the property to M/s. Advani and Batra and he was, therefore, anxious to return the earnest money of Rs. 90,000 and in addition also to pay a sum of Rs. 5,00,000 in order to get the assignment of the assessee's rights, in regard to the contract in question, in favour of Messrs. Advani and Batra. Correspondence thus ensued between the parties. Finally, it was agreed that the assessee was to receive Rs. 5,90,000 from M/s. Advani and Batra and the assessee was to transfer and assign in favour of M/s. Advani and Batra, the assessee's right, title and interest under the agreement entered into by the assessee with Anandji Haridas for purchase of the property at Doongarsey Road. The assessee finally received a sum of Rs. 5,90,000 from M/s. Advani and Batra and the receipt of which is passed by the assessee, which is annex. “H” to the statement of the case, recites that the assessee has received from M/s. H.K Advani and R.K Batra their cheque for Rs. 5,90,000 made up as follows:

“Rs. 5,00,000 being the amount of consideration for the transfer and assignment of our right, title and interest under the agreements entered into by us with Anandji Haridas for the purchase of his property at Doongarsey Road.

Rs. 90,000 being the amount of earnest money deposited by us with Messrs. Kanga and Co., Attorneys for the Mortgagees of the property, in accordance with the agreement arrived at between ourselves and Anandji Haridas, which amount has been reimbursed to us.”

2. In the assessment year 1964–65, the ITO, relying upon the wording of the receipt, held that the assessee was liable to pay capital gains tax and after allowing a sum of Rs. 14,115, on account of expenses, he brought to tax a sum of Rs. 4,85,885 by way of capital gains., This order of the ITO was upheld by AAC and the matter was taken to the Appellate Tribunal by the assessee. The Tribunal, considering the nature of the transaction as a result of which the assessee had received the amount of Rs. 5,90,000, took the view that the assessee had agreed not to insist upon the property being sold to itself, but it had agreed for consideration to part with the rights to a third party, namely, M/s. Advani and Batra, and, therefore, all its right, title and interest, which it had pursuant to the agreement, were transferred and assigned to M/s. Advani and Batra for a cash consideration of Rs. 5 lakhs. Thus, according to the Tribunal, there was a case for the levy of tax on capital gains made by the assessee in respect of the transaction in question. While, however, dealing with the computation of capital gains, the Tribunal has made a rather unusual order taking aid of the decision of the Supreme Court in Dhun Dadabhoy Kapadia v. Cit, Bombay, [1967] 63 ITR 651. The Tribunal took the view that if the assessee was to purchase the property at Rs. 234 per square yard, the value of which was on that day Rs. 300 per square yard, the assessee suffered a detriment to the extent of Rs. 66 per square yard as a result of the assignment in favour of M/s. Advani and Batra. Thus, the Tribunal directed the ITO that “while computing capital gains he will not only give the expenses which have been previously allowed but also a sum which will be arrived at by a calculation being made at the rate of Rs. 66 per square yard on the entire area that formed the subject-matter of dispute between the assessee and Anandji”.

3. The revenue was dissatisfied with this order and a reference was, therefore, asked for by the revenue in respect of the quantum of the capital gains. When the revenue asked for the reference, the assessee also asked for a reference on the question as to whether any liability at all arose for payment of capital gains tax out of the transaction in question. The prayers of the revenue and the assessee were both granted and the following two questions have been referred by the Tribunal to this court:

“(1) Whether, on the facts and in the circumstances of the case, the transaction which brought the assessee a sum of Rs. 5 lakhs, involved the transference of a capital asset and gave rise to a case of capital gains under the provisions of the Income-tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, a deduction should be allowed, while computing the capital gains, by taking note of the detriment suffered by the assessee being taken at Rs. 66 per square yard on the entire area that formed the subject-matter of dispute between the assessee and Anandji Haridas in addition to the expenses allowed by the Income-tax Officer?”

4. As already stated, question No. (1) is referred at the instance of the assessee and the second question is referred at the instance of the revenue.

5. Arguing in respect of the first question, Mr. Vyas, relying on s. 54 of the Transfer of Property Act, contended that the agreement for sale in favour of the assessee did not create any interest or right in the land which was agreed to be purchased and, therefore, the assessee owned no capital asset as contemplated by s. 2(14) of the I.T Act, 1961. It was further contended by him that when the assessee received a total amount of Rs. 5,90,000 from M/s. Advani and Batra, there was no transfer of any property as contemplated by s. 2(47) and the amount which the assessee had received was in effect compensation for breach of contract and could not be said to be consideration for the transfer of any asset. It was also contended that in any case the asset in respect of which capital gains tax was sought to be computed was an asset for the acquisition of which the assessee did not incur any cost and, therefore, no computation could be made as contemplated by s. 48 of the I.T Act.

6. Now, it is no doubt true that as provided for in s. 54 of the Transfer of Property Act, a contract for the sale of immovable property does not by itself create any interest in or charge on such property. It is, however, difficult to see how the provisions of s. 54 of the Transfer of Property Act at all become relevant for the purposes of the present case. It is not the case of the revenue nor was it contended at any stage that the right which was transferred and the transfer of which is said to have given rise to capital gains was a right in the land which was agreed to be sold by Anandji Haridas and purchased by the assessee. The case of the revenue was that under the agreement of sale, the assessee had a right to obtain a conveyance in respect of immovable property. It is this right which he has either relinquished or assigned in favour of Messrs. Advani and Batra and the consideration of Rs. 5,90,000 which the assessee had received, was the consideration for the relinquishment or the assignment in favour of Messrs. Advani and Batra.

7. What is a capital asset is defined in s. 2(14) of the I.T Act, 1961. Under that provision, a capital asset means property of any kind held by an assessee, whether or not connected with his business or profession. The other sub-clauses which deal with what property is not included in the definition of capital asset are not relevant. Under s. 2(47), a transfer in relation to a capital asset is defined as including the sale, exchange or relinquishment of the asset or the extinguishment of any right therein or the compulsory acquisition thereof under any law. The word “property”, used in s. 2(14) of the I.T Act, is a word of the widest amplitude and the definition has re-emphasised this by use of the words “of any 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. (See Hochat Kizhakke Madathil Venkateswara Aiyar v. Kallor Illath Raman Nambudhri, AIR 1917 Mad 358). Therefore, in our view, a right to obtain conveyance of immovable property, was clearly “property” as contemplated by s. 2(14) of the I.T Act, 1961.

8. It is now necessary to correctly appreciate the nature of the transaction, firstly, between the assessee and Anandji Haridas, and, secondly, between the assessee and Messrs. Advani and Batra. The true effect of the agreement of sale entered into between Anandji Haridas and the assessee is that a certain plot of land is agreed to be purchased by the assessee for a certain consideration. Out of the agreed consideration, a sum of Rs. 90,000 has been paid as earnest money. The consideration for executing the agreement of sale and getting a right to obtain a conveyance and transfer of immovable property in favour of the assessee is the payment of a sum of Rs. 90,000 by way of earnest money plus the obligation to pay the balance of the purchase price on the completion of the sale. It is in lieu of this consideration that the right to obtain a conveyance has been acquired by the assessee. Now, so far as the transaction between the assessee and Messrs. Advani and Batra is concerned, it is obvious that both the assessee and Anandji Haridas have treated the agreement of sale as subsisting and the rights under this agreement of sale were being assigned in favour of M/s. Advani & Batra. It is no doubt true that at one stage Anandji Haridas wanted to treat the transaction as cancelled, a position which was not accepted by the assessee. The assessee, however, had throughout been insisting that the agreement of sale is a subsisting agreement and that it would be constrained to file a suit for specific performance of that agreement for sale. Whatever may have been the controversy between Anandji Haridas and the assessee prior to 23rd September, 1963, when the assessee executed the receipt for Rs. 5,90,000, the position on that day was not only that the original agreement of sale between the assessee and Anandji Haridas was to be treated as subsisting but also that the tripartite agreement between the assessee, Anandji Haridas and M/s. Advani and Batra that the money paid by the assessee to Anandji Haridas was to be returned by M/s. Advani and Batra and an additional sum of Rs. 5,00,000 was also to be paid to the assessee by M/s. Advani and Batra was given effect to. Under this tripartite agreement, the assessee was to transfer and assign in favour of M/s. Advani and Batra the right, title and interest which the assessee had under the agreement entered into with Anandji Haridas. Once the parties had decided that the rights under the agreement of sale were to be assigned in favour of Messrs. Advani and Batra, it is difficult to see how the sum of Rs. 5,00,000 received by the assessee from M/s. Advani and Batra could be claimed to have been received by way of compensation or damages for breach of the agreement of sale. The position on 23rd September, 1963, when the receipt (annex. “H”) was executed by the assessee was that Rs. 5,90,000 were received by the assessee as consideration for assigning its rights under the agreement with Anandji Haridas in favour of M/s. Advani and Batra. These rights, which had been assigned in favour of M/s. Advani and Batra, clearly fell within the wide definition of capital asset in cl. (14) of s. 2 of the I.T Act, 1961.

9. It is also difficult to see how it is open to the assessee to contend that there was no transfer at all of any right in favour of M/s. Advani and Batra as contemplated by the definition of the word “transfer” in cl. (47) of s. 2 of the I.T Act. The only process of law by which the right, which was originally vested in the assessee, could be exercised by its nominee would be the process of transfer. This could be only by way of an assignment of the right in favour of M/s. Advani and Batra. Indeed the, parties themselves contemplated such a nature of transfer as would be evidenced by the receipt executed by the assessee.

10. That now brings us to the question as to whether the assessee is right in contending that it had incurred no cost when it obtained the right to obtain a sale deed. This contention seems to have been founded on a decision of this court in CIT v. Home Industries, [1977] 107 ITR 609. It must be remembered that the decision, to which one of us (Desai J.) was a party, specifically dealt with the question as to whether goodwill, which was a self-created and self-generated asset, created or generated by the activities of the assessee and which was a capital asset of the assessee, can be said to have been acquired by it at any particular point of time for any cost or any cost in terms of money and whether such a type of capital asset on transfer gives rise to chargeable gains under s. 12B(1) of the Indian I.T Act, 1922. The Division Bench referred to the provisions of s; 12B(1) of the Indian I.T Act, 1922, and s. 45 of the I.T Act, 1961, and pointed out that the concept of profit and gain arising from the transfer or sale, as contemplated by the abovementioned provisions, necessarily implies that there is something received in excess of the capital asset which is transferred or sold and profit or gain arising from sale has a necessary reference to the difference between the cost price of the asset and the sale price of the asset. The Division Bench pointed out that the charging provision in both the Acts itself brings in the concept of actual cost to the assessee of the capital asset, and what is done by the machinery provision, which is contained in sub-s. (2) of s. 12B of the Indian I.T Act, 1922, and s. 48 of the I.T Act, 1961, is to elaborate that concept and lay down the mode or method by which such profit or gain is to be computed. The Division Bench has, in that case, however, observed as follows (p. 633):

“If the capital asset is such that it has cost nothing in terms of money to the assessee, the charging provision must be interpreted as being not referable to such capital asset, and a self-created or self-generated goodwill being such asset, will be outside the purview of the charging section.”

11. It was then observed by the Division Bench (p. 634):

“Since we have come to the conclusion that self-created or self-generated goodwill is not capital asset which could be said to have been acquired by the assessee-firm at any particular point of: time and is not a capital asset which could be said to have cost something in terms of money to the assessee, such goodwill will not be a capital asset the transfer of which will give rise to chargeable capital gain under either section 12B(1) of the 1922 Act or section 45 of the 1961 Act.”

12. Apart from the fact that in that case the Division Bench was dealing with the question whether “goodwill” is a self-generated asset, it is difficult for us to see how that decision can be relied upon by the assessee in this case. We have in this case an agreement of sale in favour of the assessee which gave a right to obtain a conveyance of the property agreed to be sold. It is difficult for us to see how it can be contended on behalf of the assessee that when the assessee acquired the right to obtain a conveyance, this right did not cost it anything. When the agreement of sale was entered into, the assessee had to pay a part of consideration by way of earnest money. Indeed, that was the consideration paid to the vendor for executing the agreement of sale by the vendor. The mere fact that ultimately the earnest money was to be treated as a part of the purchase price, the balance of which was to be paid on the completion of the sale, did not detract from the fact that the immediate consideration for the execution of the agreement of sale was the payment of earnest money. 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, the 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. Therefore, this was, in our view, clearly a case which squarely fell within s. 45 of the Act and the assessee 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. Question No. 1 referred at the instance of the assessee would, therefore, have to be answered in the affirmative. Coming to the quantum of capital gains, it is impossible for us to appreciate how the Tribunal was persuaded to apply the ratio of the decision in Dhun Dadabhoy Kapadia v. Cit, Bombay, [1967] 63 ITR 651 (SC) (hereinafter referred to as “Kapadia's case”). As already pointed out earlier, while determining the income chargeable under the head “Capital gains”, the Tribunal has taken the view that the assessee, if it had purchased the land itself at the rate, of Rs. 234 per square yard, would have benefited by Rs. 66 per square yard because the price of land at Malabar Hill at that time was Rs. 300 per square yard. Therefore, according to the Tribunal, the assessee was put to a loss of Rs. 66 per square yard by the transfer and while computing capital gains, it was entitled to a deduction of Rs. 5,000.66. The facts in Kapadia's case, [1967] 63 ITR 651 (SC) are well known. That was a case where the assessee held by way of investment 710 ordinary shares in the Tata Iron & Steel Co. and when an offer to her, by which she was entitled to apply for 710 new ordinary shares at a premium with an option of either taking the shares or renouncing them wholly or partly, was made, the assessee renounced her right in respect of the 710 shares on 12th June, 1956, and realised Rs. 45,262.50. When this whole amount was sought to be taxed as capital gains, it was claimed that on the issue of the new shares, the value of the shares already held by the assessee had depreciated because by that time the value of the old shares had fallen and she had, therefore, suffered a capital loss on the old shares to the extent of Rs. 37,630 which the assessee claimed she was entitled to set off against the capital gain of Rs. 45,262.50. It was held by the Supreme Court that the assessee was entitled to deduct from the sum of Rs. 45,262.50 the loss suffered by way of depreciation in the old shares. What is important is the basis on which the Supreme Court held that the assessee was entitled, to deduct the amount of capital loss. On principle, the Supreme Court pointed out that the net capital gain or loss to the assessee would be the difference between the value of the capital asset and the cash in her hands after she had renounced her right and realised the cash value in respect of it and the value of the capital asset including the right which she possessed just before these new shares were issued and before she realised any cash in respect of the right by renouncing it in favour of some other persons. Kapadia's case, [1967] 63 ITR 651 (SC) was, therefore, a case where the value of the entire capital asset was taken into account and only a part of the capital asset was transferred by the assessee. In the instant case, it is difficult to see how this ratio of Kapadia's case, [1967] 63 ITR 651 (SC) can even remotely be attracted. All that the assessee had was a right to obtain a sale deed. Whether the assessee could have made a profit in case it had purchased the land or not was not at all material. This was not a case where the value of a part of the asset held by the assessee had depreciated because a part of the asset was transferred and as a result of that transfer the assessee had derived any additional profit. This was a simple case where the entire capital asset which consisted of its right under the agreement came to be transferred. There was no question of deduction of any loss out of the profit which, the assessee had made by transferring the capital asset: The Tribunal was, in our view, therefore, clearly in error in applying the ratio of Kapadia's case, [1967] 63 ITR 651 (SC) to the case of the assessee. In our view, 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. The assessee would, however, be entitled to a deduction of Rs. 14,11.5 on account of legal and other expenses referred to by the ITO. The second question would, therefore, have to be answered in the negative and in favour of the revenue.

13. Accordingly, question No. 1 is answered in the affirmative and in favour of the revenue; question No. 2 is answered in the negative and in favour of the revenue. The assessee to pay the costs of this reference.