1. The assessee filed a return of income on June 4, 1982, for the assessment year 1982-83, showing loss of Rs. 40,282. By the assessment order dated March 27, 1985 passed under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Officer taxed an amount of Rs. 6,94,232 under the head "Short-term capital gains" on the ground that the assessee had acquired the right under the sale agreement dated August 12, 1980, to a consideration of Rs. 5 lakhs and subsequently received surplus of Rs. 9 lakhs on the assignment of rights so acquired and, therefore, that receipt was a capital gain and further that the assessee had incurred expenses amounting to Rs. 2,05,768 partly for acquiring the rights and partly for assignment thereof. The Income-tax Officer held that the receipt of Rs. 9 lakhs by the assessee as the assignment charge of its rights was a capital gain which was a short term capital gain. In the appeal filed by the assessee against the action of the Income-tax Officer in taxing the amount of Rs. 6,94,232 under the head "Short term capital gains", the Commissioner of Income tax (Appeals)-IV, Ahmedabad, by his order dated June 3, 1986, holding that it cannot be said that the value of the right transferred was "nil" and that the cost of acquiring the right and expenditure incurred in acquiring the right had been rightly taken into account by the Income tax Officer, dismissed the appeal confirming the order of the Income tax Officer. In appeal before the Income tax Appellate Tribunal, it was urged on behalf of the assessee that there was frustration of the original agreement of sale between the assessee and the vendor and consequently there was nothing which could be assigned with the result that there was no transfer and, therefore, no capital gain at all. It was also urged that, since the cheque for the amount of earnest money of Rs. 5 lakhs had been returned to the assessee by the vendor, the assessee had not incurred any cost for the acquisition of the rights which were assigned by him and therefore, there was no capital gain which could be taxed. The Tribunal, by its order dated October 13, 1989, rejected these contentions and dismissed the appeal.
2. In the above background, the Tribunal has referred to the High Court for its opinion, out of the four questions suggested, the following three questions under section 256(1) of the Act :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the original agreement of sale between the applicant and the vendors was not frustrated by the interim orders of the High Court dated August 12, 1980 and August 14, 1980, and, therefore, there could be a valid assignment of the said agreement by the applicant ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there was cost of acquisition incurred by the applicant in respect of the agreement of purchase of the mills sought to be assigned by the applicant and, therefore, the decision of the Supreme Court in the case of Srinivasa Setty [1981] 128 ITR 294 was not applicable ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the applicant was liable to capital gains tax in respect of Rs. 9,00,000 received by it in consideration of the assignment of the contract of purchase of the mills ?"
3. On August 12, 1980, the assessee had entered into an agreement with the vendor, New Commercial Mills Company Ltd., Ahmedabad, for purchase of the textile mill for a total sum of Rs. 2,75,00,000 and the assessee gave by way of "deposit" or "earnest money", an amount of Rs. 5 lakhs by cheque. By an agreement dated August 19, 1980, the assessee also acquired the right to use the trade marks of the vendor in respect of which the assessee was to pay royalty at the stipulated rate. It appears that, by order dated August 12, 1980, of this High Court passed in a winding up petition against the vendor, the vendor was restrained from dealing with its properties and from encashing the cheque for the earnest amount. Thereafter, on November 3, 1980, the winding up petition came to be dismissed as withdrawn and the interim order was vacated by the High Court. On October 14, 1980, the assessee entered into an agreement with the Bharat Vijay Mills Ltd., by which it assigned its benefits, advantages and obligations under the agreement dated August 12, 1980, in favour of the said assignee for a sum of Rs. 9 lakhs and the vendor joined in the sale agreement as a confirming party. As recorded in the deed of assignment, the vendor returned the cheque for Rs. 5 lakhs to the assessee. As pointed out above, the assessee had claimed before the Income tax Officer that the receipt of Rs. 9 lakhs was not a taxable receipt as the assessee had not incurred any cost for acquiring its right since the cheque for the earnest amount of Rs. 5 lakhs was returned to the assessee and, therefore, the net surplus of Rs. 6,94,232 realised by the assessee after deduction of the expenditure of Rs. 2,05,768 which was incurred by way of service charge expenses, legal and professional charges and miscellaneous expenses for acquiring the rights and their assignment was not chargeable to capital gains tax.
4. The Income tax Officer, however, holding that the assessee had incurred the cost by virtue of having given the cheque for Rs. 5 lakhs by way of earnest money to the vendor and the expenditure of Rs. 2,05,768 which was incurred for acquiring the rights and assigning them, came to the conclusion that the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, was not applicable to the case of the assessee. The Income-tax Officer had added up the said amount of Rs. 5 lakhs to the amount of Rs. 9 lakhs and from the total of Rs. 14 lakhs deducted the amounts of Rs. 5 lakhs and Rs. 2,05,768 holding the balance to be taxable as a short term capital gain and that order came to be confirmed by the Commissioner of Income tax (Appeals) and the Tribunal.
5. It was contended by learned counsel, Mr. K. H. Kaji, that the assessee had not incurred any cost in respect of the agreement of purchase dated August 12, 1980, in view of the fact that the cheque for the earnest amount of Rs. 5 lakhs was not encashed by the vendor and was returned to the assessee. He, therefore, submitted that, as nothing was paid in respect of the rights of the assessee under the said agreement, the asset had no cost and, therefore, there could arise no liability to pay capital gains tax keeping in view the ratio of the decision of the Supreme Court in B. C. Srinivasa Setty's case (1981) 128 ITR 294. It is difficult to accept that contention urged on behalf of the assessee because, admittedly, the assessee had incurred an expenditure of Rs. 2,05,768 as claimed by him by way of service charge expenses, legal and professional charges and miscellaneous expenses for acquiring the rights under the agreement and for their assignment. It may also be noticed that the amount of Rs. 5 lakhs which was given by way of deposit or earnest money by the cheque issued by the assessee to the vendor was to be adjusted towards the total amount of Rs. 2.75 crores being the price of the textile mill, as recorded in clause 4 of the agreement. There is no dispute about the fact that under the assignment deed, the assignee was required to pay the full amount of Rs. 2.75 crores to the vendor. In view of this arrangement between the parties, it is clear that the liability of the assignor, that is the assessee, to pay the total consideration of Rs. 2.75 crores was also assigned to the assignee and that is why the cheque for Rs. 5 lakhs was returned to the assignor by the vendor who was a confirming party to this arrangement. In other words, though a sum of Rs. 9 lakhs was paid under the deed of assignment to the assignor, the assignee paid Rs. 5 lakhs directly to the vendor in view of the cheque of the earnest amount of Rs. 5 lakhs having been returned to the assessee-assignor. If the amount of Rs. 5 lakhs were retained by the vendor, then an amount of Rs. 5 lakhs would have been paid by the assignee to the assignor in view of the assignee's having undertaken the liability to pay the entire amount of consideration under the deed of assignment. Therefore, it cannot be said that the assessee had acquired right under the agreement of sale without having had to incur any cost simply because the cheque for Rs. 5 lakhs was returned to it unencashed by the vendor. The amount of Rs. 5 lakhs it received less from the assignee because, instead of being paid to it, it was directly paid to the vendor by the assignee in view of the assignor having been returned the earnest amount by the vendor. 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 and in confirming the decision of the Commissioner of Income-tax on that count. Question No. 2 is, therefore, answered in the affirmative and against the assessee.
6. Mr. Kaji, learned counsel, strongly contended that the agreement dated August 12, 1980, had been frustrated on account of an interim injunction having been granted by the High Court in the winding up petition on August 12, 1980, which lasted till November 3, 1980, being the date on which it was vacated due to the dismissal of the winding up petition. He submitted that, when there is prohibition against performance by an order of the court, even if it is temporary, the agreement would become void under section 56(2) of the Indian Contract Act if such an order was passed for an indefinite period. He submitted that the question whether the contract had been frustrated or not depended on the fact situation obtaining on October 14, 1980 when the assignment was made by the assessee and subsequent events cannot throw light on that count because there was a possibility and even a probability that the interim order prohibiting transfer would have continued for an indefinite period. He submitted that the fact that the assessee did not rescind the contract under clause 32(c) (d) and purported to assign the contract had no bearing on the legal position and the assignment made by the assessee was only a purported assignment of an agreement which had become void by frustration and, therefore, the assignment itself also was void. Mr. Kaji placed reliance on the decision of the Supreme Court in re H.E.H. The Nizam's Jewellery Trust, AIR 1980 SC 17, in which it was held that where the clauses in a contract for sale of certain items of trust of the price by the successful bidders and taking delivery of goods upon such payment and the court, in the meanwhile, had restrained the trustees by an ad interim injunction from finalising the sale and even after vacating of the injunction, the High Court order restoration of status quo ante before any of such bidders paid the balance of price as stipulated, the contract relating to sale of trust property must be deemed to be frustrated.
7. Under section 56 of the Indian Contract Act, an agreement to do an act impossible in itself is void and a contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. The question which arises before us for consideration is as to whether, in all cases where interim orders are passed by courts, it would have the effect of frustrating the contract because, during the period when the interim orders remained operative, the parties could not have performed the terms of the contract. It is a settled legal position that the court can given relief on the ground of subsequent impossibility when it finds that the whole purpose or the basis of the contract has been frustrated by the inclusion or occurrence of an unexpected event or change or circumstances which was not contemplated by the parties on the date of the contract. In cases like the present one where there is no question of supervening illegality involved, the proper test for frustration may be formulated as follows : If the promise under the contract were to be enforced as per the terms stipulated, could performance involve a fundamental or radical change from the obligation originally undertaken in view of the changed circumstances ? The important question is whether an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both the parties when they entered into 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 dated October 14, 1980. Under the agreement dated August 12, 1980, the "purchaser" was defined to mean 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. It is clear that this is not a case where the parties had not foreseen the fact that interim relief would be granted in the winding up petition, nor is it a case where mere grant of a temporary injunction resulted in any fundamental or radical change in respect of the obligations originally undertaken under the agreement dated August 12, 1980. The fact that the same rights and liabilities were assigned in favour of the assignee, under the deed of assignment to which the vendor was a confirming party, clearly shows that no such fundamental or radical change was brought about merely by virtue of a temporary injunction and that it is not as if any situation which was not foreseen by the parties had arisen. We are, therefore, of the view that there was no frustration of the contract dated August 12, 1980, as is sought to be contended on behalf of the assessee. The decision of the Supreme Court in re H.E.H. The Nizam's Jewellery Trust, AIR 1980 SC 17, cannot help the assessee's case because, in the case before the Supreme Court since time was of the essence of the contract as was found in paragraph 47 of the judgment and it was stipulated that, in the event there was a failure to pay 90 per cent. of the tender amount, that is the balance of the price, the contract would be deemed to have been cancelled. It was held that the granting of the injunction had prevented the performance of the contract as stipulated since 90 per cent. of the tender amount could not have been tendered by the stipulated date nor could delivery of the jewellery have been taken so long as the injunction lasted. It was also held that, even after the injunction was vacated, the successful tenderers never made an attempt to pay the balance amount till the date on which the High Court passed an order for maintaining the status quo ante and it was nobody's case that a new contract was ever entered into. The Supreme Court, therefore, held that, there was frustration of alleged contracts in the cats and circumstances of the case. In the instant case, it is clear that time was not treated to be of the essence of the contract. From the latter part of clause 32 of the agreement, it is clear that it was specifically agreed that the purchaser may, instead of rescinding the contract, extend from time to time the time for completing the sale and if the time for completion as stipulated in clause 21, namely a period of two weeks of the receipt of the necessary permission from the Urban Land Ceiling authorities expired, the vendor would have the option of rescinding the agreement notwithstanding that the purchaser extended time for the same. It was further stipulated that, if the purchaser did not comply with its obligations under the agreement within the time fixed for completion, the vendor would be entitled to cancel the agreement and would return the earnest amount. This arrangement which is reflected in the latter part of clause 32 of the agreement dated August 12, 1980, clearly shows that, though the parties indicated the time of performance of the contract in clause 21 of the agreement and described it as of essence, in reality, it never treated time to be of the essence of the contract. It is a settled legal position that, in the case of sale of immovable property, there is a presumption against time being of the essence of the contract and mere fixation of the period within which the contract has to be performed does not make time the essence of the contract. (See Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005, 1008; Gomathinayagam Pillai v. Palaniswami Nadar, AIR 1967 SC 868, 871; and Sachidananda v. G. P. and Co., AIR 1964 Orissa 269). It will, thus, be seen that the matter before the Supreme Court which related to movable property, where time was of the essence of the contract and by virtue of the injunction, the parties could not pay the amounts as were required to be deposited within the stipulated time, stands totally on a different footing from the instant case which pertains to an agreement of sale of immovable property where the parties did not intend to treat time to be of the essence of the contract having regard to the various stipulations contained in the agreement and also having regard to the conduct in executing the deed of assignment of October 14, 1980, which clearly indicated that the contract was treated as subsisting, for, otherwise, there would have arisen no question of assigning the rights and obligations under the contract dated August 12, 1980. It is also clear that, in the case before the Supreme Court, the High Court had set aside the alleged sale of the items of jewellery by the board of trustees in favour of the appellant and the other successful tenderers on the ground that there was no concluded contract between the parties. Thus, the ratio of the decision in re H.E.H. The Nizam's Jewellery Trust's case, AIR 1980 SC 17, can have no application to the facts of the present case. It would produce startling results if it were to be held that, simply because some temporary injunction may be granted in a case, it would have necessarily the effect of frustrating a contract involved in that case.
8. For the reasons indicated above, we are of the view that the Tribunal has rightly come to the conclusion that there was no frustration of the contract and, therefore, it cannot be said that there was no assignment made by the assessee. In this view of the matter, we answer question No. 1 in the affirmative and against the assessee. It is not disputed that, once it is held that there is no frustration of the contract and that there was cost of acquisition of the rights of the contract, the assessee would be liable for the tax on capital gains in respect of Rs. 9,00,000 received by it is consideration of the assignment of the contract and, therefore, in view of our answers to questions Nos. 1 and 2, question No. 3 is answered in the affirmative and against the assessee.
9. The reference stands disposed of accordingly, with no order as to costs.
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