Vijay Pal Rao, J.M:— This appeal by the assessee is directed against the order dated 30.1.2009 of CIT(A)-XVI 11, Mumbai for the assessment year 2004–2005.
2. The assessee has raised various grounds in this appeal, however, the following issues arise from the grounds of the appeal:
(i) whether in the facts and circumstances of the case, the learned CIT(A) is justified in confirming the order of the AO in treating the amount of Rs. 11,50,000 received by the assessee for surrendering her right in the agreement dated 16.12.1994 as income from the other sources, against the long term capital gain claimed by the assessee.
ii) whether in the facts and circumstances of the case, the learned CIT(A) is justified in dismissing the additional ground raised by the assessee for claiming the benefit of cost inflation index for computing the long term capital gain.
3. Brief facts of the case are as under:
a) the assessee paid Rs. 5,00,000/- on 16.12.1994 being part of refundable deposit of Rs. 1.6 crores for acquiring the tenancy rights of a flat in a building to be constructed at Pereira Road, Bandra (W), Bombay. The said building was to be constructed by P. and J. Pereira and co. a partnership firm, on plots No. 232 and 234 at Junction of Mount Mary's road and Pereira Road, Bandra (W), Bom bay-400050. These pl ots were leasehold property given by the government vide lease dated 13.3.1919 to the Archbishop of Bombay by a Public trust registered under Bombay Public Trust Act, 1950. The developer P.J Pereira and Co. entered into an agreement dated 4.12.1991 with RT. Rev. Dr. Simon I. Pimenta, Archbishop of Bombay, Trustee of the Archdioscess, a Public Body. The parties to the agreement agreed to create irrevocable rights in favour of the Developer/Contractor in respect of the properties to be developed against the consideration of Rs. 60,00,000/- to be paid to Dr. Simon I. Pimenta, the Archbishop of Bombay. The developer; in turn entered into agreement with the third parties for allotment of the flats on tenancy right by accepting the advances. The assessee paid the said amount of Rs. 5 lakhs being part payment of refundable deposits to the contractor/developer for giving the tenancy rights in the proposed flats No. 1 at 19th floor to be constructed. The project could not be materialized and assessee and the contractor agreed to cancel the agreement of the tenancy rights in the said flat. The assessee vide letter dated 02.05.2003 cancelled the agreement dated 16.12.1994 for purchase of tenancy rights of the flats. Accordingly, the assessee received the refund of Rs. 16,50,000/- against the deposit of Rs. 5 lakhs. The assessee admitted the said receipt of Rs. 11,50,000/- over and above on the deposit of Rs. 5,00,000/- as capital gain but the AO treated the same as income from other sources. The AO was of the view that it can at the best considered as interest accumulated on such deposits.
4. On appeal, the CIT(A) confirmed the action of the AO.
5. Before us, the learned AR of the assessee has submitted that the deposits of Rs. 5,00,000/- was made under the agreement dated 16.12.1994 for creating the tenancy rights in favour of the assessee. Thus, on cancellation of the agreement of tenancy right the assessee surrendered the right of tenancy and received compensation which is capital in nature. The learned AR of the assessee has referred the assessment order and the statement of Mr. B.K Gupta, a Partner of P.J Periera and Co. who appeared before the AO and filed documents which are placed at pages 11 to 14 of the paper book. Shri B.K Gupta was examined by the AO. The documents filed by Shri B.K Gupta as well as their explanation clearly show that the amount was nothing but compensation for breach of contract by the developer. The learned AR forcibly contended that the assessee never claimed the agreement between her and the developer as an agreement to sale but it was only agreement of purchase of tenancy rights. He has further submitted that the assessee treated the advance deposit as capital in nature. He has referred the balance-sheet as on 31.03.2003 and submitted that the amount of Rs. 5,00,000/- shown in the balance sheet as an advance deposits under the head “Advance deposit” as an asset of the assessee. Thus, the learned AR has submitted that when the advance deposit was interest free and the agreement between the assessee and developer was only for creating a tenancy rights in the flat then the surrender of the said rights of tenancy is an asset. He has relied upon the decision of the honourable jurisdictional High Court in the case of CIT v. Ismazila Co-operative Housing Soc. Ltd. reported in 181 ITR 174.
6. On the other hand, the learned DR has submitted that when no capital asset came into existence then no right was created in favour of the assessee by an agreement dated 16.12.1994 He has submitted that the Bombay Municipal Corporation did not approve the construction plan and no clearance certificate (CC) was granted. The land in question was a government land given on lease to the public trust and therefore the said cannot be transferred. When the developer could not get the legal title or right over the said property then there is no question of creating any right in the said property in favour of the assessee. There is no transfer of any asset. The am ount received by the assessee cannot be a capital gain because when the assessee was having no right in the property then the question of transfer or surrendering of rights does not arise. He has relied upon the order of the CIT(A).
7. We have considered the rival contentions and relevant record. The first question arises for our consideration and adjudication is whether letter dated 16.12.1994 (claimed as an agreement) creating any legal and enforceable rights in favour of the assessee over the property in question. The contents of the letter dated 16.12.1994 are reproduced as under:
“16th December 1994
Kavita S. Kandhari,
61, La Emerade,
14th road,
Bomby.
Dear Sir/Madam,
We are pleased to allot you flat No. 1 on 19th floor in building known as ………………at Pereira road, Bandra(W), Bombay 400050 at a monthly rent to be decided after signing agreement. The sum of r. 1.16 crores (Rupees one crore sixteen lakhs only) is to be paid as deposit (Refundable) and r. 24,000 (Rupees twenty four thousand) being the deposit for three months as per the terms and conditions of the tenancy agreement to be executed excluding all other charges, cesses, fees, refundable depots, etc., which are and consequent to this allotment, shall be paid by you.
1
deposit
Rs.
Rs. 5 lacs
2
On commencement of the work
Rs.
25% of total value
3
On completion of plinth
Rs.
70% (less Rs. 5 lacs paid as deposit on progress of work in equal installment)
4
On completion of 1st slab
Rs.
5
On completion of 2nd slab
Rs.
6
On completion of 3rd slab
Rs.
7
On completion of 4th slab
Rs.
8
On completion of 5th slab
Rs.
9
On completion of 6th slab
Rs.
10
On completion of 7th slab
Rs.
11
On completion of 8th slab
Rs.
12
On completion of 9th slab
Rs.
13
On completion of 10th slab
Rs.
14
On possession
Rs.
5% on possession
The detailed terms and conditions of tenancy agreement which have been discussed as per the draft prepared by Mr. Manoj Shukla, Advocate and Solicitor have been shown to have and approved by you and agreed upon between us will be set out in agreement which you shall execute immediately upon being called upon to do so.
The payment should be made within 7 days from the date of demand without fail and any delay or default in payment (payment in time being the essence of contract) shall automatically make this agreement determinated/terminated. However, without prejudice to the aforesaid and the other rights and remedy available to the owners, the owners may accept the delayed/overdue payment with interest at 24% per annum.
It is clearly understood that the time shall be essence of the contract in respect of payment.
Kindly confirm the above.
Thanking you,
Yours faithfully,
I/We confirm,
Signature of the purchaser/s
Allottee
Received the above mentioned refundable deposit by cheque/No. 504372 dated 15/12/1994 for r. 5 lakhs
For owners”
Though the said letter does not talk about any right, ownership or interest of the developer in the said property, however the legal sanctity of the letter dated 16.12.1994 is subject to the nature of right/title of the developer in the said flat No. 1 of the said property so that the developer can further transfer the same in favour of the assessee. The purchaser cannot get the better title/right than what the seller had. Undisputedly, the land in question is a government land given on lease to the Public Trust viz. Archdioscess, a Public Trust, therefore, we have strong and serious doubt in our mind about the transferability of the said property or irrevocable right by the trustee in favour of the developer against the consideration. Thus, the validity of the said agreement dated 4.12.1991 between the Trustee and the developer is highly questionable Firstly, without following the due process of law as provided under the Bombay Public Trust Act and Section 92 of Civil Procedure Code as well as other relevant Laws in force at the relevant point of time. Secondly, the property belongs to the government and the trust was having only the lease hold rights. Therefore, without the permission of the competent authority the property of the trust cannot be transferred al iened, let out, sold, mortgage, exchange or subjected to creating any charge or lien. Thirdly, the property was occupied by the tenants and in any case, can be constructed only after necessary permission was obtained from the authorities to demolish the existing structures resulting displacement of the existing tenants. Thus, when the developer could not have any legal right/title in the property in question then the transfer of the same to the third party is not possible.
8. There is no doubt that the tenancy right is a capital assets and surrender thereof extinguishes the right and amounts to transfer of capital asset. Even damages for breach of contract is also a capital receipt. But in all essences there should be a legal and enforceable tenancy rights and existence of valid and enforceable contract. In the case in hand, the letter dated 16.12.1994 does not create any legally enforceable rights in favour of the assessee in the property to be developed. When the transfer of the any right in the property in question in favour of the developer was, itself questionable and highly doubtful then how any right in the said property can be created in favour of the assessee by the developer. Even otherwise, the flat to be constructed was not in existence and was likely to be constructed subject to various legal hurdles. From the bare reading of the letter dated 16.12.1994 it is clear that the said letter does not create any enforceable right in the said property in favour of the assessee. Thus, the assessee cannot enforce the said letter/agreement dated 16.12.1994 for any right of the assessee in the property. On the basis of the said agreement, the assessee could not seek any specific performance against the developer. When no right to the asset was created by the agreement, the cancellation of the same does not amount to transfer of any asset. At the most, it can be seen as only giving up the right, if any, to sue the developer for mischief. Thus, the excess amount received by the assessee is not in lieu of any right to the assets but the same is associated/related with the amount of Rs. 5 lakhs deposited by the assessee. The decision relied upon by the learned AR is not applicable in the facts and the circumstances of the present case, when the transferor of the property had no legal right over the said property. Therefore, we are of the view that the assessee did not acquire any right to asset vide the said letter/agreement dated 16.12.1994 Consequently, by cancellation of the same does not amount to transfer of any assets resulting in capital gain. Hence, we decide this issue against the assessee and in favour of the revenue.
9. Ground No. 2, regarding the benefit of indexation for calculating the capital gain. The second issue is consequential one to the issue No. 1. Accordingly, the same is dismissed.
10. In the result, the appeal of the assessee is dismissed. Pronounced in the Open Court on 20.10.2010