Income Tax Appellate Tribunal - Mumbai
Dhruv N. Shah vs Deputy Commissioner Of Income Tax on 9 September, 2003
Equivalent citations: [2004]88ITD188(MUM), [2005]273ITR59(MUM), (2004)82TTJ(MUM)369
ORDER
Jaidev, A.M.
1. This appeal of the assessee is directed against CIT(A)'s order dt. 30th March, 2002, passed under Section 263. The grounds of appeal filed by the assessee are argumentative but it is noticed that grounds of appeal Nos. 1 and 2 are in fact the substantive grounds of appeal and the remaining grounds are the arguments in support of the aforesaid grounds of appeal. The grounds of appeal No. 1 and 2 are reproduced as under:
"1. The CIT erred in passing the order under Section 263 on the ground that the original assessment was erroneous and prejudicial to the interest of the Revenue.
2. The CIT erred in treating liquidated damages of Rs. 21,00,000 received by the assessee from M/s Mahendra Builders (P) Ltd. as revenue receipt taxable under the head 'capital gains'."
2. The facts are that assessee alongwith his father Mr. Nanalal Kapurchand Shah jointly (whose name was recorded for the sake of convenience) agreed to purchase share certificate No. 34 containing five equity shares of Rs. 50 each bearing distinctive numbers 166 to 170 (both inclusive) of Shirin Co-operative Housing Society Ltd. together with the right to use and occupy premises bearing no. 101 on the 1st floor of Shirin Apartment No. 3 situated at 211/219 Tardeo Road, Mumbai-400 007, from M/s Mahendra Builders (P) Ltd. (hereinafter referred as M/s MBPL) having its office at Mahendra Chambers, 134/136, Dr: D.N. Road, Bombay-400 001 for an aggregate consideration of Rs. 37,50,000. A copy of the agreement dt. 27th Dec., 1992 entered into between M/s Mahendra Builders (P) Ltd. and (1) Mr. Dhruva Nanalal Shah and (2) Mr. Nanalal Kapurchand Shah is available on record. As per the aforesaid agreement an amount of Rs. 36,65,000 was paid to M/s MBPL on execution of the said agreement, The vendor received the payment of Rs. 36,65,000 vide two pay-in-slips drawn on Indian Bank, Napean Sea, Road Branch, Mumbai.
2.1 The assessee agreed to pay a further sum of Rs. 50,000 within the period of one week from the receipt of the order of the appropriate authority under the IT Act, 1961. A further amount of Rs. 35,000 was to be paid by the assessee as transfer fees payable to the society for transfer of the shares on behalf of the transferor.
2.2 Shirin Co-operative Housing Society Ltd. gave no objection certificate for the transfer for the shares of M/s Mahendra Builders (P) Ltd. in respect of the said flat in favour of the assesses vide their letter dt. 27th Dec., 1992. Apparently, as the letter of the vendor dt. 27. Dec., 1992, indicates, peaceful possession of the flat was given to the assessee on 27th Dec., 1992 itself.
2.3 An application in form No. 37-I under Section 269UC of the IT Act 1961, was filed with the appropriate authority acting under the IT Act, 1961, on 30th Dec., 1992, who gave its no objection certificate under Section 269UL on 26th Feb., 1993 for transfer of said shares and said flat by M/s MBPL to the assessee.
2.4 On 7th Jan., 1993, it is alleged that some trespassers entered the said flat and took forcible possession of the flat. The trespassers were Mr. Ajaykumar Suraj Narain Kanav and Mrs. Saraladevi Suraj Narain Kanav, who allegedly had agreed to purchase the said flat from M/s Tardeo Properties (P) Ltd. (M/s TPPL, for short) which was the owner and developer of the said property. A suit, which has been admitted, was filed by said owner and developer against the said purchasers in the High Court at Bombay for cancellation of the agreement.
2.5 It was alleged by the assessee that the vendor, M/s Mahendra Builders (P) Ltd. (M/s MBPL) had given the assurance that they would take necessary action in law against the trespassers by way of filing a criminal complaint. Presumably nothing happened for obtaining the possession of the said flat from the trespassers because the assessee subsequently asked M/s MBPL to refund Rs. 36,65,000 paid by them for purchase of flat, Accordingly, M/s MBPL paid a sum of Rs. 5,00,000 by pay order dt. 1st March, 1993 to the assessee.
2.6 Thereafter, the assessee pursued the matter with M/s MBPL, for obtaining the refund of remaining money but M/s MBPL failed to refund the balance money to the assessee.
2.7 Thereafter the assessee allegedly filed a criminal complaint with the crime branch (CID) sometime in the year 1994 against the vendor M/s MBPL. M/s MBPL agreed to refund the balance sum of Rs. 31,65,000 to the assessee alongwith a further amount of Rs. 21,00,000. A copy of the agreement dt. 25th May, 1995, between the assessee and M/s MBPL in the form of exchange of letters, whereunder assessee received aforesaid sum, has been placed on record. Accordingly, the assessee received the balance sum of Rs. 31,65,000 invested by him in purchase of the flat and also a further sum of Rs. 21,00,000. Thus, a total sum of Rs. 57,65,000 was paid by vendor to the assessee.
2.8 These letters were notorised. It is stated in the notorised letter dt. 25th May, 1995 that the assessee will not claim any right, title, interest or possession in respect of the property on receipt of the payment of Rs. 57,65,000.
2.9 Consequent upon receiving a proposal from the AO for revision under Section 263, the CIT passed order under Section 263 in which it was held that "the AO has not considered whether such right, title and interest in property existed in favour of the assessee and whether such action could be considered as relinquishment of right in property." The CIT also referred to the agreement of sale dt. 27th Dec., 1992 highlighting the Clause (10) thereof, according to which only an amount of Rs. 50,000 was receivable by the assessee as liquidated damages in the event of wilful default by the vendor of the property. The CIT also pointed out that the assessee did not approach the Court to enforce his right to specific performance and also stated that claim for "liquidated damages" was not decreed by the Court. The assessee contended before the CIT in the proceedings under Section 263 that "receipt of liquidated damages by the assessee did not bear the character of income as it has no connection either with the said flat but it has been paid to the assessee as compensation for mental and physical agony suffered by the assessee and the members of the family, for loss of good bargain, steep rise in the. real estate prices in the city of Bombay and loss due to payment of taxes on capital gains earned on the sale of the original flat." It was also contended by the assessee that "liquidated damages were neither -received on account of relinquishment of any right in the said flat nor for transfer of any right in the said flat. The assessee had no right of whatsoever nature in the said flat because the said flat was already sold to other persons by whom the assessee was driven out of the said flat." It was further submitted that "the AO had made detailed enquiry before coming to the conclusion that the liquidated damages were capital receipt in the hands of the assessee and, therefore, the said amount of Rs. 21 lakhs was not taxable." It was contended that "M/s Tardeo Properties (P) Ltd. which had already sold the said flat to Mr. Ajay Kumar Suraj Narain Kanav had not conveyed any title in respect of the said flat to M/s Mahendra Builders (P) Ltd. and, therefore, M/s Mahendra Builders (P) Ltd. had no right or title to the said flat" which could be conveyed to the assessee. The assessee also' relied on certain decisions of the Courts before the CIT but the CIT, apart from discussing the facts of each case, made the following general observations:
"Before proceeding to discuss these issues in detail, I would first like to point out that in all the cases cited by the assessee in his defence, the fact that the assessees had received payments only in lieu of their right to sue was the admitted fact. Further, in all the cases there was no dispute as to the fact of non-performance of the agreement and breach of contract was established. In fact, the cases reveal that in all the cases specific performance was ruled out completely and all that the assessees had was a right to sue."
2.10 The CIT also pointed out that the assessee did not choose to bring about any case against the trespassers. The CIT further observed that "even if it is admitted that there was a breach due to the vendor committing a wilful default of any of the provisions of the agreement, the quantum could not have gone beyond Rs. 50,000." The CIT also observed that "in this case the vendor guaranteed a good title but even so the vendee was evicted, the letter can at best be allowed to recover the value of property at the date of eviction." By, inter alia, relying on the decision of Bombay High Court in the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) and the decision of Gujarat High Court in the case of Rayon Silk Mills v. CIT (1996) 221 ITR 155 (Guj), the learned CIT observed that "thus it is clear that the Hon'ble Court has made it abundantly clear that it is not the case that in all cases where inquiries have been conducted an order under Section 263 cannot be passed. If the conclusion of the AO is erroneous and prejudicial to the interest of Revenue reversionary jurisdiction of the CIT can be brought into play." Therefore, the CIT observed that the assessment order passed under Section 143(3) by the AO was erroneous inasmuch as it was prejudicial to the interest of Revenue. He, therefore, directed the AO to treat the amount of Rs. 21,00,000 received by the assessee from M/s MBPL as revenue receipt taxable as capital gain. He further observed that the amount of liquidated damages will be restricted to Rs. 50,000 as covenanted in the agreement.
The learned counsel reiterated the same arguments which were given before the CIT. The learned counsel of the assessee contended that liquidated damages of Rs. 21 lakhs received by the assessee from M/s MBPL cannot be assessed as capital gains as the assessee had mere right to sue the builder which was not a 'capital asset' as defined in Section 2(14). It was contended that the liquidated damages were capital receipts not liable to tax. The learned counsel further argued that liquidated damages were paid by M/s MBPL for the breach of contract to sell the flat to the assessee which the former could not legally have sold to the assessee. The learned counsel further referred to chronology of events given in the compilation and pointed out that the sum of Rs. 5 lakhs was refunded to the assessee by M/s MBPL on 1st March, 1993, whereas the remaining sum of Rs. 31,65,000 and liquidated damages of Rs. 21 lakhs were received on 25th May, 1995. It was pointed out that there was steep rise in the prices of flats after the year 1992-93. Referring to the agreement for transfer dt. 27th Dec., 1992 of the flat in question between M/s MBPL and the assessee, available at pp. 1 to 11 of the paper book, the learned counsel contended that as per Clause 10 of the agreement the entire amount was required to be refunded to the assessee forthwith in the event of rescinding the agreement whereas in fact M/s MBPL only refunded the amount of Rs. 5 lakhs on 1st March, 1993 and the remaining amount of Rs. 31,65,000 was refunded only on 25th May, 1995 after the filing of the criminal complaint against M/s MBPL. The learned counsel also referred to para 6 of the aforecited agreement wherein the transferor had declared and confirmed that it was absolutely entitled to hold, possess, lease and occupy the said flat and no other person had any right, title, interest, benefit, claim or demand of any nature whatsoever into or upon the shares of the Housing Society concerned and the said flat either by way of sale, exchange, mortgage, lease, lien, leave and licence, gift, trust, etc. It was stated that the agreement was fraudulently entered by M/s MBPL and the assessee became a victim of cheating by M/s MBPL as the said flat had already been sold to Smt. Sarala Devi Surya Narain Kanav and Shri Ajay Kumar Surya Narain Kanav by M/s TPPL (who were the owner and developer of the said property) vide agreement dt. 6th May, 1981 (copy available at pp. 59 to 84 of the paper book). It was further stated that the said buyers had also made payments on 12th May, 1981 and 21st July, 1982, of Rs. 26,131.25 and Rs. 26,131.25 respectively in instalments towards the purchase of the said flat. In this regard, our attention, was invited to pp. 86 to 87 of the paper book wherein copies of the receipts for. the aforesaid amounts issued by M/s TPPL to the said buyers (i.e., Smt Sarala Devi Surya Narain and Shri Ajay Kumar Surya Narain) are available. The learned counsel further pointed out that M/s MBPL is controlled by Shri Mahindra V. Shah and his wife Smt. Pratibha Mahindra Shah. It was pointed out that M/s TPPL is the sister-concern of M/s MBPL as Shri Mahindra V. Shah is the common director in both these concerns. The learned counsel pointed out that M/s TPPL was the original owner of the flat No. 101. It was pointed out that though the flat had been sold by M/s TPPL to Smt. Sarala Devi Surya Narain Kanav and Shri Ajay Kumar Surya Narain Kanav by agreement dt. 6th May, 1981 for which part payment was also received, yet the said flat was fraudulently transferred by M/s TPPL to M/s MBPL by agreement dt. 10th April, 1986 for Rs. 9,45,000. It was stated that the aforecited agreement dt. 10th April, 1986 was not registered and there was no witness to the said agreement. Hence, according to the learned counsel, M/s MBPL had no title to the flat No. 101 though it got the share certificates of the Housing Society transferred in its name. The learned counsel referred to the relevant papers in the paper book in connection with the filing of criminal complaint against Shri Mahindra V. Shah with the State Police and CID. At p. 25 is the letter dt. 25th April, 1995, written by the assessee to the Police Commissioner. At pp. 49-50 there are copies of the relevant papers pertaining to FIR lodged by the assessee with the Crime Branch of the Police under Section 420 IPC in connection with fraud/cheating committed by Shri Mahindra V. Shah and Mrs. Pratibha Mahindra V. Shah, partners of M/s. MBPL, in respect of the sale of flat in Shirin Apartment No. 3 at Tardeo Road, Mumbai, to the assessee. The learned counsel also referred to pp. 27 to 31 of the paper book and p. 36 of the paper book wherein there are copies of letters exchanged between the assessee and M/s MBPL in connection with the amicable settlement arrived at after the filing of the FIR. Our attention was particularly drawn by the learned counsel to the assessee's letter dt. 25th. May, 1995 addressed to M/s MBPL wherein it has been stated:
"It is agreed between you and me that on paying Rs. 57,65,000 (Rupees fifty seven lacs sixty five thousand only) comprising of Rs. 36,65,000 being the deposit money paid as recited hereinabove and Rs. 21,00,000 as liquidated damages and on the conditions as hereinafter recorded."
2.10.1 The learned counsel also adverted our attention to the assessee's letter dt. 29th Sept., 1997, written to the AO wherein it has been stated:
"A copy of the agreement dt. 25th May, 1995 between the assessee and M/s Mahendra Builders (P) Ltd. whereunder assessee received aforesaid sums has been placed on record. Accordingly the assessee received the balance sum of Rs. 31,65,000 invested by them in purchase of the flat and also liquidated damage of Rs. 21,00,000 for the mental tension and agony suffered by the assessee and members of his family, loss of good bargain, steep rise in the real estate prices in. the city of Bombay and loss due to payment of taxes on capital gains earned on the sale of the original flat."
The learned counsel pointed out that despite the proper putting up of the case before the AO vide letter dt. 29th Sept., 1997, there is not even a whisper in the assessment order about the liquidated damages of Rs. 21 lakhs claimed by the assessee as capital receipt. Then, the learned counsel adverted our attention to the letter dt. 2nd Nov., 2000, written by the assessee to the appropriate authority of the IT Department (available at p. 55 of the paper book) in which the assessee had pointed out:
"I had purchased flat No. 101 in Shirin Apartment at 211/219 Tardeo Road, Mumbai-400 027 from M/s Mahendra Builders (P) Ltd. who in turn had purchased the same from its sister-company named, M/s Tardeo Properties (P) Ltd.
While proceedings for issue of above certificate was going on Shri Suraj Narain Kanav and Smt. Sarladevi Kanav claimed possession of the aforesaid flat on the basis of agreement of purchase of said flat they had with M/s Tardeo Properties (P) Ltd.. They had filed copy of the said agreement with the appropriate authority and reported certain facts."
2.10.2 The learned counsel then pointed out to p. 59 of the paper book wherein there is a copy of agreement dt. 6th May, 1981, entered into by M/s TPPL with Smt, K. Sarala Devi Surya Narain and Shri K. Ajay Kumar Surya Narain towards the sale of flat No. 101, which was subsequently fraudulently sold to the assessee by M/s MBPL, The learned counsel pointed out that the agreement dt. 6th May, 1981 was duly signed by Shri Mahindra V. Shah in the capacity of director of TPPL. This agreement was also signed by Smt. Sarala S. Kanav. The learned counsel then referred to p. 85 of the paper book wherein there is a copy of kacha receipt dt. 20th July, 1982, issued to Smt. K. Sarala Devi Surya Narain by M/s TPPL for the amount of Rs. 26,131.25 received by them for gale of flat No. 101 in Building No. 3 of Shirin Apartment at Tardeo Road. At pp. 86 and 87 there are two pucca receipts available which are dt. 12th May, 1981 and 21st July, 1982 respectively issued by M/s TPPL to Smt. Saraladevi Surya Narain and Shri Ajay Kumar Surya Narain in respect of amounts of Rs. 26,131.25 each received by them in instalments as part payment in respect of the agreement for sale of the flat No. 101 in Building No. 3 of Shirin Apartment. The learned counsel also adverted our attention to the following documents:
(1) Letter dt. 1st Feb., 1993, written by Smt. K. Sarala Devi Surya Narain and K. Ajay Kumar Surya Narain to the appropriate authority of the IT Department in connection with flat No. 101 "owned and occupied by them" (copy available at p. 56 of the paper book).
(2) Letter dt. 21st Jan., 1993 written by Ajay Kumar Kanav to the Commissioner of Police regarding the harassment and torture of the builder Shri Mahindra V. Shah (available at p. 92 of the paper book).
(3) Letter dt. 27th Jan., 1993 written by Smt. K. Sarala Devi Surya Narain and Shri K. Ajay Kumar Surya Narain to the Secretary of the Shirin Co-operative Housing Society Ltd., Tardeo, Bombay, regarding their enrolment as bona fide members of the Housing Society, they being the owner and occupier of the flat No. 101 (available at p. 93 of the paper book).
(4) Copies of sale agreement and order of documents including duly filled in membership form were also furnished alongwith the above letter. 2.10.3 Apart from emphasising the fact that real estate prices had doubled between 1993 and 1995, the learned counsel contended that agreement to sell the aforesaid flat to the assessee was illegal because M/s MBPL had no title to the flat. It was pointed out that the title derived by M/s MBPL from M/s TPPL was illegal as the latter had already sold the flat to Smt. Sarala Devi Surya Narain and Shri Ajay Kumar Surya Narain. It was argued that Shri Mahindra V. Shah was the common director in M/s MBPL and M/s TPPL and hence, when the assessee made enquiries with the housing society, he was informed that Shri Mahindra V. Shah (builder) is the owner. The learned counsel contended that the receipt of liquidated damage by the assessee did not bear the character of income as it has no connection either with the purchase of the flat or with the transfer of the flat to M/s Mahendra Builders (P) Ltd but it has been paid to the assessee as compensation for mental and physical agony suffered by the assessee and the members of the family, for loss of good bargain, steep rise in the real estate prices in the city of Bombay and loss due to payment of taxes on capital gains earned on the sale of the original flat. Reliance was placed by the learned counsel on the following decisions:
(1) CIT v. Ashoka Marketing Ltd. (1987) 164 ITR 664 (Cal).
(2) CIT v. Hiralal Manilal Mody (1981) 131 ITR 421 (Guj).
(3) CIT v. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 (Bom).
(4) Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bom).
(5) CIT v. Gabriel India Ltd. (supra).
2.10.4 The learned counsel, after reading over certain extracts from the aforesaid judgments, contended that the assessee's case is on all fours with the facts of the case of CIT v. Ashoka Marketing Ltd. (supra), decided by Hon'ble Calcutta High Court. The learned counsel also referred to the submissions dt. 21st Feb., 2000 made by the assessee before the CIT during the course of Section 263 proceedings and particularly relied on pp. J to R wherein the decisions relied on are discussed. The learned counsel, while summing up his arguments, contended that the assessee had sold the original flat, new flat could not be properly acquired and hence the assessee had to pay the tax on the capital gains earned, lost his father because of the continued tensions relating to the flat and is presently staying in a tenanted property. It is urged that these factors.
should be taken into account while deciding the taxability or otherwise of the liquidated damages of Rs. 21 lakhs received by the. assessee. It was pointed out that CIT had agreed that the amount of Rs. 50,000 was towards liquidated damages. . .
2.11 On the other hand, the learned Departmental Representative pointed out that in the assessment order the AO had only used the words "relinquishment of flat". It was pointed put that nothing was said by the AO about the receipt of Rs. 21 lakhs as liquidated damages by the assessee. The learned Departmental Representative submitted that for taking action under Section 263 proposal was received from the. AO by the CIT as is clear from para 1 of CIT's order. The learned Departmental Representative further contended that the assessee had not taken due diligence to find out whether the title in respect of the flat in question was clear and unencumbered. It was stated that "Buyers beware" principle should have been followed by the. assessee. The learned Departmental Representative contended that from the assessment order or the assessment records, there is nothing to indicate that the AO had made the necessary enquiries with regard to the receipt of amount of Rs. 21 lakhs by the assessee as liquidated damages. It was stated that no questionnaire was issued by the AO in this regard. The learned Departmental Representative further submitted that in the letters dt. 25th May, 1995 (available at p. 36 of the paper book) written by M/s MBPL to the assessee with regard to the payment of Rs. 57,65,000 there is no reference to Rs. 21 lakhs being paid to the assessee as liquidated damages. The learned Departmental Representative further pointed out that the assessee had not gone to the Court against, M/s MBPL or its director, Shri Mahindra V. Shah. The learned Departmental Representative then took us through the relevant portions of assessee's letter written to Addl. Commissioner of Police (Crime) (available at p. 52 of the paper. book). The learned Departmental Representative further pointed out that the AO had not asked a single .question to the assessee in respect of the receipt of Rs. 21 lakhs claimed by the latter as liquidated damage. The learned Departmental Representative vehemently, argued that in the letters exchanged by the assessee with M/s MBPL on 25th May, 1995, it was agreed that the assessee shall not claim any right, title, interest or possession in respect of flat No. 101 of Shirin Apartment Building No. 3. It was contended by the learned Departmental Representative that relinquishment of right is covered by the definition of 'transfer' given in Section 2(47) of the IT Act. The learned Departmental Representative then took us through relevant portion of CIT's order passed under Section 263, particularly para 2.7.2 wherein it has been stated that no evidence has been brought on record to show that any action was taken by the assessee against the alleged trespassers. The learned Departmental Representative pointed out that on 27th Dec., 1992, peaceful possession was taken by the assessee as per agreement for transfer of the flat in question and on 7th Jan., 1993 the assessee was evicted forcibly by Smt. Sarala Devi Surya Narain and Shri Ajay Kumar Surya Narain. The learned Departmental Representative pointed out that even the ho objection by the Shirin Co-operative Housing Society was given to the assessee on 27th Dec., 1992 for the transfer of the flat in question from M/s MBPL to the assessee. The learned Departmental Representative then took us through agreement for transfer dt. 27th Dec., 1992 entered into between M/s MBPL and the assessee (available at pp. 1 to 12 of the paper book) and the termination agreement (in the form of exchange of letters between the assessee and M/s: MBPL) (available at pp. 32 and 33 of the paper book) and our attention was specifically drawn to the assessee's letter dt. 25th May, 1995 written to M/s MBPL stating, "I shall not claim any right, title, interest or possession in respect at the flat No. 101 on First Floor of Shirin Apartment Bldg. No. 3, Tardeo Road, Mumbai 400 007." Thus, according to the learned Departmental Representative, relinquishment of the right is covered in the definition of 'transfer' given, in Section 2(47). The learned Departmental Representative placed reliance on the following decisions:
(1) CIT v. Kartikey V. Sarabhai (1981) 131 ITR 42 (Guj).
(2) CIT v. P.N. Sreenivasa Rao (1988) 171 ITR 562 (Ker).
(3) CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom).
2.12 When the case was being heard as a part-heard case on 10th Dec., 2001, the assessee carried out an inspection of the record available with the Departmental Representative in connection with filing of letter dt. 29th Sept., 1997, before the AO. On inspection, this letter was not found on record. On the next date of hearing, i.e., 9th Jan., 2002, the assessee filed an affidavit with regard to the letter dt. 29th Sept., 1997, claimed to have been filed before the AO during the course of assessment proceedings with respect to the receipt of liquidated damages of Rs. 21 lakhs from M/s MBPL, It was contended that the filing of assessee's letter dt. 29th Sept., 1997, is also proved by AO's. letter dt.
19th Nov., 1998, written to senior audit officer with regard to audit objection for the assessment year under appeal. In the affidavit filed before us the assessee's has stated:
"I further say that the said submissions made by me in the letter dt. 29th Sept., 1997, were thoroughly discussed with Shri Anil Goel; Dy. CIT, Sp. Rg. 33, Mumbai on 29th Sept., 1997 when he was satisfied about the claim of Shri Dhruv that the receipt of Rs. 21 lakhs from M/s: Mahendra Builders (P) Ltd. is a capital receipt and not liable to tax as capital gains because. M/s Mahendra Builders (P) Ltd. had really not sold the flat to Shri Dhruv as it was not belonging to M/s Mahendra Builders (P) Ltd. I further say that Shri Anil Goel, Dy. CIT, Sp.
Rg. 33, Mumbai had made reference to the records of the appropriate authority which is having its office on 3rd Floor of Mittal Court, B-Wing, Nariman Point, Mumbai-400 021. I further say that the assessment proceedings were concluded by Shri Anil Goel, Dy. CIT, Sp. Rg. 33, Mumbai on 13th Oct., 1997, when he was fully satisfied about the non-taxability of Rs. 21 lakhs received by Shri Dhruv from M/s Mahendra Builders (P) Ltd."
In the affidavit, it has been further stated that, "I further say that before passing the order under Section 263 of the Act the CIT, City-VIII, Mumbai had called for the assessment records of the Dy. CIT, Sp. Rg. 33, Mumbai and the said letter dt. 29th Sept., 1997 giving full explanation about the receipt of Rs. 21 lakhs was found on the record of the Dy. CIT, Sp. Rg. 33, Mumbai and, therefore, the CIT has not stated in his order under Section 263 of the Act that the said letter of Shri Dhruv dt. 29th Sept., 1997 was not filed in the course of the assessment proceedings before the Dy. CIT, Sp. Rg. 33, Mumbai." Thus, case of the learned counsel of the assessee is that the letter dt. 29th Sept., 1997 was filed during the course of assessment proceedings and was available on records of the AO even during the course of proceedings under Section 263 before the CIT. The learned counsel, therefore, stated that the letter dt. 29th Sept., 1997, being not surprisingly found on record in the file produced by the, learned Departmental Representative before the Tribunal, it is very much possible that the same may be available in some other folder and full production of records by the learned Departmental Representative will prove the assessee's contention. Thus, according to the learned counsel, the AO had applied his mind to the full facts of the case in the course of assessment proceedings before exempting the receipt of Rs. 21 lakhs from being taxed in the hands of the assessee and hence, as held by the Hon'ble Bombay High Court in the case of Gabriel India Ltd. (supra), the CIT had no jurisdiction to pass an order under Section 263.
2.13 Joining the issue with the learned Departmental Representative, the learned counsel contended that in para 6.2 of his order, the learned CIT has held that liquidated damages will be restricted to the covenanted amount in the agreement (i.e., Rs. 50,000) and the remaining amount will be taxed as Capital gains. According to the learned counsel, both these things cannot go together. It is argued by him that if the amount received by the assessee is treated as liquidated damages, part of the same cannot be taxed as capital gain. The learned counsel pointed out that while giving effect to the CIT's order, the AO has excluded the amount of Rs. 50,000 from capital gains. The learned counsel stated that M/s MBPL had agreed to sell the unencumbered flat but the subsequent events showed that the flat was encumbered. Referring to p. 32 of the paper book, the learned counsel contended that letter dt. 25th May, 1995, written by the assessee to M/s MBPL, was not a termination agreement as there have to be two parties to an agreement. The learned counsel argued that the amount received was in fact a compensation for the right to sue. The learned counsel further argued that when the right in the said flat was not created in favour of the assessee, there was no question of relinquishment of the same. The learned counsel took us through the definition of 'capital asset' given in Section 2(14) of the IT Act and stated that the assessee having been thrown out from the flat, there was no property held by the assessee and hence, there was no question of its transfer. It was further stated that as the property had already been sold by M/s TPPL to Smt. Sarala Surya Narain and Shri Ajay Kumar Surya Narain, even legally the assessee was not the owner. It was stated that in Section 2(47) the 'transfer' is in relation to a capital asset. It was stated that when the capital asset is not there, there is no question of transferring the same. The learned counsel further stated that the decisions of Kerala and Bombay High Courts, relied on by the learned Departmental Representative, are distinguishable in facts. The learned counsel then referred to the decision of the Bombay High Court in the case of Gabriel India Ltd. (supra), relied on by the learned CIT. It was pointed out by the learned counsel that though the CIT extracted some observations of the High Court, yet he had not referred to the observations made thereafter in the same order which are as under:
"The CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the CIT he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed as erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interests of the Revenue."
The learned counsel further pointed out that the decision of the AO not to tax the liquidated damages of Rs. 21 lakhs was supported by four decisions of various High Courts which were quoted by the assessee in his written submissions dt. 29th Sept., 1997, filed before the AO.
3. We have given careful consideration to the rival submissions in the light of the material presented before us. We have also considered the various decisions relied on by both the sides. We are of the opinion that the receipt of the liquidated damages of Rs. 21 lakhs by the assessee does not bear the character of income as it had no connection with the purchase of flat or with the transfer of flat but the amount appears to have been paid to the assessee as he was a victim of cheating on the part of M/s MBPL. Before the flat was agreed to be sold to the assessee by the agreement dt. 27th Dec., 1992, the flat had already been sold to Smt. Sarala Devi Surya Narain and Shri Ajay Kumar Surya Narain by the previous owner M/s TPPL vide an agreement dt. 6th May, 1981. The previous purchasers of the flat had also made part payment to M/s TPPL towards the purchase of the flat as per receipts available in the paper book. Shri Mahindra V. Shah was the common director of the firms M/s TPPL and M/s MBPL and the transfer of the flat by M/s TPPL to M/s MBPL was a fraudulent transfer as the flat had already been sold by M/s TPPL to Smt. Sarala Devi Surya Narain and Shri Ajay Kumar Surya Narain. Therefore, we are of the opinion that M/s MBPL had no right or title in the said flat and hence, there was no question of conveying that right and title to the assessee by agreement dt. 27th Dec., 1992. This agreement was fraudulently entered into by M/s MBPL with the assessee and hence, we are of the opinion that it was not a valid agreement in the eyes of law. We, therefore, hold that agreement dt. 27th Dec., 1992 to sell the flat by M/s MBPL to the assessee was illegal. The flat having been sold by the original owner M/s TPPL to Smt. Sarala Devi Surya Narain and Shri Ajay Kumar Surma Narain, M/s MBPL had no title to the flat and hence, the same could not be conveyed to the assessee by virtue of an agreement dt. 27th Dec., 1992. Thus, the assessee having no right in the said flat, there was no question of extinguishment of any right therein. Thus, we hold that by virtue of settlement arrived at by exchange of letters dt. 25th May, 1995 between the assessee and M/s MBPL, there was no extinguishment of any right though as a measure of abundant caution the assessee had stated in the letter dt. 25th May, 1995, written to M/s MBPL, that he would not claim any right, title, interest or possession in respect of flat No. 101. Thus, we hold that there was neither a capital asset within the meaning of Section 2(14) nor there was any transfer within the meaning of Section 2(47). The liability of the assessee to capital gains could arise only if there was a transfer of capital asset within the meaning of Section 2(47). We, therefore, hold that the amount of Rs. 21 lakhs received by the assessee as liquidated damages could not be treated as capital gain. Since the assessee did not have to part with any stock-in-trade, the said receipt could not be treated even as a revenue receipt. Moreover, in the light of the decision of Hon'ble Calcutta High Court in the case of Ashoka Marketing Ltd. (supra), we hold that, since there was no element of cost involved in the acquisition of Rs. 21 lakhs liquidated damages received by the assessee, the amount could not be treated either as capital gain or as a revenue receipt. The assessee had only filed police complaints and had not moved the Courts. Subsequently, the settlement was arrived at and this right to sue for damages was extinguished by the settlement. In view of the decision of Hon'ble Bombay High Court in the case of Bharat Forge Co. Ltd. (supra), we hold that right to sue for damages cannot be considered as a transfer of capital asset at all since the mere right to sue is not a property which, could be transferred. Even the Hon'ble jurisdictional High Court has held, in the case of Abbasbhoy A. Dehgamwalla (supra) that right to sue is not a capital asset. Moreover, we find that the learned CIT. has not considered the decision of the Bombay High Court in Gabriel India's Ltd.'s case (supra), in the right perspective. The further observations, which have been reproduced by us. above of Bombay High Court in this case tend to help the case of the assessee whereas the learned CIT has only quoted the earlier observations of the Court. We further hold that the letter dt. 29th Sept., 1997, a copy of which is available at p. 38 of the paper book, was duly filed before the AO, he had applied his mind and then took a conscious decision not to tax the amount of Rs. 21 lakhs received by the. assessee as liquidated damages. In the assessee's letter dt. 25th May, 1995, written to M/s MBPL there is a mention of the amount of Rs. 21 lakhs as liquidated damages payable to the assessee though in M/s MBPL's letter of the same date the consolidated figure of Rs. 57,65,000 has been mentioned. This consolidated figure consists of two amounts--Rs. 36,65,000 refunded to the assessee for non-completion of the transaction in respect of the purchase of flat and Rs. 21 lakhs as liquidated damages. The AO's letter dt. 19th Nov., 1998, written to the Sr. Audit Officer, had the same contents which were given by the assessee in his letter dt. 29th Sept., 1997. Moreover, the affidavit sworn on 3rd Jan., 2000, has been filed by the assessee before us stating that the letter dt. 29th Sept., 1997, was filed before the AO and on considering the same the amount of Rs. 21 lakhs received by the assessee as liquidated damages was held as not taxable. In view of these circumstances, we hold that the AO had made necessary enquiries and then found the impugned amount as not taxable. In our opinion, the view adopted by the AO was a correct view. However, the learned CIT in his order under Section 263 has taken a different view. In the case of Pate] Cotton Co. Ltd. v. Asstt. CIT (1998) 64 ITD 273 (Mumbai), it has been held by the Tribunal, Mumbai Bench that where two views are possible in a case, mere fact that AO adopted one view will not render his view erroneous, though it might be prejudicial to the interest of Revenue. We, therefore, hold that the order passed by the CIT under Section 263 is not a valid order and the same is annulled.
4. In the result, the appeal of the assessee is allowed.
I.P. Bansal, J.M.
1. I have carefully gone through the order proposed by the learned AM. Upon careful consideration of the matter I could not persuade myself to agree with the findings of facts and the conclusion reached by my learned Brother, for the reasons given below :
1. The assessment in the present case was framed vide order dt. 13th Oct., 1997, under Section 143(3) of the IT Act, 1961.
2. During the asst. yr. 1992-93 the assessee had entered into an agreement for purchase of flat for a sum of Rs. 37,50,000 with M/s Mahendra Builders (P) Ltd. (M/s MBPL). The possession of the said flat was given to the assessee by said M/s MBPL in pursuance of the said agreement. The possession of the said flat was forceably taken back from assessee by Smt. Sarla Devi Suraj Narain Kanav and Shri Ajay Kumar Suraj Narain Kanav (in short 'third party'). Though the AO had mentioned in the assessment order that the assessee had to relinquish his interests in the said flat, however, the assessment order is silent about the total amount received by the assessee in respect of flat which was Rs. 57,65,000. The facts of the case can be summarised as follows :
(i) Flat in question is known as flat No. 101, in building No. 3 of 'Shirin Apartments' at Tardeo Road, (for the sake of convenience this flat hereinafter is referred to as 'flat');
(ii) The flat originally was owned by Tardeo Property (P) Ltd. (for short TPPL) :
(iii) As per agreement to sell dt. 6th May, 1981 the flat was agreed to be sold by M/s TPPL to 'third party' for total consideration of Rs. 2,09,050 to be payable in various instalments. The evidence regarding payment of certain instalments have been furnished by the assessee in the paper book;
(iv) On 10th April, 1986 M/s TPPL entered into an agreement to sell the said flat to M/s MBPL for a consideration of Rs. 9,45,000. Consequent to this agreement shares Nos. 166 to 170 pertaining to flat in Shirin Co-operative Housing Society Ltd. were transferred in the name of M/s MBPL :
(v) M/s MBPL vide sale agreement dt. 27th Dec., 1992 agreed to sell the said flat to Shri D.N. Shah and his father (hereinafter called as assessee) for a consideration of Rs. 37,50,000. Out of this a sum of Rs. 36,65,000 was paid at the time of execution of the agreement thereby requiring M/s MBPL to handover to assessee five abovementioned original shares having distinctive Nos. 166 to 170.
(vi) Out of the balance sum of Rs. 85,000, Rs. 50,000 was stipulated to be paid by the assessee to M/s MBPL within a period of one week of granting of NOC (no objection certificate) by the appropriate authority under the provisions of Section 26900 of the Act. The balance sum of Rs. 35,000 was stipulated to be paid by the assessee to the society being half share of the transfer fee payable on receiving no objection certificate from the appropriate authority.
(vii) On the execution of the agreement dt, 27th Dec., 1992 and after making the payment of Rs. 36,65,000 M/s MBPL handed over the vacant and peaceful possession of the said flat to the assessee as could be seen from letter dt. 27th Dec., 1992, written by M/s MBPL to the assessee. For the sake of convenience the same is reproduced below:
Dt. 27th Dec., 1992 To, Shri Dhruv Ranalal Shah & Shri Nanalal Kapurchand Shah, 403/4, Shivam, Dungaray Road, Bombay-400 006.
Sub: Possession of flat No. 101 on the first floor of Shirin Apartment, Tardeo Road, Bombay-400 007.
Dear Sir, We have today handover the vacant and peaceful possession of flat No. 101 on 1st floor of Shirin Apartments, bldg., No. 3, Tardeo Road, Bombay-400 007, in as is where is conditions.
Yours faithfully, Sd/-(for MBPL)"
(viii) On 30th Dec., 1992, application in form 37(1) under Section 269UC of the Act was filed with appropriate authority. On 26th Dec., 1993, the appropriate authority gave its no objection certificate under Section 269UL of the Act.
(ix) On 7th Jan., 1993, 'third party' is stated to have forceably taken back the possession of the said flat from the assessee. Thus, the assessee informed the incidence of 7th Jan., 1993, to M/s Mahindra Builders. M/s MBPL told the assessee that on account of default of third party the agreement with third party was cancelled and a suit has been filed recently in the High Court for cancellation of agreement with third party. Reference in this regard is made from the letter written by the assessee to Joint Commissioner of Police dt. 25th April, 1995 (p. 25 of paper book).
(x) The assessee was promised by M/s MBPL for the restoration of possession by settling the issue with 'third party'. It was also promised by M/s MBPL to return the money with interest thereon within a month if 'third party' is unable to restore the possession to the assessee. As the possession could not be restored, a refund of Rs. 5 lakhs was given by M/s MBPL to the assessee in April, 1993. (Reference in this regard is made to the letter written by assessee to Joint Commissioner of Police dt. 25th April, 1995). It has been mentioned in the abovementioned letter addressed to police as follows;
"The builders made various promises in front of officer-in-charge to return the amount with interest thereupon but have not fulfilled. The total amount due in the last week of February, 1995 was settled at Rs. 50,00,000 (Rupees fifty lakhs only).
Ultimately on 25th May, 1995, a sum of Rs. 52,65,000 was paid by M/s MBPL to the assessee, making the total payment made to assessee including Rs. 5 lakhs received on 1st March, 1993, to Rs. 57,65,000. Both assessee as well as M/s MBPL by way of exchange of letters between them settled the dispute in respect of flat. These letters have been placed at pp. 27 to 31 and at p. 36 of the paper book. It was mentioned by the assessee in these letters that after receipt of the payment, the assessee will not claim any right, title, interests or possession in respect of the said flat.
(xi) The assessment framed by the AO has been cancelled by the order of CIT under Section 263 of IT Act, 1961 and after discussing the facts and various case laws the CIT has come to a conclusion that an amount of Rs. 21 lakhs received by the assessee from M/s MBPL is a revenue receipt taxable as capital gain. CIT also concluded that liquidated damages will be restricted to the covenanted amount in the agreement which was specified at Rs. 50,000.
3. The learned counsel of the assessee has raised various propositions to challenge the validity of order under Section 263 as well as for non-assessability of the extra sum received by the assessee vide settlement arrived at between assessee and M/s MBPL on 25th May, 1995.
4. It was argued that all the material facts regarding receipt of extra money were placed before the AO during the course of assessment proceedings. The AO after careful consideration of the facts of the case, arrived at the conclusion that the relevant extra amount was not assessable to capital gain. The non-discussion in the assessment order by the AO of this fact does not mean that the AO did not apply his mind on the transaction. The CIT, therefore, was not right in making revision on the ground that AO failed to consider the assessability of extra sum of Rs. 21 lakhs. For raising the proposition reliance has been placed on the decision of Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. (supra).
5. In regard to this proposition it is observed that to invoke the jurisdiction under Section 263, it is irrelevant that whether AO has discussed any issue in detail or not. Incorrect assumption of facts or incorrect application of law is sufficient for invoking jurisdiction under Section 263 by the CIT. Reference in this regard can be invited to the following observations of their lordships of the apex Court in the case of Malabar Industrial Co. Ltd. v. CIT that :
"an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. Orders passed without applying the principles of natural justice or without application of mind, will also be orders which are erroneous" It has been further held that 'the phrase "prejudicial to the interest of the Revenue" is of wide import' and "if due to an erroneous order of the ITO, the Revenue is loosing tax lawfully payable by the assessee, such orders will definitely be prejudicial to the interest of Revenue".
So, it has to be examined that whether there was incorrect assumption of facts or any incorrect application of law. For that purpose one has to go into the merits of the case. Apparently there is no discussion in the assessment order for non-assessability of the said sum of Rs. 21 lakhs. Therefore, if a view is taken that the AO had applied his mind on the assessability of the sum in question, then we have to look into the submissions made by the assessee before the AO. According to said submission dt. 29th Sept., 1997, (p. 38 of paper book), the sum of Rs. 21 lakhs was received as liquidated damages. It is a compensation for mental tension and agony suffered by the assessee and his family members, loss of good bargain, steep rise in the price of real estate, loss due to payment of taxes on capital gain earned. It was submitted that this sum in question did not bear the character of income as it has no connection either with the purchase of flat or with the transfer of flat. Reliance was placed on the following decisions:
(i) CIT v. Ashoka Mkt. Ltd. (1987) 164 ITR 664 (Cal).
(ii) CIT v. Hiralal Manilal Mody (1981) 131 ITR 421 (Guj).
(iii) Baroda Cement & Chemical Ltd. v. CIT (1986) 158 ITR 636 (Guj).
(iv) CIT v. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 (Bom).
(v) Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bom).
The facts of these cases have been discussed in detail in the order of the CIT. After considering all these cases, the CIT has observed, in para 5.2 of his order, as under:
"Before proceeding to discuss these issues in detail, I would first like to point out that in all the cases cited by the assessee in his defence, the fact that the assessee' had received payments only in lieu of their right to sue was the admitted fact. Further, in all the cases there was no dispute as to the fact of non-performance of the agreement and breach of contract was established. In fact, the cases reveal that in all the cases specific performance was ruled out completely and all that the assessees' had was a right to sue".
As it could be seen from above conclusion of the CIT that in the cases relied upon, the specific performance of contract was ruled out completely and all that assessee had was a right to sue. Thus the case laws relied upon by the assessee had no relevance on the facts of case. It has further been pointed out by the CIT that assessee has been unable to prove that the case laws relied upon by assessee are applicable to the facts and circumstances of the assessee's case because some question of paramount importance which would be vital in determining the whether or not the amount of Rs. 21 lakhs is taxable, have gone unanswered. He set out these questions as below:
(a) Whether or not the assessee received a good title?
(b) Whether or not there was a breach of agreement?
(c) Whether the assessee was entitled to any damages and then whether he could have received any amount beyond Rs. 50,000 as damages?
It has further been mentioned by the CIT in para 5.4.2 "The assessee did not even choose to bring about any case against the trespassers, the persons who had caused him the severest damage. Nothing has been brought on record by the assessee to suggest that the assessee had lodged any form of complaint before the competent authorities against the trespassers who had forcibly evicted him from the premises. Instead the assessee lodged a report in the police against the vendor to investigate the matter further."
Simply on the basis that there existed a prior agreement of sale between 'third party' and M/s TPPL, the assertion of assessee is that the agreement between assessee and M/s MBPL was invalid one. This assertion of the assessee cannot be accepted at its face value unless examined by a competent Court of law. It is clear from the facts that no steps were taken by the assessee to enforce the claim of the assessee in any Court of law. There is a specific clause in the agreement executed between assessee and M/s MBPL dt. 27th Dec., 1992, for meeting the consequences in case of wilful default of any of the provision of the agreement. Clause 10 of the agreement reads as follows:
"10. If the transferor commits wilful default of any of the provisions of the agreement then transferees shall at their option be entitled to :
(i) specific performance of the agreement for sale by the transferor and claim from the transferor the cost, charges, expenses and damages suffered by the transferees or in the alternative
(ii) rescind this agreement in which event the transferor shall be liable to forthwith refund to the transferees the aggregate amount of Rs. 36,65,000 (Rupees thirty six lakhs sixty five thousand) paid by the transferees to the transferor without interest together with the sum of Rs. 50,000 (Rupees fifty thousand) as liquidated damages"
Thus, the assessee had a right to get specific performance. No reason has been advanced for not pressing this claim instead of the fact that almost all the consideration agreed upon had already passed, agreement was partly performed by handing over peaceful and vacant possession of the property in question. The original shares regarding flat were also handed over to the assessee.
6. It is now well settled by the various pronouncements of jurisdictional High Court that a right to obtain conveyance of immovable property is a "capital asset" within the meaning of Section 2(14) of the IT Act, 1961 (Act). These pronouncements have been extracted in the following paragraphs by the Hon'ble High Court in the case of Bafna Charitable Trust v. CIT (1998) 230 ITR 864 (Bom).
"11. In CIT v. Tata Services Ltd. (1980) 122 ITR 594 (Bom), a question arose before this Court whether a right to obtain conveyance of immovable property is capital asset within the meaning of Section 2(14) of the Act. This Court held:
'A contract for sale of land is capable of specific performance. It is also assignable. Therefore, in our view, a right to obtain conveyance of immovable property is clearly property as contemplated by Section 2(14) of the Act.' The above decision was followed by the Court in CIT v. Sterling Investment Corporation Ltd. (1980) 123 ITR 441 (Bom), where it was held that the contractual right of a purchase to obtain title to immovable property for a price, which is assignable, can be considered as a property and, therefore, a capital asset. In CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom), it was reiterated by this Court that right to obtain conveyance of immovable property falls within the expression "property of any kind" used in Section 2(14) of the Act and is, consequently a capital asset. It was held that the payment of earnest money in order to obtain such a right constitutes its cost of acquisition. Where such a right is given up, there is a transfer of capital asset."
7. As mentioned earlier, the assessee did not advance any reason for not pressing his claim for specific performance. On a close analysis of events and documents, the assessee was a bona fide purchaser without notice of any existence of earlier agreement. The right to claim specific performance was inherently available with the assessee, under these circumstances, non-pressing of claim suggests that such right was given up by the assessee which resulted in 'transfer of capital asset'. It will be wrong to say that the amount of Rs. 21 lakhs received by the assessee was against a mere right to sue. The right to sue was no doubt involved in it on breach of its stipulation, but before breach, there was also the right to have the land conveyed. A mere right to sue was applicable only to cases where there had been a breach resulting in damages and where the specific performance of the contract could not be obtained. As mentioned earlier, the assessee was a transferee for consideration without notice, so he was entitled for having conveyance in his favour. I have also perused the agreement executed between 'third party' and TPPL. In the said agreement it has been time and again stipulated that timely payments of the instalments is the essence of agreement. There was also some case filed in the High Court by the transferor for cancellation of the said agreement. In these circumstances, the assessee being bona fide purchaser without notice had a good case for specific performance of agreement. There is no evidence on record to indicate that the assessee has ever pressed this right, instead he preferred to file criminal complaint against the vendor. These circumstances suggest that the assessee had voluntarily surrendered his right to get specific performance of the agreement by accepting the amount from the vendor. Giving up of the right to get specific performance was 'property of any kind' and thus a 'capital asset' under Section 2(14) of the Act. The term 'property of any kind' has come up for consideration before the Bombay High Court in the case of CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom), wherein their lordships observed 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 IT 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 of the immovable property was a relinquishment of a capital asset. There was, therefore, a transfer of a capital asset within the meaning of the IT Act. We may, at this stage, also deal with the further argument that there was no consideration for the acquisition of the capital assets. 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."
Moreover the transaction in question can also be considered to be falling under the expression "extinguishment of any right therein. Recently apex Court in the case of CIT v. Mrs. Grace Collis and Ors. (2001) 218 ITR 323 (SC) has observed "that the definition of 'transfer' clearly contemplates the extinguishment of right in a capital asset distinct and independent of such extinguishment, consequent upon the transfer thereof. The expression "extinguishment of any rights therein" cannot be limited to such extinguishment on account of transfers. 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 cannot be accepted".
8. Much reliance has been placed by the assessee on the decision of the Hon'ble Bombay High Court in the case of Bharat Forge Co. Ltd. v. CIT (supra). This decision is based on the decision of Hon'ble Supreme Court in the case of Vania Silk Mills (P) Ltd. v. CIT (1991) 191 ITR 647 (SC). It is observed that the decision of the Supreme Court in Vania Silk Mills (P) Ltd. (supra) has been disapproved in the later decision of the Supreme Court in the case of CIT v. Mrs. Grace Collis and Ors. (supra). Moreover as pointed out earlier the case is also distinguishable on facts.
9. The contention of the assessee that the sum of Rs. 21 lakhs was a liquidated damages is not acceptable for the following reasons. It is not in accordance with the agreement existed between the parties. Much stress has been given on the word 'forthwith' as existed in Clause 10 of the agreement. It was argued that the amount of Rs. 50,000 was to be given only if the amount has to be refunded to the assessee immediately in case of non-performance of contract. It was not so done by the vendor. So the amount of Rs. 21 lakhs needs to be treated as liquidated damages given to assessee for mental tension and agony suffered by the assessee and his family members, loss of good bargain, steep rise in the price of real estate, loss due to payment of taxes on capital gain earned.
10. This contention of the assessee is also found to be contrary to record. It is observed that in the letter dt. 25th April, 1995 (pp. 25 and 26 of paper book) addressed by the assessee to Joint Commissioner of Police, it has been mentioned as under:
"The builders made various promises in front of officer-in-charge to return the amount with interest thereupon but have not fulfilled. The total amount due in the last week of February, 1995 was settled at Rs. 50,00,000 (Rupees fifty lakhs only).
11. Thus what represented the extra sum was interest on refundable amount. In no way it can be said that the extra amount was to cover any of the element asserted by the assessee in the shape of mental tension and agony suffered by the assessee and his family members, loss of good bargain, steep rise in the price of real estate, loss due to payment of taxes on capital gain earned.
12. In view of above discussion it is clear that there existed a right with assessee which, in fact, was given up by the assessee. The extra amount of Rs. 21 lakhs did not represent liquidated damages. The agreement between assessee and M/s MBPL cannot be held to be invalid on the face of it. It was only on the strength of agreement, the assessee could receive the refund as well as extra amount. The assessee never asserted his right arising out of agreement in any Court of law. The right of assessee to get deed of conveyance was in existence, being bona fide purchaser without notice. The assessee had given up this right for which the amount was received. The extra amount received represented the interest which is in the nature of revenue receipt. If it is considered that following the submissions of assessee the AO concluded that the extra amount was not assessable as income, the order of the AO was based on an incorrect assumption of facts or on incorrect application of law. Therefore, the CIT was right in invoking power under Section 263. An incorrect assumption of facts or an incorrect application of law by the AO not only renders the order of the AO erroneous, but also prejudicial to the interests of Revenue as the Revenue is loosing tax lawfully payable by the assessee.
13. Thus, in my view the case of the assessee fails on legal ground as well as on merits and appeal filed in this regard deserves to be dismissed.
14. In the result, the appeal filed by the assessee is dismissed.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 18th April, 2002 We, having differed on the points in the above appeal filed by the assessee, refer the following points of difference to the President under Section 255(4) of the IT Act, 1961:
Question No. 1: Whether, on the facts and circumstances of the case, the provisions of Section 263 of the IT Act, 1961 were rightly invoked by the CIT?
Question No. 2: Whether the amount received by the assessee from M/s Mahendra Builders (P) Ltd. and claimed as liquidated damages is assessable to tax as capital gains?
J.P. Bengra, Vice President (As Third Member)
1. There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under Section 255(4) of the IT Act, 1961, the following points of difference to me as a Third Member to resolve the controversy:
"(1) Whether, on the facts and circumstances of the case, the provisions of Section 263 of the IT Act, 1961 were rightly invoked by the CIT?
(2) Whether the amount received by the assessee from M/s Mahendra Builders (P) Ltd. and claimed as liquidated damages is assessable to tax as capital gains?"
2. The learned AM has held that the CIT cannot exercise revisionary jurisdiction under Section 263 and also held that the liquidated damages received by the assessee from M/s Mahendra Builders (P) Ltd. is not assessable to tax as capital gain whereas the learned JM has held that the CIT has rightly exercised jurisdiction under Section 263 and also held that the amount received by the assessee from M/s Mahendra Builders (P) Ltd. is assessable to tax under the head "capital gains".
3. The facts relating to the controversy are that Tardeo Property (P) Ltd. (hereinafter referred to as TPPL) was the owner of a flat No. 101, situated at first floor in building No. 3 of Shirin Apartments, 211/219, Tardeo Road, Mumbai-7. This flat was sold by M/s TPPL to Mrs. Sarladevi Surajnarain Kanav & Mr. Ajay Suraj Narain Kanav for a sum of Rs. 2,09,050 vide agreement dt. 6th May, 1981 on instalment basis and certain instalments were paid by the above purchasers. TPPL, again sold the very same flat to M/s Mahendra Builders (P) Ltd. (hereinafter referred to as M/s MBPL) having its office at Mahendra Chambers, 134/136, Dr. D.N. Road, Mumbai vide agreement dt. 10th April, 1986 for a total consideration of Rs. 9,45,000. Mr. Mahendra V. Shah was the director of both these companies, viz., M/s TPPL & M/s MBPL and, therefore, both the above referred agreements for sale were signed by him in his capacity as director of both the companies. On the basis of the later agreement dt. 10th April, 1986 with M/s MBPL, the society of the flat purchasers was registered on 5th July, 1990 and M/s MBPL was shown as the purchaser of the flat No. 101 and accordingly shares of the society were issued in favour of M/s MBPL. Subsequently on 27th Dec., 1992, the assessee, alongwith his father Mr. Nanalal Kapurchand Shah (whose name was recorded for the sake of convenience) jointly agreed to purchase share certificate No. 34 containing five equity shares of Rs. 50 each bearing distinctive numbers from 166 to 170 (both inclusive) of Shirin Co-operative Housing Society Ltd. together with the right to use and occupy premises bearing No. 101 on the 1st floor of Shirin Apartment No. 3 situated at 211/219, Tardeo Road, Mumbai-7 from M/s MBPL for an aggregate consideration of Rs. 37,50,000. As per this agreement, an amount of Rs. 36,65,000 was paid to M/s MBPL on execution of the said agreement. The assessee agreed to pay a further sum of Rs. 50,000 within the period of one week from the date of receipt of the order of the appropriate authority under the IT Act. A further amount of Rs. 35,000 was also to be paid by the assessee as transfer fees payable to the society for transfer of the shares on behalf of the transferor, M/s MBPL. Shirin Co-operative Housing Society Ltd. gave no objection certificate for transfer of the shares of M/s MBPL in respect of the said flat in favour of the assessee vide their letter dt. 27th Dec., 1992. The appropriate authority, acting on an application in Form 37-I under Section 269UC of the Act, issued a no objection certificate on 26th Feb., 1993 for transfer of said shares and said flat by M/s MBPL to the assessee.
4. On 7th Jan., 1993, Mrs. Sarla Devi S. Kanav & Ors. on the basis of earlier agreement dt. 6th May, 1981, entered into with M/s TPPL took forcible possession of the said flat, before the no objection certificate from appropriate authority could be obtained, which was issued on 26th Feb., 1993. A suit was filed by said owner and developer against the said purchasers, viz., Mrs. Sarladevi S. Kanav & Ors. in the High Court at Bombay for cancellation of the agreement, which was admitted. It was alleged by the assessee that the vendor, M/s MBPL had given assurance that necessary action against the trespassers would be taken by filing a criminal complaint. As the assessee was not successful in getting the possession of the flat, he asked M/s MBPL to refund the sum of Rs. 36,65,000 paid to them as purchase price of the flat. Accordingly, M/s MBPL paid a sum of Rs. 5 lakhs by pay order dt. 1st March, 1993, to the assessee. However, despite persistent efforts, M/s MBPL did not pay the remaining amount of Rs. 31,65,000 to the assessee. The assessee, therefore, allegedly filed a criminal complaint with the Crime Branch (CID) sometimes in the year 1994 against M/s MBPL. M/s MBPL subsequently agreed to refund the balance amount of Rs. 31,65,000 to the assessee alongwith a further sum of Rs. 21 lakhs as liquidity damages. A copy of the agreement dt. 25th May, 1995, (which was notorised) between the assessee and M/s MBPL in the form of exchange of letters whereunder the assessee received the aforesaid sum, a copy of which is on record. It is stated in the notorised letter that the assessee will not claim any right, title, interest or possession in respect of the property on receipt of the payment of Rs. 57,65,000.
5. The assessee, in the course of original assessment proceedings under Section 143(3) of the Act filed a detailed reply dt. 29th Sept., 1997. The AO, while computing the income under Section 143(3) of the Act, on the basis of his following observations, did not bring to tax the amount of Rs. 21 lakhs received by way of liquidity damages from M/s MBPL :
"During the asst. yr. 1993-94, the assessee had earned long-term capital gain of Rs. 33,23,358 on sale of flat and claimed exemption of the same under Section 54 on account of purchase of flat for Rs. 37,50,000 from Mahindra Builders (P) Ltd. However, some other persons forcibly took possession of the flat while the same was being furnished. After prolonged litigation, the assessee had to relinquish this interest in the said flat by way of cancellation of original agreement. As a result, the entire capital gain of Rs. 33,23,358 has been offered by the assessee as short-term capital gain."
Later on, the CIT, Mumbai City-VIII, Mumbai, while perusing the records of the assessee found that the assessee received Rs. 21 lakhs from M/s MBPL, which the AO treated as capital receipt. The CIT was of the view that the impugned amount should have been taxed as short-term capital gain. Therefore, he was of the view that the amount of Rs. 21 lakhs received by the assessee from M/s MBPL is, in fact, a revenue receipt taxable as capital gain. Therefore, he directed the AO to keep in mind the discussions made in CIT's order under Section 263 and treat the amount as capital gain accrued and in lieu of relinquishment of the rights vested in him in the property by virtue of agreement dt. 27th Dec., 1992 and for non-receipt of peaceful possession of the flat on 27th Dec., 1992. He further directed that the amount of liquidated damages will be restricted to the covenanted amount in the agreement. He also directed that the AO shall give effect to his order after determining whether or not the asset is a long-term capital asset or not and then to give appropriate relief as may be admissible and issue notice of demand in respect of the tax and interest arising therefrom.
6. Aggrieved by that order, the assessee filed this appeal before the Tribunal. The case was originally heard by the Bench consisting of S/Shri Jaidev, AM and I.P. Bansal, JM. As stated above, the Members differed, both on the point of exercising jurisdiction under Section 263 by the CIT and on the taxability of Rs. 21 lakhs received as liquidity damages by the assessee from M/s MBPL. Both the Members have given their individual reasons in their separate orders.
7. At the time of hearing before me, the learned counsel submitted that the CIT has incorrectly assumed jurisdiction under Section 263 without sufficient reasons. In this connection my attention was invited to assessee's letter dt. 29th Sept., 1997, addressed to the AO, in which the assessee has also mentioned this fact regarding the receipt of liquidity damages. The relevant portion of this letter reads as under:
"A copy of the agreement dt. 25th May, 1995, between the assessee and M/s Mahendra Builders (P) Ltd. whereunder assessee received aforesaid sums has been placed on record. Accordingly, the assessee received the balance sum of Rs. 31,65,000 invested by them in purchase of the flat and also liquidated damage of Rs. 21,00,000 for the mental tension and agony suffered by the assessee and members of his family, loss of good bargain, steep rise in the real estate prices in the city of Bombay and loss due to payment of taxes on capital gains earned on the sale of the original flat."
He pointed out that despite the proper putting up of the case before the AO, there was not even a whisper in the assessment order about the liquidity damages received by the assessee from M/s MBPL because he was certain that the receipt of Rs. 21 lakhs is a capital receipt not liable to tax. He then pointed out that in his letter dt. 2nd Nov., 2000, the assessee informed the appropriate authority as under:
"I had purchased flat No. 101 in Shirin Apartment at 211/219, Tardeo Road, Mumbai-400 027 from M/s Mahendra Builders (P) Ltd., who in turn had purchased the same from its sister-company named M/s Tardeo Properties (P) Ltd.
While proceedings for issue of above certificate was going on Shri Suraj Narain Kanav and Smt. Sarladevi Kanav claimed possession of the aforesaid flat on the basis of agreement of purchase of said flat they had with M/s Tardeo Properties (P) Ltd. They had filed copy of the said agreement with the appropriate authority and reported certain facts."
He pointed out that the assessee had given detailed explanation vide above two letters running into 10 pages and 1 page respectively, which form part of the record. Evidently, the claim was allowed by the AO on being satisfied with the explanation of the assessee. Therefore, the decision of the AO cannot be held to be erroneous simply because the AO did not make elaborate discussion in respect of the said item of receipt. In this connection reliance was placed on the decision of the Bombay High Court in the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) at 117. He pointed out that Section 263 does not visualise a case of substitution of the judgment of the CIT for that of the AO. Cases should be visualised where the AO, while making the assessment, examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate by himself. The CIT may be of the opinion that the estimate made by the AO was on the lower side and left to the CIT, he would have estimated the income at a higher figure than the one determined by the AO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. This is because the AO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion.
8. It is submitted that in the present case, the AO has raised a query regarding taxability of Rs. 21 lakhs and after considering the detailed replies of the assessee dt. 29th Sept., 1997 and 1st Nov., 2000 held that the same is not taxable in the hands of the assessee. He further relied on the decision of Bombay High Court in the case of CIT v. Abbasbhoy A. Dehgamwalla and Ors. (1992) 195 ITR 28 (Bom) and submitted that the order of the AO cannot be held to be erroneous. It is further submitted that the flat in question was already sold by M/s TPPL to Smt. Sarladevi S. Kanav and others vide agreement dt. 6th May, 1981. But, the director, Shri Mahendra Shah, who was also director in M/s MBPL, fraudulently sold the flat to the assessee without having any right or title in the property, which was already sold to Smt. Sarladevi S. Kanav and others. Therefore, the agreement dt. 10th April, 1986 between M/s TPPL & M/s MBPL was an invalid one and an unenforceable agreement. Thus, Shri Mahendra Kumar Shah, also the director of M/s MBPL had no right, title or interest in the said property which he could sell to the assessee, even though an agreement for sale dt. 27th Dec., 1992 was executed with the assessee, since the flat did not belong to M/s MBPL. So by cheating the assessee he fraudulently made the assessee to believe that he was the owner of the flat and then illegally sold and accepted a sum of Rs. 36,65,000 from the assessee as sale consideration of the flat. The amount was refunded only after the assessee filed a criminal complaint under Section 420 of the IPC vide FIR dt. 10th Dec., 1993 (p. 50 of the paper book). M/s MBPL paid liquidity damages of Rs. 21 lakhs to the assessee because there was a steep rise in the real estate prices, mental tension and agony suffered by the assessee and his family members and for loss of good bargain. In other words, the liquidated damages were paid for the breach of contract for selling the flat without having any right, title or interest attached to it. Thus, the right that the assessee has acquired on establishment of the breach of contract is a right to sue for damages which is not an actionable claim and, therefore, is not- a capital asset.
9. Further it was contended that the damages received have no co-relation with the flat as there was no extinguishment of any right. Reliance was placed on the decision in the case of Bharat Forge Co. Ltd. v. CIT (1994) 205 ITR 339 (Bom). It is also submitted that the decision of CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom) relied upon by the CIT has no application to the facts of the assessee's case inasmuch as in that case, the assessee firm had acquired a right in the property by paying the earnest money and Mr. B.V. Dhruv, who had agreed to sell the property, had full right and title in the vested property. Subsequently, the assessee-firm gave up the rights acquired by it of obtaining conveyance pursuant to consent of the Court. Whereas in the present case, the assessee had not acquired any right in the flat as M/s MBPL did not have any right, title or interest in the property. Therefore, the property could not have been sold to the assessee. In these circumstances, the assessee acquired the right to sue for damages for breach of contract for selling an encumbered flat. That was translated into liquidity damages due to steep rise in the real estate price in the city of Bombay as shown by the ready reckoner of the property prices between 1990 and 1999. It is pointed out that as per Clause 10 of the agreement, the entire, amount was required to be refunded to the assessee forthwith in the event of rescinding the agreement whereas in effect, M/s MBPL only refunded the amount of Rs. 5 lakhs on 1st March, 1993 and the remaining amount of Rs. 31,65,000 was refunded only on 25th May, 1995, after filing a criminal complaint against M/s MBPL. It is further emphasised that in para 6 of the aforecited agreement, the transferor had declared and confirmed that it was absolutely entitled to hold, possess, lease and occupy the said flat and no other person had any right, title, interest, benefit, claim or demand of any nature whatsoever into or upon the shares of the Housing Society concerned and the said flat either by way of sale, exchange, mortgage, lease, lien, leave and licence, gift, trust, etc. Therefore, the agreement was fraudulently entered into and the assessee was made to believe that M/s MBPL was the owner of the said flat and thereby the assessee became the victim of cheating. It is further pointed out that on enquiries, the assessee found that the earlier buyers, Smt. Sarladevi S. Kanav and others had already made payments-Rs. 26,131.25 on 12th May, 1981 and similar amount on 21st July, 1982, towards the purchase of the said flat.
10. My attention was also invited to pp. 81 to 86 of the paper book wherein copies of the receipts for the aforesaid amounts issued by M/s TPPL to the said buyers are placed. It is noteworthy that M/s MBPL is controlled by Shri Mahendra Kumar Shah and his wife Pratibha M. Shah and M/s TPPL is a sister-concern of M/s MBPL and Shri Mahendra Kumar Shah is a common director in both these concerns. It is submitted that M/s MBPL, without having any right, title or interest in the said flat, got the share certificates of the housing society transferred in its name. Thus, it is contended that the receipt of liquidated damages by the assessee did not bear the character of income and it has no connection either with the purchaser of the flat or with the transfer of the flat in the name of M/s MBPL, but it is paid to the assessee as compensation for mental and physical agony caused to him. Reliance was also placed on the decision of Gujarat High Court in the case of CIT v. Hiralal Manilal Mody (1981) 131 ITR 421 (Guj).
11. In addition to the citations mentioned above, the learned counsel for the assessee further invited my attention to Section 73 of the Indian Contract Act and emphasised that general principle for award of damage is compensatory, i.e., the injured party should as far as possible be placed in the same position in terms of money as if the contract had been performed by the party in default. Attention was also invited to Section 55 of the Transfer of Property Act and it is pointed out that the seller is bound to disclose to the buyer any defect in the property or in the seller's title thereto of which the seller is, and the buyer is not aware of, and which the buyer could not with ordinary case discover. The omission to make such disclosures as are mentioned in this section is treated as fraudulent transfer. My attention was also invited to the decision of the Bombay High Court reported in AIR (37) 1950 Bom 401 for the proposition that if a person purports to convey what he has no authority to convey and agrees to convey quiet enjoyment to the vendee, the vendor or the person claiming under him cannot avoid an obligation to pay damages r breach of the covenant on the ground that the vendor had either no interest or had a limited interest, which has since the date of the sale, ceased. In such a case the fact that the conveyance is void to the extent to which it exceeds the authority of the vendor by reason of the absence of title in him or by reason of a personal disqualification imposed upon him, does not affect the liability of the vendor or persons claiming under him to compensate the vendee for breach of the covenant of title and quiet enjoyment. Reliance was placed on the decision of the Supreme Court in the case of Smt. Annapoorani Ammal v. V.G. Thangapalam 1989-(SC2)-GJX-0300-SC for the proposition that suit for specific performance of the contract could only be decreed against the executant of the contract provided the executant had a right to dispose of the property about which the suit is filed. Thus, it is submitted that in the present case, when M/s MBPL had no right, title or interest, no specific performance can be claimed against it and the view taken by the Hon'ble JM is contrary to law. It is further pointed out that action under Section 263 was taken on the basis of the audit query raised by the audit authorities which cannot be made basis for revising the order.
12. In the written submission the learned counsel for the assessee assailed the order of the JM. However, for the sake of brevity, the submissions were that the JM had wrongly placed the burden on the assessee saying that the assessee had not availed the opportunity of specific performance of contract and asked for the refund of money. The opinion of the learned JM that the CIT has validly exercised the jurisdiction under Section 263, is unfounded. If there is absence of discussion despite the assessee has given the detailed reply, it will not amount to non-application of mind by the AO. However, the JM has wrongly relied on the observation of the CIT given at paras 5.2, 5.4, etc. The JM has also wrongly interpreted the meaning of Section 2(14) of the IT Act, which defines the 'capital asset' vis-a-vis the decision of the Bombay High Court in the case of Bafna Charitable Trust v. CIT (1998) 230 ITR 864 (Bom) and the decision of the apex Court in the case of CIT v. Mrs. Grace Collis and Ors. (2001) 248 ITR 323 (SC) as also the decision of the apex Court in the case of Varna Silk Mills (P) Ltd. v. CIT (1991) 191 ITR 647 (SC) which the assessee has distinguished in his written submission elaborately. Thus, he submitted that the view taken by the learned AM is correct that the amount is not taxable. The learned counsel for the assessee has also relied on the decision of the Karnataka High Court in the case of Chartered Housing v. Appropriate Authority (2001) 116 Taxman 331 (Kar) for the proposition that considering provisions of Section 54 of the Transfer of Property Act and in absence of registered instrument, it would be wrong to hold that simple delivery of possession under an agreement to sell would amount to a completed transaction of transfer.
13. As against this, the learned Departmental Representative heavily relied on the orders of the learned JM as well as the CIT and submitted that the CIT has rightly assumed jurisdiction under Section 263. M/s MBPL had right, title and interest in the property and that is why the agreement was entered into between the assessee and M/s MBPL which is clear from the no objection certificate of the society. It was further pointed out that the assessee had not filed any complaint and in view of that Shri Mahendra Shah has fraudulently entered into an agreement and cheated the assessee. A criminal complaint was filed at a very late stage to recover the amount only. In sum and substance, the learned Departmental Representative relied on the orders of the Hon'ble JM, and the CIT.
14. I have considered the rival submissions and gone through the material available on record. The first issue referred relates to exercise of jurisdiction under Section 263. The learned AM has opined that the CIT has wrongly exercised his jurisdiction under Section 263 by revising the order of the AO whereas the learned JM has opined that the CIT has correctly assumed the jurisdiction. While doing so, the learned JM has distinguished the case laws referred by the AM. Therefore, I will first address this issue.
The assessee, at the time of filing the return, claimed that the liquidated damages received from M/s MBPL towards settlement of the dispute are not chargeable to tax in view of his submissions and various decisions mentioned in his detailed letter dt. 29th Sept., 1997 pp. 38 to 47 of paper book. After perusing the detailed reply, the AO passed following order under which he accepted the claim of the assessee that liquidated damages are not taxable :
"During the asst. yr. 1993-94, the assessee had earned long-term capital gain of Rs. 33,23,358 on sale of flat and claimed exemption of the same under Section 54 on account of purchase of flat for Rs. 37,50,000 from Mahindra Builders (P) Ltd. However, some other persons forcibly took possession of the flat while the same was being furnished. After prolonged litigation, the assessee had to relinquish this interest in the said flat by way of cancellation of original agreement. As a result, the entire capital gain of Rs. 33,23,353 has been offered by the assessee as short-term capital gain."
If we go through the order of the AO, it would be clear that the above order did not make an elaborate discussion in this regard.
15. Now, the question arises whether the CIT can exercise jurisdiction under Section 263 in such a case where the assessee had offered a detailed explanation consequent upon the enquiries cast by the AO and allowed the claim on being satisfied with the explanation of the assessee. In this regard, I find that in the case of CIT v. Gabriel India Ltd. (supra), the Hon'ble Bombay High Court has laid down the following principle:
"The power of suo motu revision under Sub-section (1) of Section 263 of the IT Act, 1961, is in the nature of supervisory jurisdiction and can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the CIT to exercise the power of revision under this Sub-section, viz, (i) the order should be erroneous; and (ii) by virtue of the order being erroneous prejudice must have been caused to the interests of the Revenue. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the CIT he would have estimated the income at a higher figure than the one determined by the decision is held to be erroneous. Cases may be visualised where the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. This is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interests of the Revenue. But that by itself would not be enough to vest the CIT with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interests of the Revenue, then the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute, on an incorrect or incomplete interpretation, a lesser tax than what was just has been imposed. When exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the Court it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority.
Held, that the ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. This decision of the ITO could not be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the CIT himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the CIT under Section 263."
While discussing various case laws and the meaning of the word "erroneous", the Hon'ble Court has observed that from the definition it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law, makes a certain assessment, the same cannot be branded as "erroneous" by the CIT simply because according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the CIT for that of an ITO, who passed the order, unless, the decision is held to be "erroneous". Cases may be visualised, where the ITO, while making an assessment, examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The CIT on perusal of the record may be of the opinion that the estimate made by the officer concerned was lower and left to the CIT, he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the CIT with the power to re-examine the accounts and determine himself the income at a higher figure. Because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said, in such a case that in the opinion of the CIT the order in question is prejudicial to the interest of Revenue. But that by itself will not be enough to vest the CIT with the power of suo motu revision.
16. This issue also came up for consideration before the Indore Bench in the case of Eicher Motors Ltd. v. CIT (1999) 63 TTJ (Ind) 640. The learned Members while discussing the various case laws on this issue opined that it is well settled that unless the assessment order is erroneous and prejudicial to the interest of Revenue, revisional jurisdiction cannot be exercised under Section 263. The mere fact that the AO has not made detailed discussion on the issue is not enough for the CIT to invoke his revisional jurisdiction under Section 263. The action of the CIT must resemble with that of a surgeon's knife. He must use the powers conferred on him under Section 263 to correct the blatant errors. Simply because the AO has allowed the depreciation and investment allowance on enhanced value without detailed discussion on the issue is not enough to invoke revisionary jurisdiction.
17. Similarly in the case of Sarunda Cold Retreades (P) Ltd. v. ITO (1998) 99 Taxman 330 (Jp)(Mag), the Jaipur Bench of the Tribunal has taken the same view by following the decision of the Bombay High Court in the case of Gabriel India Ltd. (supra). They have observed that the assessee had given a detailed explanation in regard to enquiries relating to receipt of commission. The confirmations were filed, the statement of proprietor of payee was recorded, all these were part of the record. Evidently, the claim was allowed by the AO on being satisfied with this explanation of the assessee. This decision of ITO could not be held to be erroneous simply because in his order, he did not make an elaborate discussion in that regard. Therefore, it is clear that where the assessee had given detailed explanation regarding his claim and the AO passed an order in which he did not make an elaborate discussion, does not give the CIT the power to exercise revisionary jurisdiction under Section 263.
18. The learned JM, while discussing the case on merit has opined that AO has based on incorrect assumption of facts or application of law, so the CIT has rightly invoked the power, which, according to my mind is against the established principle laid down by the Hon'ble Bombay High Court.
19. In view of my discussion, I am of the view that the CIT(A) has no power to exercise revisionary jurisdiction under Section 263 in the given facts and circumstances of the present case. Therefore, I agree with the view expressed by the learned AM on this issue.
20. The next issue for consideration is whether the amount received by the assessee from M/s MBPL by way of liquidated damages is assessable to tax as capital gains. In this connection, I would like to mention that the facts are not in dispute with the flat No. 101, situated at first floor in building No. 3 of Shirin Apartments, 211/219, Tardeo Road, Mumbai-7 originally belonged to M/s TPPL. M/s TPPL sold the above flat to Smt. Sarladevi Kanav & Ajay S Kanav vide an agreement to sell dt. 6th May, 1981. In pursuance to the said agreement, these purchasers of the flat also made a part payment to M/s TPPL towards the purchase of the flat as per receipt available in the paper book pp. 86 & 87. From the notice issued by the IT authorities under Section 131 dt. 17th Feb., 1983 (paper book p. 88), it is clear that the IT authorities made enquiries from the said purchasers about the source of purchase of that, flat which is also clear from the specific query raised by the Department given overleaf of the notice (p. 89). So it is clear that the transaction of selling the property to Smt. Sarladevi Kanav & Ajay Kumar Kanav was a real transaction between M/s TPPL and the purchasing parties. It is noteworthy that Shri Mahinder Kumar Shah was common director of the firm M/s TPPL and M/s MBPL. It seems that when a dispute has arisen between Sarladevi Kanav & Ajaykumar Kanav and TPPL, Shri Mahendrakumar Shah being the common director of both the firms has fraudulently transferred the flat in the name of M/s MBPL and subsequently entered into an agreement between M/s MBPL and the assessee vide agreement dt. 10th April, 1986. Consequent to the fraudulent agreement between M/s TPPL and M/s MBPL. Shri Mahendrakumar Shah got the share certificate Nos. 166 to 170 pertaining to the above flat in Shirin Co-operative Housing Society transferred in the name of M/s MBPL when the agreement between M/s TPPL and Smt. Sarladevi Kanav and others was still valid. While lodging a complaint, the assessee in his application to the Joint Commissioner of Police dt. 25th April, 1995 has informed that Mahendrakumar Shah told him that the earlier agreement has been cancelled and suit has been filed in the High Court for cancellation of the agreement with Sarladevi Kanav and others. These facts have not been denied by the Revenue authorities and there is no material on record to show that the earlier agreement with Sarladevi Kanav and others was cancelled before an agreement was entered into by Mr. Mahendrakumar Shah as director of M/s MBPL with the assessee. Therefore, on these facts it is clear that M/s MBPL had no right or title or interest in the impugned flat. Hence, the question of conveying the right, title or interest in the said flat to the assessee by an agreement dt. 27th Dec., 1992 does not arise. This agreement in the given facts and circumstances can be conveniently be held as fraudulent transaction by M/s MBPL with the assessee. Therefore, in the eyes of law, it is not a valid agreement, since the flat has already been sold by the original owner, M/s TPPL, to Smt. Sarladevi Kanav and others. That is how on the basis of the earlier agreement even after this fraudulent transaction with the assessee, they, before getting the 'no objection certificate', occupied the flat on 7th Jan., 1993. On these facts, the seller M/s MBPL though had no right, title and interest in the flat purported to be transferred to the assessee by virtue of an agreement. That is why, Shri Mahendrakumar Shah made settlement out of Court after the matter was reported to the crime branch of the police and returned the amount paid by the assessee and also paid a sum of Rs. 21 lakhs as liquidated damages. So, according to me, there is no extinguishment of any right therein, though as a measure of abundant precaution, the assessee has stated in the letter dt. 25th May, 1995, that he could not claim any right, title, interest or possession in the above flat when a settlement was reached out of Court. Therefore, I hold that there was neither a capital asset within the meaning of Section 2(14) nor there was any transfer of the said capital asset under Section 2(47). The question of capital gain arises only when there is a transfer of capital asset within the meaning of these two sections.
21. In this case, M/s MBPL purported to transfer the capital asset without having any right, title or interest in it. Therefore, the assessee did not get any right, title or interest in the capital asset. What he got is the mere right to sue.
The same right to sue for damages is not an actionable claim. The right to sue for damages for breach of contract, no doubt, is capable of maturing into a right to receive damages for breach of contract. But that happens only when the damages claimed for breach of contract are either admitted or decreed and not before. In the case of CIT v. Abbasbhoy A. Dehgamwalla and Ors. (supra) the Hon'ble Bombay High Court has held that the right to sue could not be termed as capital asset if an amount is received as consideration. This is clear from the following observations:
".....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 as such opposed to public policy as is gambling in litigation. As such, it will not be quite correct to say that such a right constituted a "capital gain" which in turn has to be "an interest in property of any kind". The action of the assessee's right under the agreement of 1945 being conveyed or substituted by another right which can be said to be a "capital asset" does not, therefore, arise......"
"..........In our judgment, the only reasonable conclusion is that the right to receive damages in this case accrued to the assessee on the date of the consent decree only. Since, as already stated by us, the right under the agreement came to an end in the year 1961, if not earlier, and the right acquired in lieu thereof was only a mere right to sue, it cannot be accepted the amount of Rs. 2,52,000 was received as consideration for the transfer of a "capital asset"...."
22. In the case of Bharat Forge Co. Ltd. v. CIT (supra), the Hon'ble Bombay High Court has observed that the phrase "extinguishment of right" takes colour from the associated words and expressions and will have to be restricted to the sense analogous to them. Hence, the expression "extinguishment of any rights therein" will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer. It was further observed that right to. sue for damages could not be considered as a capital asset at all since a mere right to sue is not a property which can be said to be "transfer". Applying the said principle laid down by the Hon'ble High Court, I find that there is no extinguishment of right. Rather, what the assessee has obtained was right to sue only. Therefore, this cannot be held to be a capital asset.
23. In the present case, an issue was raised by the Department that the assessee had a right of specific performance as per the agreement. Therefore, the liquidated damages received relates to the capital asset. I have already mentioned that when M/s MBPL made a fraudulent transaction without having right, title or interest in the property, the question of right for specific performance for the contract does not arise because suit for specific performance of contract could only be decreed against the executant of the contract provided the executant had right to dispose of the property about which the suit is filed. This view was expressed by the Hon'ble Supreme Court in the case of Smt. Annapoorani Ammal v. V.G. Thangapalam (supra). Therefore, the argument of the learned Departmental Representative has no force.
24. The assessee has brought on record that due to the rise in prices in real estate during that period M/s MBPL agreed to compensate the assessee for the mental tension and agony suffered by the assessee and his family members for loss of good bargain, steep rise in the price of real estate and loss due to payment of taxes on capital gain earned which is supported by the ready reckoner and market value of flats during 1990 to 1999 placed on the paper book which can be held to be a right cause for payment of liquidated damages which is permissible under Section 73 of the Indian Contract Act.
25. Therefore, in the given facts and circumstances of the present case, I am of the opinion that the liquidated damages received by the assessee, cannot be brought to capital gain tax. It is not an income in the nature of capital receipt which was rightly not taxed by the AO. I, therefore, agree with the view taken by the learned AM.
26. Further, all receipts are not taxable under the IT Act. Sec. 2(24) defines "income". It is no doubt that this is an inclusive definition. However, a capital receipt is not income under Section 2(24) unless it is chargeable to tax as capital gain under Section 4-5. It is for that reason that under Section 2(24)(vi), the legislature has expressly stated inter alia, that income shall include capital gain chargeable under Section 45. Under Section 2(24)(vi), the legislature has not included all capital gains as income. It is only capital gain chargeable under Section 45 which has been treated as income under Section 2(24). Further under Section 2(24)(vi), the legislature has not stopped with the words "any capital gains". On the contrary it is obviously stated that only capital gains which are taxable under Section 45 could be treated as "income". In other words, capital gains not chargeable to tax under Section 45 fall outside the definition of "income" in Section 2(24). Therefore, the words "chargeable under Section 45" are very important. So, whenever an amount which is otherwise a capital receipt is to be charged under Section 2(24), and when specifically so provides for not charging to capital gain for any reason under Section 45, the same cannot be brought to tax as income by applying the general connotation under Section 2(24). It is for this reason that proviso (i)(x) to Section 3 also refers to capital gain chargeable under Section 45. The said provision uses the same phraseology as is used in Section 2(24)(vi). In other words, capital gain chargeable under Section 45 alone constitutes income. Further, such capital gains are required to be computed under the scheme of Sections 45 to 55. It is for this reason that such capital gain did not fall under Section 10(3) also. In other words, when the source of receipt has a link with business income or salary income or capital gains chargeable under Section 45, then Section 10(3) will not, apply. Therefore, if any amount of capital gain is not taxable as capital gain for any reason, then that amount cannot be treated as a casual and non-recurring receipt under Section 10(3) of the Act also.
27. An argument was raised that owing to fraudulent transaction, the assessee has received liquidated damages of Rs. 21 lakhs. Therefore, even if it has no cost of acquisition, it could, still fall under Section 56. First of all I would like to mention here that the CIT has given a definite finding regarding charging of the amount under the head capital gain. So this argument has no force. In the case of Cadell Weaving Mills Co. Ltd. v. CIT (2001) 249 ITR 265 (Bom), the Hon'ble Bombay High Court has held that if the asset has no cost, then it does not mean that the receipt would fall under Section 56. This view was expressed while deciding the case of amount received on surrender of tenancy right which is equally applicable in the present case also.
28. Now the matter will go back to the original Bench to decide the case in accordance with the majority view.
Jaidev, A.M. 9th Sept., 2003
1. In view of the difference of opinion between the JM and AM, the following points were referred to the Third Member-
"Q. No. 1. Whether, on the facts and circumstances of the case, the provisions of Section 263 of the IT Act, 1961 were rightly invoked by the CIT?
Q. No. 2. Whether the amount; received by the assessee from M/s Mahendra Builders (P) Ltd. and claimed as liquidated damages is assessable to tax as capital gains?"
2. Shri J.B. Bengra, the Hon'ble Vice President, Mumbai Benches, Mumbai, was nominated as the Third Member. In his order dt. 30th May, 2003, the learned Third Member has concurred with the view taken by the AM and held that CIT had no power to exercise revisionary jurisdiction under Section 263 in the given facts and circumstances of the case. Concurring with the view of the AM, the learned Third Member also held that the liquidated damages received by the assessee from M/s Mahendra Builders (P) Ltd., cannot be brought to capital gains tax.
In accordance with the majority view, the issue stands decided in favour of the assessee and against the Revenue.
3. In the result, the appeal filed by the assessee stands allowed.