Bombay High Court
Dhruv N. Shah vs Dy. Cit on 30 May, 2003
Equivalent citations: [2004]88ITD118(MUM)
ORDER
Per Jaidev, A.M. This appeal of the assessee is directed against Commissioner (Appeals)'s order dated 30-3-2000, 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 Nos. 1 and 2 are reproduced as under :
"1. The Commissioner 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 Commissioner erred in treating liquidated damages of Rs. 21,00,000 received by the assessee from M/s. Mahendra Builders Pvt. 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-400007, from M/s. Mahendra Builders Pvt. 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 dated 27-12-1992 entered into between M/s. Mahendra Builders Pvt. 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 Income Tax 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 Pvt. Ltd. in respect of the said flat in favour of the assessee vide their letter dated 27-12-1992. Apparently, as the letter of the vendor dated 27-12-1992 indicates, peaceful possession of the flat was given to the assessee on 27-12-1992 itself.
2.3 An application in form No. 37-1 under section 269UC of the Income Tax Act, 1961, was filed with the Appropriate Authority acting under the Income Tax Act, 1961, on 30-12-1992, who gave its no objection certificate under section 269UL on 26-2-1993 for transfer of said shares and said flat by M/s. MBPL to the assessee.
2.4 On 7-1-1993, it is alleged that some trespassers entered the said flat and took forcible possession of the flat. The trespassers were Mr. Ajay Kumar Suraj Narain Kanav and Mrs. Sarladevi Suraj Narain Kanav, who allegedly had agreed to purchase the said flat from M/s. Tardeo Properties Pvt. Ltd. (hereinafter referred to as M/s. TPPL) 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 Pvt. 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 dated 1-3-1993 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) sometimes 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 dated 25-5-1995, 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 dated 25-5-1995 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 assessing officer for revision under section 263, the Commissioner passed order under section 263 in which it was held that "the assessing officer 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 Commissioner also referred to the agreement of sale dated 27-12-1992 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 Commissioner 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 Commissioner 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 assessing officer 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 Pvt. 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 Pvt. Ltd. and, therefore, M/s. Mahendra Builders Pvt. 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 Commissioner but the Commissioner, 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 Commissioner also pointed out that the assessee did not choose to bring about any case against the trespassers. The Commissioner 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 Commissioner also observed that in this case the vendor guaranteed a good title but even so the vendee was evicted, the latter 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 , the learned Commissioner 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 assessing officer is erroneous and prejudicial to the interest of revenue reversionary jurisdiction of the Commissioner can be brought into play". Therefore, the Commissioner observed that the assessment order passed under section 143(3) by the assessing officer was erroneous inasmuch as it was prejudicial to the interest of revenue. He, therefore, directed the assessing officer 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.
2.11 The learned counsel reiterated the same arguments which were given before the Commissioner. 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 1-3-1993 whereas the remaining sum of Rs. 31,65,000 and liquidated damages of Rs. 21 lakhs were received on 25-5-1995. 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 dated 27-12-1992 of the flat in question between M/s. MBPL and the assessee, available at pages 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 1-3-1993 and the remaining amount of Rs. 31,65,000 was refunded only on 25-5-1995 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 dated 6-5-1981 (copy available at pages 59 to 84 of the Paper Book). It was further stated that the said buyers had also made payments on 12-5-1981 and 21-7-1982 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 pages 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 dated 6-5-1981 for which part payment was also received, yet the said flat was fraudulently transferred by M/s. TPPL to M/s. MBPL by agreement dated 10-4-1986 for Rs, 9,45,000. It was stated that the aforecited agreement dated 10-4-1986 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 page 25 is the letter dated 25th April, 1995 written by the assessee to the Police Commissioner. At pages 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/chcating 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 pages 27 to 31 of the Paper Book and page 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 dated 25th May, 1995 addressed to MBPL wherein it has been stated :
"It is agreed between you and me that on paying Rs. 57,65,000 (Rupees Fifty Seven Lakhs 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."
2.11.1 The learned counsel also adverted our attention to the assessee's letter dated 29-9-1997, written to the assessing officer wherein it has been stated :
"A copy of the agreement dated 25-5-1995 between the assessee and M/s. Mahendra Builders Pvt. 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 assessing officer vide letter dated 29-9-1997, 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 dated 2-11-2000 written by the assessee to the appropriate authority of the I.T. department (available at page 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 Mahendra Builders Pvt. Ltd., who in turn had purchased the same from its sister company named M/s. Tardeo Properties Pvt. 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 Pvt. Ltd. They had filed copy of the said agreement with the Appropriate Authority and reported certain facts."
2.11.2 The learned counsel then pointed out to page 59 of the Paper Book wherein there is a copy of agreement dated 6-5-1981 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 dated 6-5-1981 was duly signed by Shri Mahindra V. Shah in the capacity of Director of M/s. TPPL. This agreement was also signed by Smt. Sarala S. Kanav. The learned counsel then referred to page 85 of the Paper Book wherein there is a copy of kacha receipt dated 20-7-1982 issued to Smt. K. Sarala Devi Surya Narain by M/s. TPPL for the amount of Rs. 26,131.25 received by them for sale of flat No. 101 in Building No. 3 of Shirin Apartment at Tardeo Road. At pages 86 and 87 there are two pucca receipts available which are dated 12-5-1981 and 21-7-1982 respectively issued by M/s. TPPL to Smt. Sarala Devi 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 dated 1-2-1993 written by Smt. K. Sarala Devi Surya Narain and K. Ajay Kumar Surya Narain to the appropriate authority of the I.T. department in connection with Flat No. 101 "owned and occupied by them" (copy available at page 56 of the Paper Book).
(2) Letter dated 21-1-1993 written by Ajay Kumar Kanav to the Commissioner of Police regarding the harassment and torture of the builder Shri Mahindra V. Shah (available at page 92 of the Paper Book).
(3) Letter dated 27-1-1993 written by Smt. K Sarala Devi Surya Narain and Shri K. Ajay Kumar Surya Narain to the Secretary of the Shirin Cooperative 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 page 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.
2.11.3 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 letter 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 Pvt. 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. .
(2) CIT v. Hiralal Manilal Mody .
(3) CIT v. Abbasbhoy A. Dehgamwalla .
(4) Bharat Forge Co. Ltd. v. CIT .
(5) Gabriel India Ltd.'s case (supra).
2.11.4 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 Ashoka Marketing Ltd. (supra) decided by Hon'ble Calcutta High Court. The learned counsel also referred to the submission dated 21-2-2000 made by the assessee before Commissioner during the course of section 263 proceedings and particularly relied on pages 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 Commissioner had agreed that the amount of Rs. 50,000 was towards liquidated damages.
2.12 On the other hand, the learned Departmental Representative pointed out that in the assessment order the assessing officer had only used the words "relinquishment of flat". It was pointed out that nothing was said by the assessing officer 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 assessing officer by the Commissioner as is clear from para 1 of Commissioner'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 be ware" 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 assessing officer 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 assessing officer in this regard. The learned Departmental Representative further submitted that in the letters dated 25-5-1995 (available at page 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 Additional Commissioner of Police (Crime) (available at page 52 of the Paper Book). The learned Departmental Representative further pointed out that the assessing officer 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 25-5-1995, 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 Income Tax Act. The learned Departmental Representative then took us through relevant portion of Commissioner'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 27-12-1992 peaceful possession was taken by the assessee as per agreement for transfer of the flat in question and on 7-1-1993 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 no objection by the Shirin Cooperative Housing Society was given to the assessee on 27-12-1992 for the transfer of the flat in question from M/s. MBPL to the assessee. The learned Departmental Representative then look us through agreement for transfer dated 27th December, 1992 entered into between M/s. MBPL and the assessee (available at pages 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 pages 32 and 33 of the Paper Book) and our attention was specifically drawn to the assessee's letter dated 25-5-1995 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-400007". 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 .
(2) CIT v. P.N. Sreenivasa Rao .
(3) CIT v. Vijay Flexible Containers .
2.13 When the case was being heard as a part heard case on 10-12-2001, the assessee carried out an inspection of the record available with the Departmental Representative in connection with filing of letter dated 29-9-1997 before the assessing officer. On inspection, this letter was not found on record. On the next date of hearing, i.e., 9-1-2002, the assessee filed an affidavit with regard to the letter dated 29-9-1997 claimed to have been filed before the assessing officer 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 dated 29-9-1997 is also proved by assessing officer's letter dated 19-11-1998 written to Sr. Audit Officer with regard to audit objection for the assessment year under appeal. In the affidavit filed before us the assessee has stated :
"I further say that the said submissions made by me in the letter dated 29-9-1997 were thoroughly discussed with Shri Anil Goel, Dy. CIT, Sp. Rg. 33, Mumbai on 29-9-1997 when he was satisfied about the claim of Shri Dhruv that the receipt of Rs. 21 lakhs from M/s. Mahendra Builders Pvt. Ltd. is a capital receipt and not liable to tax as capital gains because M/s. Mahendra Builders Pvt. Ltd. had really not sold the flat to Shri Dhruv as it was not belonging to M/s. Mahendra Builders Pvt. 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, 13-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 13-10-1997 when he was fully satisfied about the non-taxability of Rs. 21 lakhs received by Shri Dhruv from M/s. Mahendra Builders Pvt. 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 Commissioner of Income Tax, City-VIII, Mumbai had called for the assessment records of the Dy. CIT, Sp. Rg. 33, Mumbai and the said letter dated 29-9-1997 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 Commissioner of Income-tax has not stated in his order under section 263 of the Act that the said letter of Shri Dhruv dated 29-9-1997 was not filed in the course of the assessment proceedings before the Dy. CIT, Sp. Rg. 33, Mumbai". Thus, the case of the learned counsel of the assessee is that the letter dated 29-9-1997 was filed during the course of assessment proceedings and was available on records of the assessing officer even during the course of proceedings under section 263 before the Commissioner. The learned counsel, therefore, stated that the letter dated 29-9-1997 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 assessing officer 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 Hon'ble Bombay High Court in the case of Gabriel India Ltd. (supra), the Commissioner had no jurisdiction to pass an order under section 263.
2.14 Joining the issue with the learned Departmental Representative, the learned counsel contended that in para 6.2 of his order, the learned Commissioner 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 Commissioner's order, the assessing officer 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 page 32 of the Paper Book, the learned counsel contended that letter dated 25-5-1995, 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 Income Tax 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 Bombay High Court in the case of Gabriel India Ltd., relied on by the leaned Commissioner. It was pointed out by the learned counsel that though the Commissioner 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 Commissioner, 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 Commissioner he would have estimated the income at a figure higher than the one determined by the Income Tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income Tax Officer 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 Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue."
The learned counsel further pointed out that the decision of the assessing officer 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 dated 29-9-1997 filed before the assessing officer.
3. We have given a 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 dated 27-12-1992, 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 dated 6-5-1981. 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 firm 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 dated 27-12-1992. 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 dated 27-12-1992 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 Surya 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 dated 27-12-1992. 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 dated 25-5-1995 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 dated 25-5-1995, 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 damage 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. Dehagamwalal (supra) that right to sue is not a capital asset. Moreover., we find that the learned Commissioner has not considered the decision of Bombay High Court in Gabriel India Ltd.'s case 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 Commissioner has only quoted the earlier observations of the court. We further hold that the letter dated 29-9-1997, a copy of which is available at page 38 of the Paper Book, was duly filed before the assessing officer, 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 dated 25-5-1995, 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 assessing officer's letter dated 19-11-1998, written to the Sr. Audit Officer, had the same contents which were given by the assessee in his letter dated 29-9-1997. Moreover, the affidavit sworn on 3-1-2000 has been filed by the assessee before us stating that the letter dated 29-9-1997 was filed before assessing officer 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 assessing officer had made necessary enquiries and then found the impugned amount as not taxable. In our opinion, the view adopted by the assessing officer was a correct view. However, the learned Commissioner in his order under section 263 has taken a different view. In the case of Patel Cotton Co. Ltd. v. Asstt. CIT , it has been held by the ITAT, Mumbai Bench 'E', that where two views are possible in a case, mere fact that assessing officer 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 Commissioner under section 263 is not a valid order and the same is annulled.
4. In the result, the appeal of the assessee is allowed.
Per I.P. Bansal, J.M.I have carefully gone through the order proposed by the learned Accountant Member. 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 dated 13-10-1997 under section 143(3) of the Income Tax Act, 1961.
2. During the assessment year 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 Private Limited (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 (hereinafter referred to as 'third party'). Though the assessing officer 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');
(h) The flat originally was owned by M/s. Tardeo property Private Limited (hereinafter referred to as M/s. TPPL);
(iii) As per agreement to sell dated 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 had been furnished by the assessee in the paper books);
(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 share 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 dated 27-12-1992 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 above mentioned 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 269UD 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 dated 27-12-1992 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 dated 27-12-1992, written by M/s. MBPL to the assessee. For the sake of convenience the same is reproduced below:
Dated 27-12-1992 To Shri Dhruv Ranalal Shah & Shri Nanalal Kapurchand Shah, 403/4, Shivam, Dungaray Road, Bombay-400006 Sub : Possession of flat No. 101 on the first floor of Shirin Apartment Tardeo Road, Bombay - 400007.
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-400007, in as is where is conditions.
Yours faithfully, Sd/ (for MBPL)"
(viii) On 30-12-1992, application in form 37(1) under section 269UC of the Act was filed with appropriate authority, on 26-2-1993, the Appropriate authority gave its No Objection Certificate under section 269UL of the Act.
(ix) On 7-1-1993, '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 7-1-1993 to 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 dated 25-4-1995 (page 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 dated 25-4-1995). 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 25-5-1995 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 1-3-1993 to Rs. 57,65,000. Both assessee as well as M/s. MBPL by way of exchange of letter; between them settled the dispute in respect of flat. These letters have been placed at pages 27 to 31 and at page 36 of the paper book. It was mentioned by the assessee in these letters that alter 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 assessing officer has been cancelled by the order of Commissioner under section 263 of Income Tax Act, 1961 and after discussing the facts and various case laws the Commissioner 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. Commissioner 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 25-5-1995.
4. It was argued that all the material facts regarding receipt of extra money were placed before the assessing officer during the course of assessment proceedings. The assessing officer 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 assessing officer of this fact does not mean that the assessing officer did not apply his mind on the transaction. The Commissioner, therefore, was not right in making revision on the ground that assessing officer 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 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 assessing officer 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 Commissioner. 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 (2000) 243 ITR 831 (SC) that :
"an incorrect assumptions 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 Income Tax Officer, 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 assessing officer 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 assessing officer. According to said submission dated 29-9-1997 (page 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) Ashoka Mkt. Ltd.'s case (supra)
(h) Hiralal Manilal Mody's case (supra)
(iii) Baroda Cement & Chemicals Ltd. v. CIT
(iv) Abbasbhoy A. Dehgamwalla's case (supra)
(v) Bharat Forge Co. Ltd.'s case (supra).
The facts of these cases have been discussed in detail in the order of Commissioner. After considering all these cases, the Commissioner 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 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 case 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 Commissioner 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 Commissioner 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 questions of paramount importance which would be vital in determining 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 Commissioner 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 dated 27-12-1992 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 lakh 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 Income Tax Act, 1961. These pronouncements have been extracted in the following paragraphs by the Hon'ble High Court in the case of Bafna Charitable Trust v. CIT .
"11. In CIT v. Tata Services Ltd. , 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 Corpn. Ltd. , 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 , 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 M/s. 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 Vijay Flexible Containers (supra), 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. 11c could assign that right. What he acquired under the said agreement for sale was therefore, property within the meaning of the Income Tax Act and, consequently, a capital asset. When he filed the suit in this court against the vendors, he claimed specific performance of the said agreement for sale by conveyance to him of the immovable property and, only in the alternative, damages for breach of the agreement. A settlement was arrived at when the suit reached hearing at which point of time the assessee gave up his right to claim specific performance and took only damages. His giving up of the right to claim specific performance by conveyance to him 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 Income Tax Act. We may, at this stage, also deal with the further argument that there was no consideration for the acquisition of the capital 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 (2001) 248 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 Hon'ble Bombay High Court in the case of Bharat Forge Co. Ltd. (supra). This decision is based on the decision of Hon'ble Supreme Court in the case of Vania Silk Mills (P) Ltd. v. CIT . It is observed that the decision of Supreme Court in Vania Silk Mills (P.) Ltd.'s case (supra) has been disapproved in the later decision of Supreme Court in the case of Mrs. Grace Collis (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 gains earned.
10. This contention of the assessee is also found to be contrary to record. It is observed that in the letter dated 25-4-1995 (pages 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 assessing officer concluded that the extra amount was not assessable as income, the order of assessing officer was based on an incorrect assumption of facts or on incorrect application of law. Therefore, the Commissioner was right in invoking power under section 263. An incorrect assumption of facts or an incorrect application of law by assessing officer not only renders the order of assessing officer 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.
Order under section 255(4) of the Income Tax Act, 1961 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 Income Tax Act, 1961 :
Question No. 1 : Whether on the facts and circumstances of the case, the provisions of section 263 of the Income Tax Act, 1961 were rightly invoked by the Commissioner of Income Tax ?
Question No. 2 : Whether the amount received by the assessee from M/s. Mahendra Builders Pvt. Ltd. and claimed as liquidated damages is assessable to tax as capital gains ?
Third Member Order Per Shri J.P. Bengra, Vice-PresidentThere being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under section 255(4) of the Income Tax 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 Income Tax Act, 1961 were rightly invoked by the Commissioner of Income Tax ?
(2) Whether the amount received by the assessee from M/s. Mahendra Builders Pvt. Ltd. and claimed as liquidated damages is assessable to tax as capital gains ?"
2. The learned Accountant Member has held that the Commissioner of Income-tax cannot exercise revisionary jurisdiction under section 263 and also held that the liquidated damages received by the assessee from M/s. Mahendra Builders Pvt. Ltd. is not assessable to tax as capital gain whereas the learned Judicial Member has held that the Commissioner of Income-tax has rightly exercised jurisdiction under section 263 and also held that the amount received by the assessee from M/s. Mahendra Builders Pvt. Ltd. is assessable to tax under the head "capital gains".
3. The facts relating to the controversy are that M/s. Tardeo Property Pvt. 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 dated 6-5-1981 on instalment basis and certain instalments were paid by the above purchasers. M/s TPPL, again sold the very same flat to M/s. Mahendra Builders Pvt. Ltd. (hereinafter referred to as MBPL) having its office at Mahendra Chambers, 134/136, Dr. D.N. Road, Mumbai vide agreement dated 10-4-1986 for a total consideration of Rs. 9,45,000. Mr. Mahendra V. Shah was the director of both these companies, viz. TPPL & 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 dated 10-4-1986 with M/s. MBPL, the society of the flat purchasers was registered on 5-7-1990 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 27-12-1992, 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 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 Income Tax 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 MBPL in respect of the said flat in favour of the assessee vide their letter dated 27-12-1992. The Appropriate Authority, acting on an application in form 37-I under section 269UC of the Act, issued a no objection certificate on 26-2-1993 for transfer of said shares and said flat by M/s. MBPL to the assessee.
4. On 7-1-1993, Mrs. Sarladevi S, Kanav & Others, on the basis of earlier agreement dated 6-5-1981 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 26-2-1993. A suit was filed by said owner and developer against the said purchasers, viz. Mrs. Sarladevi S. Kanav & Others in the High Court at Bombay for cancellation of the agreement, which was admitted. It was alleged by the assessee that the vendor, 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 MBPL to refund the sum of Rs. 36,65,000 paid to them as purchase price of the flat. Accordingly, MBPL paid a sum of Rs. 5 lakhs by pay order dated 1-3-1993 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 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 dated 25-5-1995, (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 dated 29-9-1997. The assessing officer, 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 MBPL :
"During the assessment year 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 Pvt. 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 Commissioner of Income-tax, 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 assessing officer treated as capital receipt. The Commissioner 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 MBPL, is, in fact, a revenue receipt taxable as capital gain. Therefore, he directed the assessing officer to keep in mind the discussions made in Commissioner'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 dated 27-12-1992 and for non-receipt of peaceful possession of the flat on 27-12-1992. He further directed that the amount of liquidated damages will be restricted to the covenanted amount in the agreement. He also directed that the assessing officer 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, Accountant Member and I.P. Bansal, Judicial Member. As stated above, the Members differed, both on the point of exercising jurisdiction under section 263 by the Commissioner 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 Commissioner has incorrectly assumed jurisdiction under section 263 without sufficient reasons. In this connection my attention was invited to assessee's letter dated 29-9-1997 addressed to the assessing officer, 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 dated 25-5-1995 between the assessee and M/s. Mahendra Builders Pvt. 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 assessing officer, there was not even a whisper in the assessment order about the liquidity damages received by the assessee from 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 dated 2-11-2000, 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 Mahendra Builders Pvt. Ltd., who in turn had purchased the same from its sister company named M/s. Tardeo Properties Pvt. 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 Pvt. 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 assessing officer on being satisfied with the explanation of the assessee. Therefore, the decision of the assessing officer cannot be held to be erroneous simply because the assessing officer did not make elaborate discussion in respect of the said item of receipt. In this connection reliance was placed on the decision of Bombay High Court in the case of Gabriel India Ltd. (supra). He pointed out that section 263 does not visualise a case of substitution of the judgment of the Commissioner for that of the assessing officer. Cases should be visualised where the assessing officer 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 Commissioner may be of the opinion that the estimate made by the assessing officer was on the lower side and left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the assessing officer. That would not vest the Commissioner with power to re-examine the accounts -and determine the income himself at a higher figure. This is because the assessing officer 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 Commissioner does not feel satisfied with the conclusion.
8. It is submitted that in the present case, the assessing officer has raised a query regarding taxability of Rs. 21 lakhs and after considering the detailed replies of the assessee dated 29-9-1997 and 1-11-2000 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 Abbasbhoy A Dehgamwalla (supra) and submitted that the order of the assessing officer 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 & Others vide agreement dated 6-5-1981. But, the director, Shri Mahendra Shah, who was also director in 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 & Others. Therefore, the agreement dated 10-4-1986 between TPPL & MBPL was an invalid one and an unenforceable agreement. Thus, Shri Mahendrakumar Shah, also the director of MBPL had no right, title or interest in the said property which he could sell to the assessee, even though an agreement for sale dated 27-12-1992 was executed with the assessee, since the flat did not belong to 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 dated 10-12-1993 (page 50 of the paper book). 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. (supra). It is also submitted that the decision of Vijay Flexible Container's case (supra) relied upon by the Commissioner 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 1-3-1993 and the remaining amount of Rs. 31,65,000 was refunded only on 25-5-1995 after filing a criminal complaint against 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 & Others had already made payments Rs. 26,131.25 on 12-5-1981 and similar amount on 21-7-1982, towards the purchase of the said flat.
10. My attention was also invited to pages 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 js noteworthy that MBPL is controlled by Shri Mahendrakumar Shah and his wife Pratibha M. Shah and M/s. TPPL is a sister concern of M/s. MBPL and Shri Mahendrakumar Shah is a common director in both these concerns. It is submitted that 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 Hiralal Manilal Mody (supra).
11. In additions 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 care 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 Bombay High Court in Ravji Bapuchand v. K.L. Bavchiekar 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 or 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 MBPL had no right, title or interest, no specific performance can be claimed against it and the view taken by the Hon'ble Judicial Member 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 Judicial Member. However, for the sake of brevity, the submissions were that the Judicial Member 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 Judicial Member that the Commissioner 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 assessing officer. However, the Judicial Member has wrongly relied on the observation of the CIT given at paras 5.2, 5.4, etc. The Judicial Member has also wrongly interpreted the meaning of section 2(14) of the Income Tax Act, which defines the 'capital asset' vis-a-vis the decision of Bombay High Court in the case of Bafna Charitable Trust (supra) and the decision of the Apex Court in the case of Mrs. Grace Collia (supra) as also the decision of the Apex Court in the case of Vania Silk Mills (P) Ltd. (supra) which the assessee has distinguished in his written submission elaborately. Thus, he submitted that the view taken by the learned Accountant Member 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 Judicial Member as well as the Commissioner of Income-tax and submitted that the Commissioner 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 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 Judicial Member and the Commissioner.
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 Accountant Member has opined that the Commissioner has wrongly exercised his jurisdiction under section 263 by revising the order of the assessing officer whereas the learned Judicial Member has opined that the Commissioner has correctly assumed the jurisdiction. While doing so, the learned Judicial Member has distinguished the case laws referred by the Accountant Member. Therefore, I will first address this issue.
15. 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 dated 29-9-1997 (pages 38 to 47 of paper book). After perusing the detailed reply, the assessing officer passed following order under which he accepted the claim of the assessee that liquidated damages are not taxable :
"During the assessment year 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 Pvt. 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."
If we go through the order of the assessing officer it would be clear that the above order did not make an elaborate discussion in this regard.
16. Now, the question arises whether the Commissioner 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 assessing officer and allowed the claim on being satisfied with the explanation of the assessee. In this regard, I find that in the case of Gabriel India Ltd. (supra), the Honourable Bombay High Court has laid down the following principle :
"The power of suo motu revision under sub-section (1) of section 263 of the Income Tax 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 Commissioner 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 Income Tax Officer acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualized where the Income Tax Officer 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 Commissioner, 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 Commissioner he would have estimated the income at a higher figure than the one determined by the Income Tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. This is because the Income Tax Officer 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 Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself would not be enough to vest the Commissioner 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 Income Tax Officer 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 Income Tax Officer on being satisfied with the explanation of the assessee. This decision of the Income Tax Officer 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 Commissioner 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 Income Tax Officer to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner of Income Tax 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 Income Tax Officer acting in accordance with law, makes a certain assessment, the same cannot be branded as "erroneous" by the Commissioner simply because according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of Commissioner for that of an Income Tax Officer, who passed the order, unless, the decision is held to be "erroneous". Cases may be visualized, where the Income Tax Officer, 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 Commissioner on perusal of the record may be of the opinion that the estimate made by the officer concerned was lower and left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the Income Tax Officer. That would not vest the Commissioner with the power to re-examine the accounts and determine himself the income at a higher figure. Because the Income Tax Officer has exercised the quasi judicial power vested in him in accordance with law and arrived at aconclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said, in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision.
17. 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 Assessing Officer has not made detailed discussion on the issue is not enough for Commissioner to invoke his revisional jurisdiction under section 263. The action of the Commissioner 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 assessing officer has allowed the depreciation and investment allowance on enhanced value without detailed discussion on the issue is not enough to invoke revisionary jurisdiction.
18. Similarly in the case of Sarunda Cold Retreades (P) Ltd. v. ITO (1998) 99 (Tax-Mag.) 330, the Jaipur Bench of the Tribunal taken the same view by following the decision of Bombay High Court in the case of Gabriel India Ltd. (supra). They have observed that where 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 assessing officer on being satisfied with this explanation of the assessee. This decision of Income Tax Officer 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 Assessing Officer passed an order in which he did not make an elaborate discussion, does not give the Commissioner the power to exercise revisionary jurisdiction under section 263.
19. The learned Judicial Member, while discussing the case on merit has opined that assessing officer has based on incorrect assumption of facts or application of law, so the Commissioner has rightly invoked the power, which, according to my mind is against the established principle laid down by the Hon'ble Bombay High Court.
20. In view of my discussion, I am of the view that the Commissioner (Appeals) 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 Accountant Member on this issue.
21. 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 TPPL. TPPL sold the above flat to Smt. Sarladevi Kavan & Ajay S. Kanav vide an agreement to sell dated 6-5-1981. 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 pages 86 & 87. From the notice issued by the income-tax authorities under section 131 dated 17-2-1983 (paper book page 88), it is clear that the Income-tax 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 (page 89). So it is clear that the transaction of selling the property to Smt. Sarladevi Kanav & Ajaykumar Kanav was a real transaction between the TPPL and the purchasing parties. It is noteworthy that Shri Mahendrakumar Shah was common director of the firm TPPL and 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 MBPL and subsequently entered into an agreement between MBPL and the assessee vide agreement dated 10-4-1986. Consequent to the fraudulent agreement between TPPL, and 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 TPPL and Smt. Sarladevi Kanav & others was still valid. While lodging a complaint, the assessee in his application to the Joint Commissioner of Police dated 25-4-1995 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 & 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 & others was cancelled before an agreement was entered into by Mr. Mahendrakumar Shah as director of 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 dated 27-12-1992 does not arise. This agreement in the given facts and circumstances can be conveniently be held as fraudulent transaction by 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 & 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 7-1-1993. On these facts the seller 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 the 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 dated 25-5-1995 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.
22. 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 Abbasbhoy A. Dehgamwalla (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 that the amount of Rs. 2,52,000 was received as consideration for the transfer of a "capital asset" ...."
23. In the case of Bharat Forge Co. Ltd. (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.
24. 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 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 (supra). Therefore, the argument of the learned departmental representative has no force.
25. 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.
26. 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 assessing officer. I, therefore, agree with the view taken by the learned Accountant Member.
27. Further, all receipts are not taxable under the Income Tax Act. Section 2(24) defines "income". It is no doubt that this is an inclusive definition. However, a capital receipt is not income under section 2(14) unless it is chargeable to tax as capital gain under section 45. 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) (sic.) 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.
28. 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 Commissioner 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 Wvg. Mills Co. (P) Ltd. v. CIT , 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.
29. Now the matter will go back to the original Bench to decide the case in accordance with the majority view.
Per Jaidev, A.M.In view of the difference of opinion between the Judicial Member and Accountant Member, 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 Income Tax Act, 1961 were rightly invoked by the Commissioner of Income Tax?
Q. No. 2. Whether the amount received by the assessee from M/s. Mahendra Builders Pvt. 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 dated 30-5-2003, the learned Third Member has concurred with the view taken by the Accountant Member and held that Commissioner 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 Accountant Member, the learned Third Member also held that the liquidated damages received by the assessee from M/s. Mahendra Builders Pvt. 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.