Commissioner of Income Tax vs J. Dalmia

D.P. Wadhwa, J.—The following question has been referred to this Court u/s 256(1) of the income tax Act, 1961 (''the Act''), by the Tribunal, Delhi Bench ''D'', New Delhi: Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,02,500 is assessable as capital gains other than long-term capital gains in the hands of the assessee?

The case pertains to a property which was under construction in Greater Kailash, New Delhi. Satish Kumar Sood & Co. (''the contractors'') were the owners of this property. They entered into an agreement to sell with one Krishan Prasad. This was on 29-11-1966. The price was settled at Rs. 4,95,000. An earnest money of Rs. 20,000 in cash was paid by Krishan Prasad to the contractors at that time. The construction was to be completed in accordance with certain specifications, which were annexed to the agreement to sell. The agreement provided that the sale deed could be got executed by Krishan Prasad either in his own name or in the name of his nominee or nominees. It was further provided that if the contractors failed to execute the sale deed, the purchaser would be entitled to get the sale deed executed by specific performance through a Court of law at the risk and cost of the contractors, and in that event, the contractors would also be liable to pay damages to the purchaser in accordance with the prevalent market price. By a letter dated 26-12-1966, Krishan Prasad informed the contractors that he had irrevocably nominated J. Dalmia, karta of the joint Hindu family, as his nominee to purchase the property in question. It was mentioned in this letter that after the nomination, Krishan Prasad would have no concern with the purchase of the property and that the contractors would deal directly with the nominee. The balance of the sale consideration, being Rs. 4,75,000, was to be paid by the nominee at the time of execution of the sale deed. A letter was also addressed on the same date by J. Dalmia to Krishan Prasad. It was mentioned in this letter that J. Dalmia was to pay Rs. 20,000 to Krishan Prasad at the time of final execution of the sale deed between him (J. Dalmia) and the contractors. No other consideration was expressed to be payable to Krishan Prasad, though it was mentioned in this letter that in case of default on the part of J. Dalmia to get the sale deed executed, he would pay Rs. 20,000 to Krishan Prasad, and in case default was committed by the contractors, the sum of Rs. 20,000 was nevertheless payable by J. Dalmia to Krishan Prasad but only after the success of J. Dalmia in Court. All the legal expenses were to be in the account of Krishan Prasad. On 15-3-1967, J. Dalmia wrote to the contractors drawing their attention to the letter of 26-12-1966 of Krishan Prasad to them and also to the agreement to sell dated 29-11-1966. The contractors were asked to intimate the progress of the building and the notice regarding completion of the building for the purpose of execution of the sale deed. On 18-4-1967, a notice was got sent to the contractors by J. Dalmia calling upon them to inform J. Dalmia regarding obtaining of the completion certificate so that J. Dalmia could arrange to have the sale deed executed in terms of the agreement. When no reply was received, J. Dalmia filed a suit for injunction against the contractors restraining the contractors from selling, alienating or in any other way transferring the property in question. Krishan Prasad was also impleaded as a defendant and it was averred that he was a necessary and proper party as J. Dalmia, the plaintiff, had acquired the title and interest through him. It was stated in the plaint that the contractors though had obtained the completion certificate, they failed to intimate the plaintiff regarding the completion of the construction and that the contractors were trying to sell the property to a third party in breach of the agreement referred to above. 2. It appears that an ex parte injunction was obtained by J. Dalmia and when the matter came up for hearing before the Court on 6-6-1967, the parties entered into an agreement-referring their disputes and differences to the sole arbitration of Shri D.P. Kapoor, chartered accountant. It was, however, specifically mentioned that J. Dalmia had agreed to give up his claim for the specific performance of the contract dated 29-11-1966 which relieved the contractors from their undertaking in the Court for not to sell the property. J. Dalmia retained his claim and rights for damages only in accordance with law against the contractors. The arbitrator gave his award on 14-7-1967. He awarded a sum of Rs. 1,02,500 ''as damages for compensation for breach of the contract'' payable by the contractors to J. Dalmia, and the contractors were further held liable to refund Rs. 20,000 to Krishan Prasad, which amount had been received by the contractors from him. A sum of Rs. 1,000 was also awarded as costs to J. Dalmia being the costs of legal proceedings, which J. Dalmia had to incur in the Court against the contractors. Thus, a sum of Rs. 1,03,500 was awarded to J. Dalmia.

When J. Dalmia (HUF), the assessee, filed the return of income for the assessment year 1968-69, it was claimed that the sum of Rs. 1,02,500 received from the contractors was in the nature of a windfall or a casual gain. It was claimed that the amount was not a capital gain, as there was neither any capital asset nor the relinquishment thereof. The ITO rejected this contention and included this sum as ''capital gains'' other than long-term capital gains in the taxable income of the assessee. The AAC, however, accepted the contention of the assessee, and held that no capital gains had accrued to the assessee. The matter was there after taken to the Tribunal by the revenue. The Tribunal by its order dated 24-2-1973 dismissed the appeal. The Tribunal held that "such rights as the assessee acquired in this case were not proprietary rights but only rights of a personal nature which will not be comprehended within the meaning of the term ''capital asset'' in section 2(14) ". The Tribunal also rejected the alternative argument of the revenue, holding that even ''if the rights over the contract represent the capital asset in this case, there was no transfer of such capital asset so as to attract capital gain tax''. The Tribunal, however, did not deal with another submission of the assessee that again even if there was a capital asset, there was no actual cost to the assessee in acquiring the same.

At the instance of the revenue, the Tribunal has referred the question set out in the beginning of this judgment for decision of this Court.

It will, thus, be seen that in case of default by the contractors, under agreement for sale, the purchaser could claim specific performance of the agreement and in addition could also claim damages in accordance with the prevailing market rate. Reference may be made to section 21 of the Specific Relief Act, 1963. This section provides that the purchaser in a suit for specific performance of a contract may also claim compensation for its breach, either in addition to, or in substitution of, such performance. In determining the amount of compensation, the Court is guided by the principles specified in section 73 of the Contract Act, 1872. It may, however, be noticed that the suit filed by J. Dalmia was not for specific performance of the contract, where he could also claim damages. It was a suit for permanent injunction, wherein it was prayed that the contractors be restrained from selling, alienating or in any other way transferring the property in question and from executing the transfer in the name of any person other than J. Dalmia. The parties, instead of proceeding with the suit agreed to refer their disputes to arbitration. J. Dalmia as well as Krishan Prasad gave up their claim for specific performance of the contract but retained their claim and right for damages only in accordance with law. Further, no consideration passed from the contractors to J. Dalmia and Krishan Prasad. What was referred to the arbitrator was the question regarding the question of damages in respect of breach of the contract committed by the contractors. This right was in addition to and not in lieu of the right of specific performance, as was provided by the contract.

We are, therefore, left with the question as to whether the right to claim damages in the instant case is a ''property of any kind* and thus, a ''capital asset'' u/s 2(14) of the Act. The further question as to whether there was a transfer of such a ''capital asset'', would arise only if the right to claim damages is held to be a ''capital asset''. But, again, it will have to be examined if such a right could be transferred. Relying on the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. Tata Services Ltd., it was contended by Shri Wadhera the learned counsel for the revenue, that any right which can be called property will be included in the definition of ''capital asset'' and that a contract for sale of land is capable of specific performance and is also assignable, and he referred to section 15 of the Specific Relief Act, 1963. Therefore, according to Shri Wadhera, a right to obtain conveyance of immovable property is clearly a property, as contemplated by section 2(14). This argument overlooks the fact that the right to specific performance had been specifically given up by the assessee, J. Dalmia, and what was left was a mere right to sue for damages. In the case of Tata Services Ltd. (supra), there was an agreement to purchase a residential plot and the purchaser had paid Rs. 90,000 as earnest money.

The vendor was, however, in breach of the agreement as he wanted to sell this property to a third party at a higher price. Finally, there was a tripartite agreement between the purchaser (the assessee), the vendor, and the third party, and the purchaser was returned the earnest money as well as paid a sum of Rs. 5,00,000 ''being the amount of consideration for the transfer and assignment'' of his right, title and interest under the contract for sale. It was held that the amount of Rs. 5,00,000 was received by the assessee as consideration for assigning his rights under the agreement and these rights, which has been assigned, clearly fell within the definition of ''capital asset''. It will thus be seen that the facts of this case are quite different and the authority does not help Shri Wadhera. It may, however, be noticed at this stage that Krishan Prasad constituted J. Dalmia as his nominee under the agreement and assigned his rights to J. Dalmia without any consideration. J. Dalmia as the nominee could maintain a suit for specific performance. We need not go into the validity of the nomination, though it was argued that the contract between Krishan Prasad and J. Dalmia, whereby the rights under the contract for sale were assigned to J. Dalmia, was void being without any consideration. The parties, however, did not dispute the right of J. Dalmia as a nominee under the contract for sale. In a recent decision of this Court in Hari Dass Sood v. Narinder Singh Oberai [R.F.A. (Ori.) No. 3 of 1977, decided on 16-12-1983], it was held that a nominee could maintain suit for specific performance. No doubt, the nomination in that case was not without consideration.

Shri Hari Har Lal, the learned counsel for the assessee, however, contended that a mere right to sue is not a property and it cannot be transferred. He referred to section 6 of the Transfer of Property Act. Relying on a decision of the Supreme Court in Swami Motor Transport (P) Ltd. and Another Vs. Sri Sankaraswamigal Mutt and Another, , he also submitted that the right of the assessee under the contract for sale of immovable property was not in the nature of property in that the assessee was having no interest in or right of property. The Supreme Court was concerned with the question of right to purchase property by a tenant under the Madras City Tenants Protection Act, 1922, with reference to article 19(1)(f) of the Constitution of India. Reliance was placed on the following passage of the judgment:

... The law of India does not recognise equitable estates. No authority has been cited in support of the contention that a statutory right to purchase land is, or confers, an interest or a right in property. The fact that the right is created not by contract but by a statute cannot make a difference in the content or the incidents of the right: that depends upon the nature and the scope of the right conferred. The right conferred is a right to purchase land. If such a right conferred under a contract is not a right of property, the fact that such a right stems from a statute cannot obviously expand its content or make it any the less a non-proprietary right. In our view, a statutory right to apply for the purchase of land is not a right of property. It is settled law that a contract to purchase a property does not create an interest in immovable property.... (p. 874)

This is, however, not the question in the present case. We are not concerned whether the assessee acquired any interest in the immovable property by virtue of the contract for sale. u/s 54 of the Transfer of Property Act, 1882, a contract for sale of immovable property does not of itself create any interest in or charge on such property. In Sidhrajbhai Sabbai v. State of Gujarat AIR 1963 SC 540, it was held that the word ''property'' in article 19(1)(f) must doubtless be extended to all those recognized types of interest which have the insignia or characteristics of proprietary rights. We are to determine whether damages received by the assessee were in respect of transfer of a ''capital asset''. There was a breach of contract and the assessee received damages in satisfaction thereof. He had a mere right to sue for damages. Assuming the same to be ''property'', this could not be transferred u/s 6(e). The relevant provision may be reproduced:

Property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force,

(e) A mere right to sue cannot be transferred.

We do not find any exception under the Act though the word ''transfer'' in relation to capital asset has been defined in section 2 (47) which includes sales, exchange or relinquishment of the asset or the extinguishment of any right therein. The damages, which were received by the assessee, cannot be said to be on account of relinquishment of any of his asset'' or on account of extinguishment of his right of specific performance under the contract for sale.

u/s 5 of the Transfer of Property Act, ''transfer of property'' means an act by which a person conveys property to another and ''to transfer property'' is to perform such act. A mere right to sue may or may not be property but it certainly cannot be transferred. There cannot be any dispute with the proposition that in order that a receipt or accrual of income may attract the charge of tax on capital gains, the sine qua non is that the receipt or accrual must have originated in a ''transfer'' within the meaning of section 45, read with section 2 (47), of the Act. Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by the assessee as damages was not assessable as capital gains.

It was also argued on behalf of the assessee that the cost to the assessee of the acquisition of his aforesaid right under the contract for sale was nil and as such, the transfer would be outside the scope of section 48 of the Act and in this context, reliance was placed on a decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, . But, the view which we have taken makes it unnecessary to go into this question. Accordingly, we answer the question in the negative and in favour of the assessee. We leave the parties to bear their own costs.