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Income Tax Appellate Tribunal, ‘G’ BENCH MUMBAI
Before: SHRI AMIT SHUKLA & MS PADMAVATHY S
CO No.41/Mum/2024 M/s. Shelter Developers आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue and cross objection by the assessee against order dated 21/08/2023 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) for the A.Y.2016-17.
In the grounds of appeal the Revenue has challenged the deletion of various expenses claimed by the assessee aggregating to Rs.6,36,91,849/- out of the compensation amount received by the assessee claimed as revenue receipts; Whereas, assessee in the cross objection assessee has stated that entire compensation received as per the consent terms is in the nature of capital receipts and hence, not taxable.
3. The brief facts and the background of the case are that assessee firm has received an amount of Rs.35 Crores as compensation on account of „Out of Court settlement‟ arising out of long standing dispute for the sale of right in the land/plot bearing S.No.92, admeasuring 14 Acres and 36 Gunthas (72,000 sq. yards) situated at Village, Mauje Mila Taluk, Dist: Thane. The assessee has debited several expenses against the amount received as compensation initially treating as revenue receipts and offered net profit of Rs.6,56,91,849/- in the return of income. The details of these expenses debited were as under:-
Construction of Boundry Wall 6,55,78,837 Land 2,32,88,527 Compensation Paid 214,95,00,000 Professional/Consultancy Charges 1,41,15,500 Liability for Cost / Expenses / Damages 3,00,00,000
The assessee, M/s. Shelter Developer is a partnership firm which was founded as per partnership deed executed on 30/06/1986 for developing the property in the aforementioned land. The partnership deed consisted of Ms. Amruta Patel, Ms. Varsha Patel and Ms. Heena Patel. These partners had purchased tenancy right in the aforesaid land from Mr. Govind B Baber, Laxmibai Desai and other parties through registered agreement in the year 1986. It was after purchasing the tenancy right, Ms. Amruta Patel, Ms. Varsha Patel and Ms. Heena Patel alongwith other partners formed a partnership firm, i.e., M/s. Shelter Developers and introduced the tenancy right in land as capital contribution in the firm for a capital credit of Rs.40,00,000/-.
Land on assessee has acquired the tenancy right through registered agreement had a checkered history of dispute. Earlier this land was in the name of Estate Investments Pvt. Ltd. Later Conwood Construction & Developers Pvt. Ltd. acquired rights from M/s. Estate Investments Co. Pvt. Ltd. and decided to develop the same. These rights were acquired subject to pending claims and litigations. However, possessory rights on the said CO No.41/Mum/2024 M/s. Shelter Developers land was claimed by Mr. Govind B Baber, Laxmibai Desai but later on they sold the rights of the said land to one Shri Wahab Talakdhar Choudhary in the year 1967. Similarly, Laxmibai Maruti Desai sold her rights to Kantibhai B Parekh and there were cases pending in Thane Court as all the parties were fighting for the rights in relation to the ownership upon the said land. In the year 1986, Amruta Kantilal Patel, Mrs. Varsha Pravin Patel, Mr. Heena Deepak Patel brought rights from Mr. Govind B Baber, Laxmibai Maruti Desai, Kantibhai B Parekh etc., by a registered document. After 1986, various parties started contesting in different courts ignoring the registered rights they had given to the partners of the assessee firm. Subsequently, in the year 1987 MRTP Court decided that Mr.Govind B Baber, Laxmibai Maruti Desai and other parties did not even had any tenancy rights on the said land. Before us, the copy of the judgment passed by the Maharashtra Revenue Tribunal, Mumbai has been filed, wherein the Court held as under:- “The revision application No. 3/90 is allowed. The judgment and order dated 14-6-1989 passed by the Asst. Collector, Thane Division, Thane, in Tenancy Appeal No.3/78 and the judgment and order dated 8-11-1977 passed by the Tahsildar of Thane in Tenancy Case. No. 854/3/69 are hereby quashed and set aside so far as the claim of the said Shri Govind Bhiku Babar (now represented by his heirs in the revision) is concerned and it is hereby held and declared that the said Shri Govind Bhiku Babar since deceased his heirs and legal representatives were/are not the tenants of the suit land.”
CO No.41/Mum/2024 M/s. Shelter Developers 6. Thus, the registered agreement through which the partners of the assessee firm bought the tenancy right from Mr. Govind B Baber, Laxmibai Maruti Desai etc., was found to be untenable as these parties have fraudulently transferred / sold the tenancy rights to the partners of the assessee firm. Despite such an order by the MRTP Court in the year 2007 whereby ruling was given that Mr. Govind B Baber and others that they did not had any tenancy right on the suit land, clandestinely a consent term was filed before the Hon‟ble Bombay High Court between Govind B Baber and others and the landlords M/s. Estate Investments Pvt. Ltd., wherein Mr. Govind B Baber and others had consented that they have no tenancy rights on the land and M/s. Estate Investments Pvt. Ltd., is owner of suit land free of tenants. Both the parties collided with each other undermining rights and interests of the assessee firm which assessee firm was under the belief they have purchased the tenancy rights through registered document. Since there was a fraudulent representation before the Hon‟ble High Court, the assessee firm had challenged the consent terms before the Hon‟ble Supreme Court and filed SLP. The assessee firm contended before the Hon‟ble Supreme Court that the consent terms were executed fraudulently and collusion with other parties to deprive them of their rightful claims over the land which assessee had acquired through a registered document. In the assessment order, the detailed sequences of reference and various suits and directions have been narrated. However, the crux of the facts and issues, we have summarized hereinabove. There were various suits and cases filed by the CO No.41/Mum/2024 M/s. Shelter Developers Assessee against the landlords and other parties for defrauding them.
Thereafter, in the year 2015 the consent term was filed in the Hon‟ble Supreme Court between the assessee, i.e., Shelter Developers and the landlords, Estate Investments Pvt. Ltd. wherein, “right to sue” was settled by withdrawing the following suits filed by the assessee. The details of these suits as per the consent term filed before the Hon‟ble Supreme Court were as under:- Suit No. 1074 of 1995 and review application No. 13 of 1997 before Maharashtra Revenue Tribunal. Writ Petition No. 5140 of 2005 before Hon'ble Bombay High Court. Misc. Application in Suit No. 551 of 1998 for restoration of said suit and/or M.A 458 of 2004 for restoration of said suit No. 551 of 1998. Further, it was also consented that order of Maharashtra Revenue Tribunal dated 8th January 1997 which held that Govind Baber did not have any tenancy right was proper and binding on appellate firm Shelter Developers. In clause (p) of the consent Terms it was agreed that the Estate Investments Private Limited was always having the right over the suit property and the firm Shelter Developers never derived any right. The copy of consent terms filed with Supreme Court has been filed before us enclosed in paper book.
CO No.41/Mum/2024 M/s. Shelter Developers 8. In pursuance of the consent term whereby the assessee withdrew the “right to sue”, the assessee firm received compensation of Rs.35 Crores. In the return of income assessee had offered this sum as income and claimed expenditure to the tune of Rs. 29 Crores as stated in the earlier part of the order. The ld. AO in his detailed order and analyzing each and every payment of expenses etc., including statements of certain person came to the conclusion that the expenses claimed by the assessee are of bogus / non-genuine and accordingly, he added sum of Rs.24,50,78,837/- and computed the gross total income in the following manner:-
Business Income 6,62,56,724 Add : Inflated expenses on 6,55,78,837 account of Boundary Wall Add : Compensation paid 14,95,00,000 Add : Provision for cost 3,00,00,000 24,50,78,837 /expenses/damages Gross Total Income 31,13,35,561
9. The ld. CIT (A) after considering various observations and finding of the ld. AO and considering the assessee‟s submissions dealt each and every issue and gave relief of the addition made by the ld. AO on account of claim of various expenses out of compensation received by the assessee. However, at this stage we CO No.41/Mum/2024 M/s. Shelter Developers not going into the merits of deletion of expenses claimed, albeit we will examine the very taxability of receipts.
Though the department has come in appeal against the addition deleted by the ld. CIT (A) and upholding the finding of the ld. AO that the expenses claimed by the assessee are non- genuine. However, the assessee in his cross objection has challenged that the entire compensation received of Rs.35 Crores is not taxable as it is a capital receipt.
11. Before us, the ld. CIT DR objected for admission of cross objection and the ground raised by the assessee that amount of compensation received is not taxable when the assessee itself has offered this amount as revenue receipt and the only dispute was with regard to genuineness of the expenditure claimed by the assessee in the profit and loss account. He submitted that assessee cannot take different stand because assessee in the return of income has claimed it as revenue receipt and before the ld. AO assessee had stated that the expenses claimed was on account of commercial expediency and now assessee cannot be permitted to withdraw the claim and claim it as a capital receipt. In support of his contention, he relied upon the judgment of the Hon‟ble Supreme Court in the case of Shriram Investments vs. CIT reported in (2024) 167 taxmann.com 139; and another judgment of the Hon‟ble Supreme Court in the case of PCIT vs. Wipro Ltd., reported in (2022) 140 taxmann.com 223.
CO No.41/Mum/2024 M/s. Shelter Developers 12. On the other hand, ld. Counsel for the assessee submitted that it is purely a legal issue and such a legal issue whether the amount is taxable under the provisions of the Act or not can be raised at any stage and in support he relied upon the judgment of Hon‟ble Supreme Court in the case of NTPC vs. CIT reported in (1998) 229 ITR 383. He further relied upon the judgment of the Hon‟ble Jurisdictional High Court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd., reported in 349 ITR 336.
We have heard both the parties on the issue of admissibility of assessee‟s claim that the amount of compensation is a capital receipt and hence not taxable, and can such a claim be raised at the stage of the Tribunal when this ground was not raised either before the ld. AO or the ld. CIT (A) and has neither claimed in the return of income.
Thus, the issue is whether the Tribunal has the power /jurisdiction to examine such claim. The 3 judges bench of Hon‟ble Supreme Court in the case of NTPC vs. CIT (supra) had considered precisely same question which reads as under:- “Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same?”
The Hon‟ble Supreme Court had answered this question after observing and holding as under:-
CO No.41/Mum/2024 M/s. Shelter Developers “Under section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier. In the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688, this court, while dealing with the powers of the Appellate Assistant Commissioner observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer. This court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be CO No.41/Mum/2024 M/s. Shelter Developers considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal (vide, e.g., CIT v. Anand Prasad [1981] 128 ITR 388 (Delhi), CIT v. Karamchand Premchand P. Ltd. [1969]
74. ITR 254 (Guj) and CIT v. Cellulose Products of India Ltd. [1985] 151 ITR 499 (Guj) [FBI). Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee The refrained question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee.”
This principle laid down by the Hon‟ble Supreme Court has been reiterated and explained further by the Hon‟ble Jurisdictional High court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd.,(supra). After considering the judgment of Hon‟ble Supreme Court in the case of Goetze India Ltd. vs. CIT reported in (2006) 157 taxmann.com 1 wherein, the Hon‟ble High Court observed and held as under:-
21. It was then submitted by Mr. Gupta that the Supreme Court had taken a different view in Goetze (India) Limited v. Commissioner of Income-tax, (2006) 157 Taxman 1. We are unable to agree. The decision was rendered by a Bench of two learned Judges and expressly refers to the judgment of the Bench of three learned Judges in National Thermal Power Company Limited vs. Commissioner of Income-tax (supra). The question before the Court was whether the appellant-assessee could make a claim for deduction, other than by filing a revised return. After the return was filed, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The claim, therefore, was not before the appellate authorities. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Act to make an amendment in the return of income by modifying an application at the assessment stage without revising the return. The Commissioner of Income-tax (Appeals) allowed the assessee's appeal. The Tribunal, however, allowed the department's appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Company Limited contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held :-
4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income- tax Act, 1961. There shall be no order as to costs."
CO No.41/Mum/2024 M/s. Shelter Developers 22. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under section 254.
Thus, the Hon‟ble Supreme Court has held that the Tribunal has the power to entertain such a claim for the first time before the Tribunal even though the claim was not before the appellate authorities or was not before the Assessing Officer.
Now coming to the judgment relied upon by the ld. CIT DR, the Hon‟ble Supreme Court in the case of Shriram Investments vs.CIT (supra), the issue before the Hon‟ble Supreme Court was whether the revised return filed by the assessee which was barred by limitation u/s.139 (5), does the AO has jurisdiction to consider the claim made by the assessee in the said revised return. The Hon‟ble Supreme Court held that the revised return was barred by limitation and ld. AO does not have any jurisdiction to consider the claim by the assessee in the revised return. Nowhere, the Hon‟ble Supreme Court has held that the Tribunal does not have the power u/s.254. On the contrary, the Hon‟ble Supreme Court observed that the Tribunal has not exercised its power u/s.254 to consider the assessee‟s claim and instead Tribunal has directed the ld. AO to consider the assessee‟s claim made in the revised return which was barred by CO No.41/Mum/2024 M/s. Shelter Developers limitation where ld.AO had no jurisdiction to consider the claim. The relevant para 8 & 9 clarifying this issue reads as under:- "8. Coming to the decision of the Tribunal, we find that the Tribunal has not exercised its power under Section 254 of the IT Act to consider the claim. Instead, the Tribunal directed the assessing officer to consider the appellant's claim. The assessing officer had no jurisdiction to consider the claim made by the assessee in the revised return filed after the time prescribed by Section 139(5) for filing a revised return had already expired.
Therefore, we find no reason to interfere with the impugned judgment of the High Court. The appeal is, accordingly, dismissed."
Thus, this judgment in fact conversely speaking implies that the power can be exercised by the Tribunal u/s.254 to consider the claim.
Coming to the another judgment relied upon by the ld. DR in the case of PCIT vs. Wipro Ltd., this judgment pertain to the issue whether revised return filed by the assessee can only substitute its original return u/s.139(1) and cannot transform it into return u/s.139(3). Here in this case assessee has claimed benefit u/s. 10B(8) by furnishing declaration in the revised return and after the due date prescribed u/s.139(1) and the same was denied as a requirement of furnishing the declaration before the ld. AO within the due date of filing of return u/s.139(1) was a mandatory condition and not directory. The Hon‟ble Supreme Court held that the revised return filed by the assessee u/s.139(5) can only substitute its original return filed CO No.41/Mum/2024 M/s. Shelter Developers u/s.139(1) and cannot transform it into return u/s.139(3) in order to give benefit of carry forward of set off of any loss u/s.80. Thus, this judgment is clearly not applicable in the facts of the case.
However, there is another judgment of the Hon‟ble Supreme Court in the case of Wipro Ltd., vs. CIT reported in (2022) 140 txmann.com 223(SC), wherein, the Hon‟ble Supreme Court held that the Tribunal can entertain any legal ground for the first time before the Hon‟ble Supreme Court had referred to the three Judge Bench judgment of the Hon‟ble Supreme Court in the case of NTPC Ltd., The relevant observation of the Hon‟ble Supreme Court reads as under:-
“10. The learned ASG appearing for the department had faintly argued that since the appellant in its return had taken a conscious explicit plea with regard to the part of the claim being ascribable to capital expenditure and partly to revenue expenditure, it was not open for the appellant to plead for the first time before the ITAT that the entire claim must be treated as revenue expenditure. Further, it was not open to the ITAT to entertain such fresh claim for the first time. This submission needs to be stated to be rejected. In the first place, the ITAT was conscious about the fact that this claim was set up by the appellant for the first time before it, and was clearly inconsistent and contrary to the stand taken in the return filed by the appellant for the concerned assessment year including the notings made by the officials of the appellant. Yet, the ITAT entertained the claim as permissible, even though for the first time before the ITAT, in appeal under section 254 of the 1961 Act, by relying on the dictum of this Court in National Thermal Power Co. Ltd. (supra). Further, the ITAT has also expressly recorded the no objection given by the representative of CO No.41/Mum/2024 M/s. Shelter Developers the department, allowing the appellant to set up the fresh claim to treat the amount declared as capital expenditure in the returns (as originally filed), as revenue expenditure. As a result, the objection now taken by the department cannot be countenanced.
Learned ASG had placed reliance on the decision of this Court in Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1/284 ITR 323 in support of the objection pressed before us that it is not open to entertain fresh claim before the ITAT. According to him, the decision in National Thermal Power Co. Ltd. (supra) merely permits raising of a new ground concerning the claim already mentioned in the returns and not an inconsistent or contrary plea or a new claim. We are not impressed by this argument. For, the observations in the decision in Goetze (India) Ltd. (supra) itself make it amply clear that such limitation would apply to the "assessing authority", but not impinge upon the plenary powers of the ITAT bestowed under section 254 of the Act. In other words, this decision is of no avail to the department.”
The aforesaid judgment of the Hon‟ble Supreme Court clearly clinches the issue that the ITAT can entertain such a claim for the first time in terms of its claim u/s.254, accordingly, we admit the legal issue raised by the assessee in the cross objection and the objections raised by the ld. AR is rejected.
Now coming to the issue whether the compensation received by the assessee is a capital receipt or the revenue receipt. From the perusal of the facts and material brought on record and the observations made in the impugned orders, it is clear that the partners of the assessee firm M/s. Shelter Developers have purchased the tenancy rights from Govind B Baber and others CO No.41/Mum/2024 M/s. Shelter Developers through registered agreement in the year 1986 and this right acquired on the land was taken as a capital contribution in the partnership firm for a capital credit of Rs.40,00,000/-. Later on it was found that Govind B Baber and others did not have any tenancy right at all and MRTP Court in the year 1987 had categorically held that they did not have any tenancy right on the said land. Once, Govind B Baber and others, themselves did not had any tenancy right, they could not have transferred the right to the assessee firm. As discussed above in the year 2007, Govind B Baber and others and the landlord M/s. Estate Investments Pvt. Ltd., had filed consent term before the Hon‟ble Bombay High Court and consented that they had no tenancy right on the land and thereby, bypassing and undermining the rights and interests of the assessee firm. Thereafter, assessee had challenged this consent terms before the Hon‟ble Supreme Court on the ground that these consent terms were executed fraudulently and collusion with other parties to deprive them of their rightful claims. In the year 2015, the consent term was filed in the Hon‟ble Supreme Court between Shelter Developers and the landlord M/s. Estate Investments Pvt. Ltd., wherein it was agreed by the parties that the assessee firm will withdraw the „right to sue‟ by withdrawing various suits which has been stated above. Thus, the compensation which was received was on account of giving up the „right to sue‟ against the landlords M/s. Estate Investments Pvt. Ltd., CO No.41/Mum/2024 M/s. Shelter Developers 24. Before us ld. CIT DR had relied upon the judgment of the Hon‟ble Bombay High Court in the case of CIT vs. Vijay Flexi Containers (Bom) reported in (1990) 186 ITR 693.
25. On the other hand ld. Counsel for the assessee submitted that the judgment of the Hon‟ble Bombay High Court in the case of Vijay Flexi Containers related to specific performance of the contract and it was not the case of compensation on account of right to sue. The right to sue is a capital receipt and in support he strongly relied upon the judgment of the Hon‟ble Bombay High Court in the case of Sterling Construction and Investments vs. ACIT (2015) 374 ITR 474.
26. Thus, the issue before us is, whether the compensation received by the assessee as per the consent term filed before the Hon‟ble Supreme Court can be brought to tax as revenue receipt or it is a capital receipt not chargeable to tax. As per Section 6 of Transfer of Property Act, right to sue cannot be transferred. If the compensation or damage is received on account of right to sue, it cannot be held that it is a transfer of capital asset. The Hon‟ble High Court in the case of DCIT vs. Abbasbhoy D Deghghamwala reported in 195 ITR 28 (Bom) wherein, the issue was that taxpayer had entered into contract for acquiring lease rights in property from Government. The vendor committed breach and contract was cancelled. The court directed that specific performance was not to be insisted and taxpayer could claim compensation for breach. The Hon‟ble High Court held that compensation so received was held to be a non chargeable CO No.41/Mum/2024 M/s. Shelter Developers capital receipt. HC held that a right to sue for damages is not an actionable claim; it cannot be assigned. Transfer of such right is illegal and is opposed to public policy. Not being capital asset and not being transferable, receipt of compensation is not liable to capital gains as claimed by tax authority. The relevant observations of the Hon‟ble High Court reads as under:- "right to receive compensation is statutory right, the right that a person acquires on the establishment of a breach of contract is at best a mere right to sue despite the definition of the expression capital asset' in the widest possible terms in s. 2(14), a right to a capital asset must fall within the expression property of any kind' and must not fall within the exceptions. Sec. 6 of the Transfer of Property Act which uses the same expression 'property of any kind in the context of transferability makes an exception in the case of a mere right to sue The decisions there under 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 much 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 asset which in turn has to be 'an interest in property of any kind... the right acquired in lieu thereof was only a mere right to sue, it cannot be accepted that the amount was received as consideration for the transfer of a 'capital asset, Le, right to the execution of a lease deed in terms of the 1945 agreement, during the previous year. In that view of the matter, no part of the amount was taxable as capital gains.”
27. Ergo, mere right to sue is not an actionable claim which cannot be assigned. However, this issue is squarely covered by the judgment of the Hon‟ble Bombay High Court in the case of Sterling Construction Investment vs. ACIT (supra), wherein, CO No.41/Mum/2024 M/s. Shelter Developers the decision of CIT vs. Vijay Flexi Containers has been considered at length by the Hon‟ble High Court. The facts in that case were that the assessee had entered into an oral agreement with 'ECL' to purchase factory premises to give it on lease and earn lease rent. At the time of finalizing the sale agreement, ECL backed out of said oral agreement. The assessee filed suit before Trial Court of 'specific performance' and to grant of damages for breach of said agreement. The Court passed consent decree, under which ECL agreed to pay 5 crores to assessee by way of damages. The relevant observation and finding of the Hon‟ble High Court reads as under:- “23. The question of law was, "whether the right conferred upon the Assessee by the sale agreement of "property of any kind?" It is in that context that the Division Bench arrived at the conclusion that the right acquired is not a mere right to sue. The Assessee acquired under the said agreement for sale the right to have the immovable property conveyed to him. He was, under the law, entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right. What he acquired under the said agreement for sale was, therefore property within the meaning of the IT Act and consequently a capital asset. In the Suit that he filed, a settlement was arrived at, 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 relinquishment of the capital asset. There was, therefore, a transfer of a capital asset within the meaning of the IT Act. It is this view which was placed before this Court in the case of Abbasbhoy A. Dehgamwalla (supra).
CO No.41/Mum/2024 M/s. Shelter Developers 24. However, the Division Bench deciding the issue in the case of Abbasbhoy A. Dehgamwalla (supra) noted that once the Assessee's claim to specific performance of the agreement was rejected, then, the alternative claim for damages for breach of agreement even if worded the receipt of that sum could be taxed as the Assessee's income under the head capital gains. That could not have been taxed as such after the Assessee's right to obtain specific performance was extinguished when the Court refused to grant such a relief.
Thereafter, the alternate argument of the Revenue that the right to receive damages for breach of contract represented the consideration of the original right has been dealt with. The Division Bench concluded that even if the widest possible interpretation accepted, still the amount of damages cannot be taxed as capital gains. That has been held to be a compensation in money for breach of the contract. That, as appearing in this case, is something which will be the substitution for the original relief. It is in lieu of specific performance. There is no right then to claim the property but to be compensated for breach of an agreement to transfer the immovable property and in future. Once such a transfer cannot be obtained as the Decree for specific performance has been refused, then, the receipt of monetary sum cannot be taxed as claimed by the Revenue. This is apparent from a reading of paras 8 and 9 of the Division Bench Judgment. In these circumstances, the reliance placed on another Division Bench Judgment of this Court need not be considered.
In the present Appeal, the Tribunal failed to note that in this case as well the specific performance of the agreement was refused. It is erroneously held that the claim of the Assessee regarding specific performance had never been rejected by this Court. A reading of the order passed by the Division Bench leaves us in no manner of doubt that such a Decree was expressly denied. The Consent Terms may constitute an agreement or contract between the parties, however, a Consent Decree is CO No.41/Mum/2024 M/s. Shelter Developers passed after the agreement is placed before the Court and the Court applies its mind and records a satisfaction that the terms are not contrary to law or public policy. That they can be accepted and based on that a Decree can be passed. Therefore, it is not an agreement between the parties, by which the Suit was disposed of but on that agreement there is a seal of approval or satisfaction of the Court and in terms of Order XXIII Rule 3 of the Civil Procedure Code, 1908. In such circumstances, even if there was any interim order in favour of the Assessee in the present case eventually the Suit ended in the Assessee's claim for specific performance being refused and he being entitled to receive the sum stipulated in this Court's order in lieu of the specific performance. In these circumstances, the Assessee was right in urging that he has no right, title or interest in the immovable property. The Tribunal completely misread and misconstrued this Court's order. In the Consent Terms, which are drawn up and based on which the Suit is decreed by the Court, it does not deal with the rival cases on merits. There is no requirement of the Court then passing an order and Judgment on merits of the claim of the parties. The Court is required to apply its mind and consider as to whether the arrangement reached by the parties can be accepted by it. Once it is accepted and an order or decree is passed in terms thereof, then, it is an order of the Court. Thus, the Court has not undertaken any mechanical exercise or has not casually and lightly accepted the terms and approved the same. It has performed a conscious act and in terms of Order XXIII Rule 3 of the Civil Procedure Code, 1908. This clearly means that the relief was refused. One cannot then pick up a stray sentence or observation from the Judgment of this Court and apply it to the given fact situation. We find that the present case was similar to that of Abbasbhoy A. Dehgamwalla (supra). In this case this Court declared that the Plaintiff/Assessee has no right, title or interest in the immovable property. That specific performance is therefore clearly refused. The other observations of the Division Bench deciding the case of Abbasbhoy A. Dehgamwalla (supra) and Vijay Flexible Containers (supra) need not be considered. We do not CO No.41/Mum/2024 M/s. Shelter Developers think that the Assessee had any right left or remaining in him to claim the immovable property, which is subject matter of the oral agreement. That right got extinguished once the specific performance was refused. Even if the refund of earnest money or compensation is the relief granted, it is apparent on a reading of the Specific Relief Act, 1963 that the Court has power to grant relief of possession, partition or refund of earnest money if any person sues for specific performance of a contract for the transfer of immovable property. That power is to be found in section 22 of the Specific Relief Act, 1963. By section 21, the Court has a power to award compensation in certain cases and by sub-section (1) thereof, it is clarified that in a Suit for specific performance of a contract, the Plaintiff may also claim compensation for its breach, either in addition to, or in substitution of such performance. When such relief is claimed in substitution of performance, then, by virtue of sub-section (2) of section 21, the Court can award the Plaintiff compensation even if it decides the specific performance ought not be granted. However, there are specific provisions which the Plaintiff must comply with. Eventually, the jurisdiction to decree specific performance conferred in a Court is discretionary and it is not bound to grant such relief merely because it is lawful to do so (see section 20 of the Specific Relief Act, 1963).
The agreement for sale of immovable property itself does not create any right, title or interest in the immovable property, which is subject matter of such agreement but creates a right to obtain performance of the agreement by approaching Court of law and seeking a Decree of specific performance in terms of the Specific Relief Act, 1963. It is that limited right which is recognised by law and the difference between contract for sale of an immovable property and sale as emerging from section 54 of the Transfer of property Act, 1882 is thus explained.
Here in the present case also assessee firm individually did not had any right over the disputed land and landlord Estate CO No.41/Mum/2024 M/s. Shelter Developers Investment Pvt. Ltd., always had the rights. The assessee had acquired the tenancy right from certain persons who had fraudulently transferred rights to assessee and since assessee was defrauded by Estate Investment Pvt. Ltd., and Govind B Baber & others, assessee had filed various suits and cases before the various Courts. Thus, there was no right of any specific performance but only „right to sue‟ which was withdrawn in the consent term before the Hon‟ble Supreme Court on account of which compensation was paid. Thus, we hold that compensation received by the assessee giving up of „right to sue‟ is capital receipt and hence, not chargeable to tax. Accordingly, we hold that entire compensation of Rs.35 Crores is not taxable.
Since, we have allowed the cross objection by the assessee therefore, we are not going into various observations and findings of the ld. AO and ld. CIT(A) with regard to allowability of claim of expenses.
In the result, cross objection filed by the assessee is allowed and Revenue‟s appeal is dismissed. Order pronounced on 18th February, 2025.