Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A’’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SMT. BEENA PILLAI
O R D E R Per B.R Baskaran, Accountant Member :
The appeal filed by the Revenue is directed against the order dated 22/3/2016 passed by ld CIT(A)-6, Bengaluru and it relates to the asst. year 2010-11.
2. The effective ground urged by the Revenue reads as under:-
2. On the facts and in circumstances of the case, the CIT(A) erred in holding that the assessee was eligible for exemption u/s 54F, when the transaction actually did not qualify for capital gains, since there was neither ownership of capital asset nor transfer thereof. Hence, the liquidated damages were paid to the assessee only due to failure of the vendor to perform the agreed terms and conditions in the Agreement and not for relinquishment/ extinguishment of rights. The amount was paid for breach/non-performance of contract and therefore, qualified for taxation under the head 'Income from Other Sources'.
3. The facts relating to the above said case are stated in brief:
The assessee entered into an agreement for purchase of agricultural land on 14/3/2005 from a person named Shri Y Narasaraju. The property was agreed to be purchased for a sum of Rs.50 lakhs and the assessee paid a sum of Rs.46,50,000/- as advance to the seller Shri V Narasaraju. Since the seller could not execute the conveyance deed, a cancellation agreement was entered between the parties on 20/4/2009, as per which, a sum of Rs.2,03,50,000/- was agreed to be paid by Shri Narasaraju to the assessee. The above said amount consisted of advance paid by the assessee of Rs.46,50,000/- and liquidated damages of Rs.1,73,50,000/-. The assessee offered above said amount of Rs.1,73,50,000/- as Long term capital gains and also claimed exemption u/s 54F of the Act against above said capital gain. The AO took the view that the liquidated damages received by the assessee was not as a result of “transfer of any capital asset” within the meaning of sec. 2(14) r.w.s 2(47) of the Act. According to the AO, the said payment was made for breach of contract and ‘not towards extinguishment of any rights in a capital asset’. Accordingly, he assessed the same as income under the head Income from other sources.
4. The ld CIT(A), however, agreed with the contentions of the assessee and held that the liquidated damages received by the assessee is capital gain in the hands of the assessee, since the same was received on extinguishment of rights vested with the assessee in the scheduled property. The ld CIT(A) also held it to be long term capital gain and accordingly directed the AO to allow deduction u/s 54F of the Act. The Revenue is aggrieved by the decision so rendered by ld CIT(A).
5. We heard the parties and perused the record. We noticed that the assessee has relied on various case laws before ld CIT(A) and the first appellate decided the issue in favour of the assessee by considering those case laws. For the sake of convenience, we extract below the relevant observations made by the ld CIT(A) on this issue.
“8. A careful reading of Sub-Clause (vi) of Section 2(47) of the I T Act, reveals that any transaction by way of agreement or whatsoever or in any manner whatsoever, which has the effect of transferring or enabling the enjoyment of any immovable property would get the character of transfer. In the instant case, even if the date of completion of sale transaction is considered as date of acquisition of property, the transfer as per Cancellation of Agreement of Sale dated 20/04/2009 would be more than 36 months, therefore income arising out of such agreement would be eligible for taxing under the head long term capital gains.
9. After having considered the factual matrix of the case, the legal matrix is also considered. The appellant during appellate proceedings, in his written submission filed, relied on several case laws and submitted a note on the reason to treat consideration of Rs. 2.5 crores received on transfer/extinguishment/ relinquishment of agreement rights in respect of property as income from capital gains. What needs to be considered is whether the receipt is a capital receipt / asset within the meaning of Section 2(14) and whether relinquishment of agreement rights or termination of agreement will tantamount to transfer of asset within the meaning of Section 2(47). It is pertinent to take note of the provisions of Section 2(14) for the definition of capital asset. Section 2(14) envisages that capital asset means property of any kind held by appellant. Section 2(47) envisages transfer in relation to a capital asset which includes ; (i) the sale, exchange or relinquishment of the asset: or (ii) extinguishment of any rights therein.... The case laws, which are relied upon by the appellant are discussed herewith and analysed to find out whether these are applicable in the appellant's case.
1 High Court of Madhya Pradesh, Indore Bench - CIT Vs. Smt.Laxmidevi Ratani, clearly observed that - 'instead, it was held that the said amount was a capital receipt exigible to capital gain tax as it involved transfer of property within the meaning of section 2(47)'.
CIT Vs. Suresh Chandra Jam (AP) - definition of the expression 'capital asset' occurring in section 2(14) & 2(47) have reference only to the assessment of capital gains.
K.R. Srinath Vs. ACIT (2004) (141 Taxman 268)(MAD)
CIT Vs. Vijay Flexible Containers (1980) (186 ITR 693), observed as under :-
……….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 for 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 asset. 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."
CIT Vs. Mrs. Grace Collis (2001) (248 ITR 323) observed that:
"We have given careful thought to the definition of "transfer" in section 2(47) and to the decision of this court in Vania Silk Mills Pvt. Ltd.'s case (1991) 191 ITR 647. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression "extinguishment of any rights therein" to such extinguishment on account of transfers or to 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. To so read the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer."
6. CIT Vs. Tata Services Ltd. (1980) (122 ITR 594), observed as under: "The court noted the definition of capital asset and transfer under the Income-tax Act. It noted that a contract for the sale of land was capable of specific performance and was assignable and in this behalf, relied upon the old Madras High Court's judgment reported in Venkateshwara Aiyyar V. Kallor Illath Raman Namubdhri AIR 1917 Mad. 358. It concluded that a right to obtain conveyance of immovable property was property as contemplated by section 2(14) of the Income- tax Act. It held that the amount of Rs. 5,00,000/- had been received by an assessee as consideration for assigning its rights under the agreement which fell within the wide definition of "capital asset" in the Income-tax Act. It also held that the earnest money paid by assessee to ".." was the consideration for which the property under the agreement had been acquired."
7. CIT Vs. Sterling Investment Corpn. Ltd. (1980) (123 ITR 441), observed as under :-
"It considered the definition of "capital asset" under the Income-tax Act and held that the contractual right of the purchaser to obtain title to immovable property for a price, which right was assignable, had to be considered to be "property" and. therefore a "capital asset". In this behalf, reference was made to the judgment in the case of Tata Services Ltd. (supra). The court rejected the argument that if the right to purchase was given up and the vendor was relieved of his obligation, there would be no capital gain. The court approved of what had been said in the case of CIT V.Rasiklal Maneklal (HUF) (1974) 95 ITR 656 (Bom.), in regard to the essential features of a transaction of relinquishment, namely, that the property in which the interest was relinquished continued to exist; it continued to be owned by some person or persons even after the transaction of relinquishment and the interest of the person relinquishing his interest in the property was given up or abandoned or surrendered."
9.1. In K.R. Srinath V Asstt CIT 2004 141 Taxman 268 (Mad) it was held that 'when an agreement for purchase of property is later cancelled, there is relinquishment of right. Where an assessee initially paid an advance under an agreement for purchase of a property, reserving right to specific performance of the agreement, and later received consideration under another agreement under which the earlier agreement was cancelled and the vendor was allowed to sell the property to any person at any price, there was a relinquishment of right by the assessee which amounts to 'transfer', and the resulting gain was assessable as capital gains. Since the assessee had paid a sum for acquiring the right to acquire the sale deed, it could not be said that there was no cost of acquisition'.
9.2 The Hon'ble Madras High Court in the case cited supra also dealt with the issue as to 'whether by termination of earlier agreement and by allowing vendor to sell property to any person at any price, assessee had given up or relinquished his right to specific performance - Held yes - Whether since definition of 'transfer' in section 2(47) is wide enough to include relinquishment of an asset, there was a transfer of capital asset within meaning of section 2(47) - Held yes. The assessee had a right to insist on specific performance, gave up the right readily and received a sum in question. By termination of the earlier agreement and y allowing the vendor to sell the said property to any person at any price, the assessee had given up or relinquished his right of specific performance and as consideration of relinquishing that right, the asssessee was paid the sum in question. The right, title and interest acquired under the agree of sale clearly feel within the definition of 'capita asset'. Instead of assigning the right to third party/parties, the assessee relinquished those of an asset.[Para 12]' 'Para 12. As seen already, the assessee had a right to insist on specific performance, gave up the right readily and received a sum referred to supra. There can be no doubt that by termination of the earlier agreement and by allowing the vendor to sell the said property to any person at any price, the assessee had given up or relinquished his right of specific performance and as consideration for relinquishing that right, the assessee was paid a sum of Rs. 6,00,0001-. The right, title and interest acquired under the agreement of sale clearly fall within the definition of 'capital asset' [section 2(14)]. Instead of assigning the right to third party/ parties, the assessee relinquished those rights. We have already seen that the definition of 'transfer' in section 2(4 7) is wide enough to include relinquishment of an asset.' 'Para 13. With regard to the contention that there was no cost of acquisition incurred by the assessee for obtaining the rights under the agreement dated April 3, 1986, and consequently there could be no capital gains assessable, it is to be noted that at the time of agreement of sale the assessee paid Rs. 40,000. That payment was made pursuant to the agreement. Only by paying the said amount the assessee acquired the right to get the sale deed executed in his favour.'
10. Keeping in view the factual noting as well the legal noting, in the instant case, it is held that the rights acquired on account of 'Agreement for Sale' entered into by the appellant amounting to Rs. 50 lakh is to be considered as the cost acquisition of the asset I property which is in the nature of capital asset within the meaning of section 2(14) of the l.T.Act. And as per the 'Agreement for Sale', the date of completion of the sale shall be 31/03/2006 subject to the Vendor i.e., Sri Y. Narsaraju effecting conversion of the property for non-agricultural use.
11. Having considered the acquisition of right as per the 'Agreement for Sale' as extinguishment of such right or whether it is breach of contract. After perusing the Cancellation of Agreement of Sale' and also the case laws relied upon by the appellant, it is held that consideration received for cancellation of sale in the form of liquidated damages are nothing but consideration received towards transfer of rights or extinguishment / relinquishment of rights and not for breach of contract. The damages to be received for breach of contract has been specifically mentioned in the agreement for sale in separate clause, whereas in the main clause, the consideration in the form of liquidated damages were specifically mentioned. Therefore the gains which arose on such transfer I relinquishment/ extinguishment of rights is to be taxed under the head capital gains.
12. The next issue that will arise after considering the transaction as transfer/relinquishment/ extinguishment of right as capital asset transferred within the meaning of section 2(47) of the Act, is whether transfer took place within 36 months or more in order to ascertain the gains as Short Term or Long Term. The date of Agreement for Sale is 14/03/2005 and the date of Cancellation of Agreement of Sale is 20.04.2009. However in the Agreement for Sale, it was specifically mentioned that sale transaction shall be completed by 31/03/2006. Even if this date of completion of sale transaction is taken, the period of holding the rights are more than 36 months. Therefore, the gains which arose on transfer/ relinquishment I extinguishment of the rights vested with the appellant in the scheduled property are treated as Long Term Capital Gains. Hence, the ground of appeal is hereby allow.”
Before us the ld DR placed his reliance on the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Balbir Singh Maini (2017) 398 ITR 537. The ld DR submitted that in the case before Hon’ble Supreme Court also, a joint development agreement was entered into and he same was cancelled later. The Supreme Court held that the compensation received on the said cancellation of the Joint Development Agreement would not be profit or gain, which arises from transfer of capital asset which should be brought to tax u/s 45 r.w.s 48 of the Act.
On the contrary the ld AR placed his reliance on the decision rendered by Hon’ble High Court of Karnataka in the case of CIT Vs. H Anil Kumar (2011) 242 CTR (Kar) 537. The ld AR submitted that the facts in the above said case is identical with the facts prevailing in the present case.
The ld AR submitted that the assessee herein, by entering into agreement of sale on 4/3/2005 has acquired right over the property, i.e., the assessee got the right to enforce specific performance. He submitted that the said right constitutes “capital asset” within the meaning of sec. 2(14) of the Act. The ld AR submitted that, as per the condition of agreement of sale initially entered, the seller has to convert the status of agricultural land into non agriculture. However the seller could not convert the status of land into non agriculture as originally agreed. Hence a cancellation agreement was entered on 20/4/2009, by which the original sale agreement was cancelled and assessee received compensation in the form of liquidated damages. The ld AR submitted that the said compensation was received towards extinguishment of assessee’s right for enforcement for specific performance. Hence the same shall constitute capital gains in the hands of the assessee, as per the decision rendered by Hon’ble jurisdictional high court in the case of H Anil Kumar (Supra).
The ld AR further submitted that the decision rendered in the case of Balbir Singh Maini (Supra) is based on different set of facts which is not applicable to the issue under consideration. In the case before Hon’ble Supreme Court the parties entered into joint development agreement but the same was not registered as per the requirement of Amendment Act of 2001, even though the Joint development agreement fell within the sec. 53A of the Transfer of Property Act prior to its amendment in 2001. The Hon’ble Supreme Court held that since the joint development agreement was not registered, the same has as no efficacy in the eyes of law and hence no transfer can be said to have taken place under the aforesaid documents.
We heard the rival contentions and perused the record. There is no dispute with regard to the fact that the assessee had entered into an “agreement of sale” for purchase of an agricultural land located in Venkatala Village, Yelahanka Hobli, Bengaluru North Tq. A perusal of the said agreement would show that as per clause 4.6 of the agreement, the vendor shall effect conversion of scheduled property from ‘agricultural” to “non-agricultural use”. As per clause-6, either of the party committing breach shall be liable to pay cost, expenses, damages, losses incurred by the aggrieved party.
In the case of H Anil Kumar (Supra), the assessee entered into an agreement for purchase an immovable property and paid Rs.1,00,000/-as advance. Subsequently the assessee filed a suit for specific performance of the agreement for sale. Thereafter, the assessee withdrew the suit for specific performance in lieu of payment of Rs.7,50,000/-. The Hon'ble jurisdictional Karnataka High Court held that right of specific performance of the contract of sale constitutes Capital asset and compensation received for giving up the above said right constitutes capital gains.
In our view, the facts of the present case are identical with the facts available in the case of H Anil Kumar (supra). The assessee herein has given advance for purchase of land in the year 2005 and accordingly acquired right for specific performance of agreement of sale. The said right constitutes “capital asset” within the meaning of sec.2(14) of the Act. Subsequently, the assessee has received money for giving up the said right. The same shall constitute capital gains in the hands of the assessee as per the decision rendered by the jurisdictional High Court in the case of H Anil Kumar (supra).
We have gone through the decision rendered by Hon'ble Supreme Court in the case of Balbir Singh Maini (supra). The facts prevailing in that case are distinguishable. First of all, it was a case of joint development agreement and the provisions of sec.53A of the Transfer of Property Act were applicable. Since the Joint Development Agreement was not registered, the Hon'ble Supreme Court held that there is no agreement in the eyes of law. Hence it was held that the compensation cannot be assessed as Capital gains. In the instant case, it is not the case of assessing officer that the assessee did not get the “right of specific performance of agreement of sale” upon entering the sale agreement between the assessee and the seller. In the absence of such a legally valid finding, in our view, the revenue cannot place reliance on the decision rendered by Hon'ble Supreme Court in the case of Balbir Singh Maini (supra).
In view of the foregoing discussions, we are of the view that there is no infirmity in the order passed by Ld CIT(A) and accordingly we uphold the same.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the Open Court on 29th January, 2019.