ISHVAKOO GRAND PLAZA,NEW DELHI vs. DCIT, CIRCLE- 54(1), NEW DELHI

The appeal has been filed by the Assessee against order dated 12.06.2017 passed in appeal no. 18/10010/2016-17 for assessment year 2015- 16, by the Commissioner of Income Tax (Appeals)-18, New Delhi (hereinafter referred to as the First Appellate Authority or in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 30.3.2016 u/s 143(3) of I.T. Act, 1961 (hereinafter referred to as ‘the Act’) passed by DCIT, Central Circle-54(1), New Delhi (hereinafter referred as Ld. Assessing officer or in short ‘Ld. AO’).

Ishvakoo Grand Plaza 2. The assessee is a firm having income from Business or Profession. The assessee filed return of income on 30.09.2013 declaring an income of Rs.46,89,452/-. The case was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) of the Act dated 03.09.2014 was issued and duly served upon the assessee. Subsequently, notice u/s 142(1) along with questionnaire was issued on 31.08.2015 and served upon the assessee.

2.1 During the year under consideration, the assessee has received Rs.20,40,00,000/- in a settlement in the court, which the assessee has claimed as non - taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio.

2.2 The assessee vide letter dated 09.10.2015, filed the following sequence of events which led to the receipt of Rs. 20,40,00,000/-:

“SEQUENCE OF EVENTS (i) 19.04.2004: The assessee firm (LESSEE), took on lease the entire property comprising of Easement Floor, Ground Floor, First Floor, Second Floor, Third Floor and Terrace, with parking area, on Plot bearing No. 73 Ring Road, Lajpat Nagar, New Delhi, (LEASED PROPERTY), (approx area 22,000 sqft), from one Sh Parvinder Singh Chopra (LESSOR), vide lease deed executed at New Delhi on the 19th day of April, 2004, on a monthly lease amount of Rs.9,00,000/- effective from 01.06.2004. Copy of the lease deed is filed at Pages …to…. of these submissions. The LEASE DEED was registered in the Office of the Sub Registrar V New Delhi, as document No. 4581, in Book No 1 Volume No 3963 on Pages 122 to 134. The LESSEE took on lease The LEASED Property to carry on its business. The lease was renewable every 3 years, with 15% increase in the rent amount at the time of each renewal. The LESSEE paid The LESSOR, Rs. 45,00,000 by way of security deposit, refundable at the time of vacation of the Leased premises, AND Rs. 45,00,000/- as advance rent for 5 months The LESSEE, with the consent of The LESSOR, could make reasonable alterations / changes in the LEASED

Ishvakoo Grand Plaza PROPERTY to meet its business requirement. Clause 13 of the Lease deed, reads as under: That in case the "LESSOR" intends to sell the premises, first priority of purchase of the premises shall be given to "LESSEE" and if "LESSEE" does not avail the offer and in the event of transfer of demised premises by "LESSOR" to a third party, the "LESSOR" shall be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements present and such purchaser shall be bound by all the terms and conditions concerning this arrangement including the return of security amount paid by The "LESSEE" after deducting arrears and dues or otherwise in same manner as the "LESSOR" was and as if no transfer had taken place. In case the purchaser further sells to any other purchaser or purchasers, the present arrangements will also be binding on them. Relations between The LESSOR and The LESSEE in due course began to detoriate. The LESSOR alleged that the LESSEE delayed in the payments of the rent amounts, and made structural changes in the premises against what was provided in the Lease Deed. The LESSEE on the other hand alleged that it was unable to effectively carry on business in the LEASED PREMISES because of interference by The MCD Authorities etc. (ii) 19.10.2005 : The LESSOR committed breach of clause 13 of the LEASE DEED. Without making the first offer to the LESSEE, as was' provided in clause 13 of the LEASE DEED, the LESSOR sold the entire property to one M/s KANDHARI INFRASTRUCTURES PVT LTD., 177-F, Industrial Area Phase I, Chandigarh, for a consideration of Rs Six crores. The sale deed was registered with The Sub Registrar V, New Delhi, as document No. 15980 in Book No 1 Volume No. 5492 at pages 1 to 192. The LESSOR did not. (iii) 26.09.2006 : The assessee firm (LESSEE) then instituted suit No. CS(OS) No. 1863 of 2006, before The High Court of Delhi, at New Delhi, "For Preemption and/or for specific performance Of Agreement to sell and for permanent Injunction". A copy of the suit filed is listed at Pages 40 to 47 of these submissions. Mr. Parvinder Singh Chopra (LESSOR) and M/s Kandhari Infrastructures Pvt Ltd were made the two Defendants. M/s Kandhari Infrastructures Pvt Ltd, as Owner of The LEASED PROPERTY, also filed a Civil Suit No CS (OS) No 101 of 2007 before The Delhi High Court, against the assessee firm, seeking decree of ejectment / possession of the property as also arrears of rent, damages and mesne profits. (iv) 06.08.2007:The Hon'ble Delhi High Court, passed an interim order in CS (OS) No101 of 2007,And required the assessee firm to hand over possession of The LEASED PROPERTY to M/s Kandhari

Ishvakoo Grand Plaza Infrastructures Pvt Ltd. The Hon'ble Court also appointed a Local Commissioner. (v) 25.04.2012 : The Hon'ble Court referred both the above suits to Meditation. Sh K VENKATRAMAN, Advocate, was appointed as the Mediator. Several meetings were held between the parties to the suit and The Mediator on 30.04.2012, 10.05.2012, 23.05.2012 and 29.05.2012. (vi) 29.05.2012 : A settlement was reached between the assessee firm and M/s Kandhari Infrastructures Pvt Ltd. Copy of the settlement agreement is filed at Pages H & to £ & of these written submissions. The parties, which had been litigating since 2006, wished to put an end to litigation and have peace of mind. They therefore resolved to compromise and amicably settle their disputes and compromise. M/s Kandhari Infrastructures Pvt Ltd., offered to pay Rs. 20,40,00,000 (Rs. Twenty crore Forty Lakhs) to the assessee firm, which the assessee firm accepted. The parties agreed not to pursue their right to sue against each other. M/s Kandhari Infrastructures Pvt Ltd. paid Rs. 20,40,00,000 (Rs. Twenty crore Forty Lakhs) to the assessee firm. It is this amount that the assessee firm claims is a Non Taxable capital receipt.” 2.3 Thus the Ld. AO vide notice u/s 142(1) of the Act dated 26.02.2016, enquired from assess that the right of Preemption/right of first priority of purchase of the premises falls under the definition of “Capital Asset” u/s 2(14) of the Act and the relinquishment of the said right falls under the definition of "Transfer” as per the Act. Therefore, why the amount of Rs. 20,40,00,000/- received from M/s. Kandhari Infrastructures Pvt. Ltd. should not be treated as Long Term Capital Gain arising from such transfer.

2.4 To this vide letter dated 26.02.2016, received on 29.02.2016, the assessee filed the following submissions :

"(i) The Assessing Officer has erroneously observed that "The right of Preemptive/right of first priority of purchase of the premises "73, Ring Road, Lajpat Nagar, New Delhi" falls under the definition of "Capital Asset" u/s 2(14) of The Income Tax Act, 1961". It does not fall so. (ii) The Assessing Officer has further erroneously observed that Ishvakoo Grand Plaza the assessee had relinquished any right. The assessee having not relinquished any right, the other observations of the Assessing Officer that " The relinquishment of the said right falls under the definition of "Transfer" as per the provisions of Section 2(47) of The Income Tax Act, 1961" becomes meaningless and inappropriate. (iii) It would be incorrect and against law to hold that the amount of Rs. 20,40,00,000/- received by the assessee from M/s Kandhari Infrastructures Pvt Ltd. should be treated as Long Term Capital Gain arising from such transfer, chargeable to tax in the hands of the assessee firm." The assessee further submitted that : “Kind attn. is drawn to the following salient and important issues :

(i) The premises in question viz "73, Ring Road, Lajpat Nagar, New Delhi" stood transferred on 13.10.2015, when the LESSOR Sh. Parvinder Singh sold the property under a registered deed to M/s Khandhari Infrastructures (P)Ltd. (ii) On 13.10.2015, Sh. Parvinder Singh (LESSOR) ceased to be the owner of the premises M/s. Khandhari infrastructures(P) Ltd. became the new owner of the premises, and continues to remain so as on date of the submissions. The assessee firm was neither the owner nor the Transferor or the Transferee of the premises. The assessee firm was not a party and was not associated in any manner with the transfer of the property. The assessee firm was not also a beneficiary to the consideration exchanged on the transfer of the property between the BUYER and the SELLER. Rs. 20,40,00,000 received by the assessee firm is not therefore against the transfer of the premises. The provisions of section 2(14), 2(47) and other related / applicable provisions of The Income Tax Act, 1961, governing the taxability of Capital Gains tax on transfer of an asset, being an immovable .asset, are not applicable and are not attracted. (iii) The Hon'ble Delhi High Court, vide its interim order passed On 06.08.2009, required the assessee firm to vacate the premises in question and hand over vacant possession of the premises to M/s Khandhari Infrastructures (P) Ltd the new and present owner of the premises in question. The tenancy right and Ishvakoo Grand Plaza possession of the premises in question with the assessee stood extinguished and ceased to exist from 06.08.2009. Rs. 20,40,00,000 received by the assessee firm is not for surrender of any tenancy rights. This sum is also not received against handing over of vacant possession of an immovable asset. The provisions of section 2(14), 2(47) and other related / applicable provisions of The Income Tax Act, 1961, governing the taxability of Capital Gains tax for surrender of any tenancy rights or for giving vacant possession of an immovable asset are not applicable and are not attracted."

2.5 Thereafter taking into consideration of the claim of the assessee the Ld. AO observed that;

“To determine the taxability of the receipt of Rs.20,40,00,000/-, the following questions need to be Considered : I. Whether there was any ‘capital asset’ as per the definition of ‘capital asset’ u/s 2(14) of the Income Tax Act, 1961? II. Whether there was a ‘transfer’ as per the definition of ‘transfer’ u/s 2(47) of the Income Tax Act, 1961 ? III. Whether the receipt of Rs. 20,40,00,000/- is taxable? IV. Computation of Capital Gain. 2.6 So in order to determine the existence of a capital asset, Ld. AO having taken into consideration definition of capital asset in section 2(14) of the Act concluded that the term property has to be understood in the widest amplitude and it includes movable assets / immovable assets, tangible / intangible asset, incorporeal rights and chose in action. He concluded that ‘rights’ are included in the term property.

2.7 Referring to definition of transfer u/s 2(47) of the Act Ld. AO went on to observe that use of words ‘relinquishment’ of rights in section 2(47) of the Act include right of pre-emption or first right of purchase. He observed that this is an additional right upon the assessee and is distinct and separate from the assessee’s tenancy rights. Thereafter, considering the clauses of lease deal in favour of the assessee and the litigation initiated by the assessee in the form of suit for specific

Ishvakoo Grand Plaza performance/ for pre-emption, the Ld. AO observed that assessee has given up all its right by virtue of settlement agreement. Ld. AO observed that, the withdrawal of the suit which was filed for the enforcement of the right of pre-emption by the assessee as part of settlement agreement shows that when the assessee gave up all its rights as part of the said agreement, it also relinquished its “right of preemption” which was the premises for the suit. Ld. AO also considered the issues framed by Hon’ble Delhi High Court in the suit instituted by the assessee to conclude that since it was an enforceable right it was a capital asset.

2.8 Thereafter based on the sequence of events, litigation and settlement, the Ld. AO considered it as relinquishment of asset for the purpose of clause (i) of section 2(47) of the Act. Ld. AO observed that if a person either gives up, abandons and surrenders interest of that person in a property but the property in which interest is relinquished continues to exist and continues to be owned by some person or persons after the transaction of relinquishment, then the case of assessee would be of relinquishment in terms of settlement agreement.

2.9 Thereafter, Ld. AO calculated the receipt of Rs. 20,40,00,000/- as taxable in the hands of assessee regardless of the fact that amount was paid by the subsequent purchaser. The ld. AO considered the date of lease deed 19.04.2004 to be the date of acquisition of capital asset, as there was no cost of acquisition of the right of preemption the cost of acquisition of the capital asset was taken as Nil. The date of transfer was considered to be 31.05.2012 as per the settlement agreement and thus the sale consideration was arrived at Rs. 20,40,00,000/- as received under the settlement agreement.

2.10 Ld. AO has distinguished the law cited by the assessee primarily on the basis that the judgments relied were in regard to damages being received in a civil suit while in the case in hand there was a suit for specific performance on the basis of right of preemption and not damages for breach of contract.

Ishvakoo Grand Plaza 3. The ld. CIT(A) has sustained the addition with following relevant findings in para 5.5.31:-

“5.5.31 On the basis of above discussion made in the factual premises of our case and on the anvil of law enunciated, it is quite apparent that the assessee has received Rs. 20.4 crores for relinquishing at least two rights, one, the right of pre-emptive purchase and the right to perpetual lease. The contentions of the appellant that he has lost the tenancy right upon surrender of possession to M/s. Khandhari is not correct, as discussed in detail above. The mere vacation of the property when the appellant agreed to do so under Court direction is only to facilitate the adjuciation before the Hon’ble HC, the question of its valuable rights still remains to be adjudicated and subsists as on the date of settlement. This only got extinguished when the consideration of Rs. 20.4 cr. was received by the appellant. Even otherwise, when the sale consideration of the property was Rs. 6 crores, it would be novice to accept a contention that it has been paid Rs. 20 crore voluntarily and not in connection for extinguishment of pre- emptive right to purchase or surrender of tenancy right. The contention that such a huge and disproportionate amount was paid just like that voluntarily is not acceptable. This flies in the face of common sense. The question then remains is what was the compensation for. The AR has preferred to prevaricate the issue. (See his submission dt 9/6/2017 discussed at para 5.5.33 infra) Law of evidence mandate that when the best evidence is not produced, the issue has to be decided against the appellant. (b) Be that as it may, the contention of the AO that such a high compensation was for pre-emptive right to purchase also is not plausible. It could be for a host of factors and the entirety of facts are close to the chest of the appellant which is kept under cover. The fact remains that the right of lease in perpetuity was relinquished and the consideration also attributable to it. Furhter, the transfer of tenancy right is exigible to capital gain tax, without doubt. (c) In any case, the appellant has not submitted the basis of consideration of Rs. 20.4 cr. received by it. The onus to prove that it is capital receipt not liable to be taxed has also not been discharged. Even otherwise, such contentions are bound to fail in view of the discussion made above.

Ishvakoo Grand Plaza (d) The upshot of the entire discussion is that the appellant has transferred valuable rights (capital asset) of pre-emptive right to purchase and also right to lease in perpetuity. It is liable to be exigible to capital gain for the entire amount of Rs. 20.40 cr. The same is held. Penalty proceedings u/s. 271(1)(c) is to be initiated for furnishing of inaccurate particulars leading to concealment of taxable income.”

“1. That the learned CIT (A) has erred both on facts and in law in confirming the order of assessment and upholding the addition made of Rs. 20,40,00,000/-.

4. That on the facts and circumstances of the case the CIT (A) has further completely overlooked that there being no transfer made by the assessee in the instant year and even if there was for the sake of an argument any transfer on breach of the condition by the lessor then the same related to the FY 2005-06 and as such there being no income accrued to the assessee in the instant year, any addition made to the total income was wholly unwarranted.

6. That the learned C1T (A) has further erred in initiating proceedings u/s 271(l)(c) of the Act despite the fact such Ishvakoo Grand Plaza proceedings had been initiated by the AO and were pending for adjudication before him. 7. That the learned CIT (A) has failed to appreciate that there could have been no double jeopardy and as such, the initiation of proceedings under section 271(l)(c) of the Act was wholly unwarranted and untenable in law.” 5. Heard and perused the record.

5.1 On behalf of the assessee, primarily the contention of Ld. Sr. Counsel was that Ld. Tax Authorities below have fallen in error in not understanding the nature of right of pre-emption. It was submitted that this right is a mere right to sue and cannot be considered to be transferable asset. Ld. Sr. Counsel took the Bench through sequence of events and documents reflecting various litigations and transactions of settlement to submit that Ld. Tax Authorities below have fallen in error in considering the amount received under settlement to be capital gains. He referred to the judgment of Hon’ble Delhi High Court in CIT vs. J. Dalhu 1985 20 taxman 86 Delhi to submit that mere right to sue may or may not be property but it certainly cannot be ‘transferred’ within the meaning of section 45 r.w.s. 2(47) of the Act. He also relied following judgments to submit that the pre-emption being ‘Right in Personam’ could not have been transferred:- • CIT vs. J. Dalmia: [1984] 149 ITR 215 (Delhi)Baroda • Cement & Chemicals Ltd. vs. CIT : [1986] 158 ITR 636 (Gujrat) • CIT vs. Abbasbhoy A. Dehgamwalla: [1992] 195 ITR 28 (Bombay) • Bharat Forge Co. Ltd. vs. CIT : [1994] 205 ITR 339 (Bombay) • ITO vs. Ganeshsagar Infrastructure (P.) Ltd.: [2022] 135 taxmann.com • Bhojison Infrastructure (P.) Ltd. vs. ITO ; [2018] 173 ITD 436 • Satyam Food Specialities (P.) Ltd. vs. DCIT : [2015] 68 SOT 449 (Jaipur- Trib) • Chheda Housing Development Corpa vs. ACIT : [2019] 179 ITD 154 (Mumbai) • Dhruv N. Shah vs. DCIT : [2004] 82 TTJ 369 (Mumbai) ™ • ACIT vs. Jackie Shroff: [2018] 172 ITD 425 (Mumbai)”

Ishvakoo Grand Plaza 5.2 Ld. Sr. Counsel relied judgment of Hon’ble Supreme Court of India in Bishan Singh & Others vs. Khazan Singh & Another 1958 AIR 838 and of Hon’ble Allahabad High Court in Jhagru Rai vs. Basdeo Rai and Anr. 1924 Allahabad 400, to stress that the contract for a right of pre-emption or re-purchase does not give rise to any interest in the immovable property.

(b) Be that as it may, the contention of the AO that such a high compensation was for pre-emptive right to purchase also is not plausible. It could be for a host of factors and the entirety of facts are close to the chest of the appellant which is kept under cover. The fact remains that the right of lease in perpetuity was relinquished and the consideration also attributable to it. Further, the transfer of tenancy, right is exigible to capital gain tax, without doubt. In any case, the appellant has not submitted the basis of (c) consideration of Rs. 20.4 cr. Received by it. The onus to prove that it is capital receipt not liable to be taxed has also not been discharged. Even otherwise, such contentions are bound to fail in view of the discussion made above. The upshot of the entire discussion is that the appellant (d) has transferred valuable rights (capital asset) of pre-emptive right to purchase and also right to lease in perpetuity. It is liable to be exigible to capital gain for the entire amount of Rs. 20.40 cr. The same is held penalty proceedings u/s 271(1)(c) is to be initiated for furnishing of inaccurate particulars leading to concealment of taxable income. 6.1 He has submitted that the Ld. Counsel of the appellant has taken a Ishvakoo Grand Plaza contrary position to the earlier position taken by the appellant, that the appellant did not had a pre-emptive right rather the appellant had the right to sue for breach of clause 13 of the lease deed dated 19.04.2004. Ld. DR has distinguished the judgements relied by Ld. Sr. Counsel by submitting that the question for examination, before the Hon’ble Supreme Court in the case of Bishan Singh and Ors. Vs. Khazan Singh and Ors.[Civil Appeal no. 255 of 1954] dated 20.05.1958 (supra) was to decide that out of many claimant of the Right to pre- emption on certain property under Punjab Pre-emption Act, who has the superior right or all have equal right. The other question before the Hon’ble Court was to decide whether this right is modified or otherwise enlarged by the provision of the Act. So, the subject matter before the Hon’ble Apex Court was not to examine the nature and definition of right of pre-emption to property.

6.2 Further, referring to the Judgment of Hon’ble Allahabad High Court dated 28.01.1924 in the case of Jhagru Rai vs. Basdeo Rai and Ors.[AIR 1924 ALL400] the Ld. DR submitted that is also not an authoritative law on the issue of right of pre-emption to property.

6.3 Ld. DR has relied the judgement of the Hon’ble Supreme Court in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others 1954 AIR 417 to submit that same is an authoritative law on this subject where the Hon’ble Apex Court has scrutinized the nature and character of the right of pre-emptive purchase in this case. He submitted that while adjudicating the issue on this subject, the Hon’ble Apex Court in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others has stated as under: “That the law of pre-emption imposes a limitation or disability upon the ownership of a property to the extent that it restricts the owner’s unfettered right of sale and compels him to sell the property to his co-sharer or neighbor as the case may be. The person who is a co-sharer in the land or owns land in the vicinity consequently gets an advantage or benefit corresponding to the burden with which the owner of the property sold. The crux of the Ishvakoo Grand Plaza whole thing is that the benefits as well as the burden of the right of pre-emption run with the land and can be enforced by or against the owner of the land for the time being although the right of pre-emptor does not amount to an interest in the land itself. It may be stated here that if the right of preemption had been only a personal right of sale in a certain manner, a bona-fide purchaser without notice would certainly obtain an absolute title to the property, unhampered by any right of the pre-emptor and in such circumstances there could be no justification for enforcing the right of pre-emption against the purchaser on grounds of justice, equity and good conscience on which ground alone the right could not be enforced at the present day. In our opinion the law of pre-emption creates right which attaches to the property and on that footing only it can be enforced against the purchaser.” 6.4 Ld. DR contended that the Hon’ble Supreme Court in this case has conclusively held that the benefit as well as burden of the right of pre-emption runs with the land and can be enforced by or against the owner of the land for the time being which is contrary to the argument of the Ld. Counsel that the right for pre-emption is right in personam i.e. right against the person.

6.5 Referring to Hon’ble Patna High Court judgement in the case of Sheo Kumar Dubey vs. Smt. Sudama Devi and Anr. AIR 1962 Pat 125 he submitted that in this judgement both the judgment of Hon’ble Supreme Court i.e. in the case of Bishan Singh and Ors. Vs. Khazan Singh and Ors. and in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others has been discussed. Ld. DR pointed out that the Hon’ble High Court in para 11 of the judgment has stated as under:

“The decision of the Privy Council in Sheo-baran Singh v. Kulsumunnissa, AIR 1927 PC 113, though not directly in point, lends considerable support to the view that the customary right of pre-emption is a right annexed to the land and not a mere personal right. The entire controversy now has been set at rest by their Lordships of the Supreme Court in AIR 1954 SC 417, wherein the view taken by the Allahabad High Court that it was not a mere personal right but an incident annexed to the land has been accepted as correct. In order to appreciate the precise nature of the law of pre-emption, It will be necessary to reproduce

Ishvakoo Grand Plaza here the observations of their Lordships of the Supreme Court. They have observed as follows: "In our opinion it would not be correct to say that the right of pre- emption under Muhammaden law is a personal right on the part of the pre-emptor to get a re-transfer of the property from the vendee who has already become owner of the same …… It is true that the right becomes enforceable only when there is a sale but the right exists antecedently to the sale, the foundation of the right being the avoidance of the inconvenience and disturbances which would arise from the introduction of a stranger into the land. We agree with Mr. Justice Mahmood that the sale is a condition precedent not to the existence of the right but to its enforceability The correct legal position seems to be that the law of pre-emption imposes a limitation or disability upon the ownership of a property to the extent that it restricts the owner's unfettered right of sale and compels him to sell the property to his co-sharer or neighbour as the case may be. The person who is a co-sharer in the land or owns lands in the vicinity consequently gets an advantage or benefit corresponding to the burden with which the owner of the property is saddled, even though it does not amount to an actual interest in the property sold. The crux of the whole thing is that the benefit as well as the burden of the right of pre-emption run with the land and can be enforced by or against the owner of the land for the time being although the right of the pre-emptor does not amount to an interest in the land itself. It may be stated here that if the right of pre-emption had been only a personal right enforceable against the vendee and there was no infirmity in the title of of the owner restricting his right of sale in a certain manner, a 'bona fide' purchaser without notice would certainly obtain an absolute title to the property, unhampered by any right of the pre-emptor and in such circumstances there could be no justification for enforcing the right of pre-emption against the purchaser on grounds of justice, equity and good conscience on which grounds alone the right could be enforced at the present day. In our opinion the law of pre-emption creates a right which attaches to the property and on that footing only it can be enforced against the purchaser."

6.6 Ld DR submitted that further, there are numerous judgments of Hon’ble Supreme Court and various High Courts wherein it has been held that the transfer

Ishvakoo Grand Plaza of lease hold rights and lease in perpetuity constitute a transfer and liable to tax on capital gains. Some of the Judgments have been examined by Ld.CIT(A) in para 5.26 of his order on page 75.

“The Privy Council has said in more cases than one, that the law of pre-emption was introduced in this country by the Muhammadans. There is no indication of any such conception in the Hindu Law and the subject has not been noticed or discussed either in the writings of the Smriti writers or in those of later commentators. Sir William Macnaghten in his Principles and Precedents of Mahomedan Law has referred to a passage in the Makanirvana Tantra which, according to the learned author, implies that pre-emption was recognised as a legal provision according to the notions of the Hindus. But the treatise itself is one on mythology, not on law and is admittedly a recent production. No value can be attached to a stray passage of this character the authenticity of which is not beyond doubt. During the period of the Mughal emperors the law of pre- emption was administered as a rule of common law of the land in those parts of the country which came under the domination of the Muhammadan rulers, and it was applied alike to Muhammadans and Zimmees (within which Christians and Hindus were included), no distinction being made in this respect between persons of different races and creeds. In course of time the Hindus came to adopt pre-emption as a custom for reasons of convenience and the custom is largely to be found in provinces like Bihar and Gujarat which had once been integral parts of the Muhammadan empire. Opinions differ as to whether the custom of preemption amongst village communities in Punjab and other parts of India was borrowed from the Muhammadans or arose

Ishvakoo Grand Plaza independently of the Muhammadan Law, having its origin in the doctrine of "limited right" which has always been the characteristic feature of village communities. Possibly much could be said in support of either view, and there is reason to think that even where the Muhammadan Law was borrowed it was not always borrowed in its entirety. It would be useful to refer in this connection to the following observations of the Judicial Committee in Digambar v. Ahmad (1): " In some cases the sharers in a village adopted or followed the rules of the Mahomedan Law of pre-emption, and in such cases the custom of the village follows the rules of the Mahomedan Law of pre-emption. In other cases, where a custom of pre-emption exists, each village community has a custom of pre-emption which varies from the Mahomedan Law of pre-emption and is peculiar to the village in its provisions and its incidents. A custom of pre- emption was doubtless in all cases the result of agreement amongst the shareholders of the particular village, and may have been adopted in modern times and in villages which were first constituted in modern times." It is not necessary for our present purpose to pursue this discussion any further. Since the establishment of British rule in India the Muhammadan Law ceased to be the general law of the land and as pre-emption is not one of the matters respecting which Muhammadan Law is expressly declared to be the rule of decision where the parties to a suit are Muhammadans, the Courts in British India administered the Muhammadan Law of pre-emption as between Muhammadans entirely on grounds of justice, equity and good conscience' Here again there was no uniformity of views expressed by the different High Courts in India and the High Court of Madras definitely held that the law of pre-emption, by reason of its placing restrictions upon the liberty of transfer of property, could not be regarded to be in consonance with the principles of justice, equity and good conscience(2). Hence the right of pre-emption is not recognised in the Madras Presidency at all even amongst Muhammadans except on the footing of a custom. Rights of preemption have in some provinces like Punjab, Agra and Oudh been embodied in statutes passed by the Indian Legislature and where the law has been thus codified it undoubtedly becomes the territorial law of the place and is Ishvakoo Grand Plaza applicable to persons other than Muhammadans by reason of their property being situated therein. In other parts of India its operation depends upon custom and when the law is customary the right is enforceable irrespective of the religious persuasion of the parties concerned. Where the law is neither territorial nor customary, it is applicable only between Muhammadans as part of their personal law provided the judiciary of the place where the property is; situated does not consider such law to be opposed to the principles of justice, equity and good conscience. Apart from these a right of pre-emption can be created by contract and as has been observed by the Judicial Committee in the case referred to above, such contracts are usually found amongst sharers in a village. It is against this background that we propose to examine the contentions that have been raised in the present case.”

“ (1) The right of pre-emption is not a right to the thing sold but a right to the offer of a thing about to be sold. This right is called the primary or inherent right. (2) The pre-emptor has a secondary right or a remedial right to follow the thing sold. (3) It is a right of substitution but not of re-purchase i.e., the pre-emptor takes the entire bargain and steps into the shoes of the original vendee. (4) It is a right to acquire the whole of the property sold and not a share of the property sold. (5) Preference being the essence of the right, the plaintiff must have a superior right to that of the vendee or the person substituted in his place. (6) The right being a very weak right, it can be defeated by all legitimate methods, such as the vendee allowing the claimant of a superior or equal right being substituted in his place.” (Emphasis supplied)

13. ...The right to pre-empt the sale is not exercisable till a pre- emptible transfer has been effected and the right of preemption is not one which is looked upon with great favour by the courts presumably for the reason that it is in derogation of the right of the owner to alienate his property. It is neither illegal nor fraudulent for parties to a transfer to avoid and defeat a claim for pre-emption by all legitimate means...” (Emphasis supplied) 15 The right of pre-emption is a preferential right to acquire the property by substituting the original vendee. The transfer or sale of an immovable property is a condition precedent to the enforceability of the right. The right of pre-emption is attached to the property and only on that footing can it be enforced against the vendee. Though the right is recognised by law, yet it can be rendered imperfect by the vendor when he transfers the property to another person who also has a superior right to the plaintiff pre-emptor” 10. Also relevant is to keep in mind is that practice of Pre-Emption is held to be inconsistent with Constitutional Scheme and modern idea and reliance can be placed on the judgment in Smt. Vijayalakshmi Vs. B. Himantharaja Chetty, AIR 1996 SC 2146, where Hon’ble Supreme Court was pleased to observe as under:

“The concept of substitution from that long and even before has been the foundation of the law of pre-emption and has been noticed, followed and employed, time and again, in a catena of decisions. The fact that this Court in Atam Prakesh vs. State of Haryana [1986(2) SCC 249] has struck down the right of pre-emption based on consanguinity as a relic of the feudal past, inconsistent with the constitutional scheme and modern ideas, has not altered the situation that the right of pre- emption, wherever founded, whether in custom, statute or Ishvakoo Grand Plaza contract, is still a right of being substituted in place of the vendee, in a bargain of sale of immovable property. We therefore need not burden this judgment with other attributes of the concept as attempted by both Hon’ble Judges of the High Court.”

“13. That in case the LESSOR intends to sell the premises, first priority of purchase of the premises shall be given to LESSEE and if LESSEE does not avail the offer and in the event of transfer of demised premises by “LESSOR” to a third party, the “LESSOR” shall be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements present and such purchaser shall be bound by all the terms and conditions concerning this arrangement including the return of security amount paid by LESSEE after deducting arrears and dues or otherwise in same manner as the “LESSOR” was and as if no transfer had taken place. In case the purchaser further sells to any other purchaser or purchasers, the present arrangements will also be binding on the.”

“The aforementioned clause bestows the “Right of preemption’' upon the assessee and it further safeguards the assesse’s “Tenancy Rights” as the clause states that in case the LESSEE Ishvakoo Grand Plaza (which is the assessee) does not avail the offer of sale and in the event of transfer of the premises to a third party, the LESSOR “shall” be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements and the purchaser “shall” be bound by all the terms & conditions concerning this arrangement. Further, if the purchaser further sells to any other purchaser, the present arrangements will also be binding on them. The point to be noted above is that the continuity of the arrangement is mentioned with the assessee’s first right of purchase/ right of preemption. This implies that even if the assessee did not avail the offer of purchase and the property was sold to a third party, the assessee would not only retain its “tenancy rights” but also retain its “right of preemption”. The assessee’s rights would continue even if the property was further sold. As a corollary, the assessee’s “Right of Preemption” does not cease to exist with the sale of the property. The assessee retains the right to avail the first offer of purchase even if he has refused it earlier.”

Ishvakoo Grand Plaza company with effect from 01.06.2006.