2005 (2) TMI 105 - HC - Income Tax

Capital Receipt of Rs. 7,34,000 Deemed Taxable as Capital Gains Under Income-tax Act, Overruling Tribunal Decision.

The HC ruled in favor of the Revenue, determining that the amount of Rs. 7,34,000 qualifies as a capital receipt subject to capital gains tax, as it ... Computation of Capital Gains - the amount as capital receipt not exigible to capital gains tax as no transfer of any property define u/s 2(47) of income tax act 1961? - HELD THAT:- We respectfully concur with the aforesaid principle of law laid down by the Bombay High Court in Vijay Flexible Containers [1989 (9) TMI 16 - BOMBAY HIGH COURT] while answering the question referred to this court in favour of the CIT and against the assessee. Indeed, facts of the case involved in the present case and the one which were subject-matter of Vijay Flexible Containers are so identical that there is no room for finding out any distinguishing feature so as to take contrary view. The expression 'property of any kind' used in section 2(14) is of wide import. When we read this expression along with the expression defined in section 2(47)(ii), i.e., extinguishment of any rights therein, we have no hesitation in holding that the giving up of the right to claim specific performance by an assessee to get conveyance of immovable property in lieu of receiving consideration resulted in extinguishment of rights in property thereby attracting the rigour of section 2(14) read with section 2(47) ibid. We answer the question referred to us in favour of the CIT (Revenue) and against the assessee. In other words, we answer the question by holding that the Tribunal was not justified in holding the amount as capital receipt not exigible to capital gains tax as no transfer of any property was involved within the meaning of section 2(47) of the Income-tax Act. Instead, we hold by answering the question that the amount is a capital receipt exigible to capital gains tax as it involved transfer of property within the meaning of section 2(47) of the Income-tax Act. No costs. Issues Involved:1. Whether the amount of Rs. 7,34,000 is a capital receipt not exigible to capital gains tax due to the absence of a transfer of property within the meaning of section 2(47) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Facts of the Case:The assessee, a partner in a firm, entered into a contract to purchase immovable property. When the seller did not fulfill the contract, the firm filed a suit for specific performance, which was dismissed. An appeal led to a compromise where the seller agreed to pay Rs. 14,85,001 as consideration or damages. The Assessing Officer treated this amount as capital gains and taxed it. The Commissioner of Income-tax (Appeals) upheld this view, but the Tribunal reversed it, relying on the Supreme Court's decision in Vania Silk Mills P. Ltd. v. CIT [1991] 191 ITR 647.2. Tribunal's Decision:The Tribunal concluded that the receipt of Rs. 14,85,001 did not attract capital gains tax as there was no transfer of property within the meaning of section 2(47). The Tribunal's decision was based on the Supreme Court's ruling in Vania Silk Mills P. Ltd.3. Revenue's Argument:The Revenue argued that the Tribunal's reliance on Vania Silk Mills P. Ltd. was misplaced as the Supreme Court had subsequently disapproved this decision in CIT v. Grace Collis (Mrs.) [2001] 248 ITR 323. The Revenue contended that the amount should be treated as capital gains based on the Bombay High Court's decision in CIT v. Vijay Flexible Containers [1990] 186 ITR 693.4. Assessee's Argument:The assessee's counsel relied on the Delhi High Court's decision in CIT v. J. Dalmia [1984] 149 ITR 215 and two Supreme Court decisions-Swami Motor Transports (P.) Ltd. v. Sri Sankaraswamigal Mutt, AIR 1963 SC 864, and Ram Baran Prasad v. Ram Mohit Hazra, AIR 1967 SC 744-to argue that the Tribunal's decision should be upheld.5. High Court's Analysis:The High Court analyzed the definition of 'capital asset' under section 2(14) and 'transfer' under section 2(47) of the Income-tax Act. It referred to the Bombay High Court's decisions in Tata Services Ltd. [1980] 122 ITR 594 and Sterling Investment Corporation Ltd. [1980] 123 ITR 441, which held that the right to obtain conveyance of immovable property is a capital asset and its relinquishment is a transfer.6. Precedents and Legal Principles:The High Court concurred with the Bombay High Court's view in Vijay Flexible Containers [1990] 186 ITR 693, which held that giving up the right to claim specific performance in exchange for money constituted a transfer of a capital asset. The court noted that the definition of 'transfer' includes the extinguishment of any rights in a capital asset.7. Disapproval of Vania Silk Mills P. Ltd.:The High Court noted that the Supreme Court in CIT v. Grace Collis (Mrs.) had disapproved the decision in Vania Silk Mills P. Ltd., clarifying that the extinguishment of rights in a capital asset is independent of the transfer.8. Conclusion:The High Court answered the question in favor of the Revenue, holding that the amount of Rs. 7,34,000 is a capital receipt exigible to capital gains tax as it involved the transfer of property within the meaning of section 2(47) of the Income-tax Act. The Tribunal's decision was thus overturned, and the amount was held to be taxable as capital gains.