1989 (10) TMI 72 - AT - Income Tax

Tribunal rules on capital gains tax, contract frustration, damages, and acquisition costs.

The Tribunal upheld the taxability of the amount received as capital gains, rejected the frustration of contract claim, dismissed the damages argument, ... Assessment Year, Capital Gains, Earnest Money, High Court, Textile Machinery, Winding Up Issues:1. Whether the amount received by the assessee is taxable as capital gains.2. Whether there was a frustration of the contract between the assessee and the vendor.3. Whether the amount received can be considered as damages for breach of contract.4. Whether the assessee incurred any cost for acquiring the rights.Analysis:Issue 1: Taxability of the amount received as capital gainsThe case involved the assessee's claim of acquiring the right to buy a textile mill for a certain amount or receiving Rs. 9 lakhs for assigning this right. The Income-tax Officer treated the amount as short-term capital gain after adding the earnest money and other expenses incurred by the assessee. The Commissioner upheld this decision, stating that the value of the right transferred was not nil, unlike in previous cases. The Tribunal confirmed the order, emphasizing that the amount received was not damages and dismissing the appeal.Issue 2: Frustration of the contractThe assessee claimed that the original contract was frustrated due to a court order, leading to no transfer and no capital gain. However, the Tribunal rejected this argument, stating that the court order was temporary, and the subsequent agreement with a new party indicated a substitution of the old contract. The Tribunal emphasized that the amount received was for acquiring something of value, refuting the frustration claim.Issue 3: Consideration of damages for breach of contractThe assessee argued that the amount received was damages for breach of contract. However, the Tribunal noted that the amount was received from a different party, not the vendor, and thus, the damages claim was not accepted. The Tribunal highlighted that the amount was part of a commercial transaction for acquiring valuable rights, not damages.Issue 4: Cost incurred for acquiring the rightsThe assessee contended that no cost was incurred as the earnest money was returned. The Tribunal, relying on legal principles, explained that the earnest money represented the price for the right to purchase the property, which was forfeited due to the failure to fulfill the obligation. The Tribunal clarified that the assessee did incur a cost by agreeing to pay the amount forfeited as earnest money, ultimately confirming the Commissioner's decision.In conclusion, the Tribunal upheld the taxability of the amount received as capital gains, rejected the frustration of contract claim, dismissed the damages argument, and affirmed that the assessee did incur a cost for acquiring the rights.