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2023 (9) TMI 746
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....LLP on a plot of land for consideration of Rs. 10,75,00,000/-. Accordingly, payment of Rs. 25,00,000/- by cheque No.017447 drawn on bank of India dated 02/07/2010 was paid by the assessee. This amount of Rs. 25,00,000/- was nearly 2.33% of the total consideration payable by the assessee. Later on, the said project did not materialize and was aborted and accordingly, the builder had cancelled the allotment returning the advance of Rs. 25,00,000/- vide cheque dated 29/07/2014 which amount was not deposited in the bank by the assessee. The assessee then filed suit on 30/11/2015 before the Hon'ble Bombay High Court, being suit No.21/2016 for claiming damages, that an agreement sale u/s .4 of Maharashtra Ownership Flats Act (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act (MOFA) was entered for the suit premises and prayed for perpetual injunction restraining the Defendant from selling or dealing with, disposing of, alienating, encumbering, parting with possession or creating third party rights of any nature whatsoever in respect of the suit area or part thereof. 4. Aadi Property LLP contested the assessee's suit on the following grounds and expres....
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....he commercial premises therein and consequently, the contours of the Old Project by completely different from that of the Project as is presently envisaged. The Old Project was comprised of mostly commercial buildings whereas the Project is predominantly residential and very little commercial user. In fact, the location where the commercial premises were to be provided, residential buildings are being put up there. The Defendant, having made significant progress in the construction of the Project and also having created other party rights in the Project, it was realized that the original allotment of office space is not even constructed in the new plan. Since, specific performance of the allotment of 25000 square feet (Saleable area) of the commercial premises is not possible, damages in lieu of the Plaintiff's right to sue would thus be the only relief/ remedy that the Plaintiff would be eventually entitled in the caption suit. Considering that specific performance of the MOU is not possible, it has been agreed that damages shall be paid by the Defendant to the Plaintiff in lieu of the Plaintiff's right to sue." "10. In accordance with the aforesaid discussions, t....
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....or A.Y.2018-19 and to explain as to why the receipt of compensation of Rs. 7,65,26,000/- should not be treated as income escaping assessment. Again in response to the said notice assessee furnished all the relevant documents and explanations with respect to the information in question, vide letter dated 29/03/2022 explaining that no income had escaped assessment and the damages received were not liable to tax. From the records it appears that after considering the reply of the assessee, order u/s. 148A(d) dated 07/04/2022 was passed wherein it was concluded that the case of the assessee was not a fit case for issue of notice u/s. 148. The copy of notices and the replies have been placed in the paper book from pages 264-279 of the paper book. 8. After the completion of the assessment of Section 143(3) in the aforesaid manner and the issuance of notice u/s. 148A and dropping of such proceedings, the ld. PCIT in his revisionary jurisdiction issued a notice u/s. 263 on 02/03/2023, again on the same issue of taxability of receipt of compensation of Rs. 7,65,26,000/-. In the show-cause notice, ld. PCIT held that the ld. AO accepting the claim of the assessee in his order passed u/s. 1....
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....e to consider the judgment of the Hon'ble Jurisdictional High Court in the case of CIT vs. Vijay Flexi Containers supra and accordingly, in terms of Clause-(d) to Explanation 2 to Section 263 are attracted and therefore, it is deemed to be erroneous and prejudicial to the interest of the Revenue. 11. We have heard both the parties at length and also perused the relevant finding given in the impugned order as well as various materials referred to before us at the time to hearing. To put the issue succinctly, whether the compensation received by the assessee as per the consent decree dated 10/07/2017 of the Hon'ble Bombay High Court which was based on the basis of consent terms filed by the parties, can be brought to tax or it is a capital receipt not chargeable to tax. As noted above in the consent decree of the Hon'ble Bombay High Court, in para 9, it has been clearly stated that since specific performance of allotment of 25,000 sq.ft (salable area) of the commercial premises is not possible, damages in lieu of the plaintiff"s right to sue would thus be the only relief/ remedy that the Plaintiff would be eventually entitled in the caption suit. Considering that specific performa....
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....management of a Court of Wards, to assign his interest as such tenant, farmer or lessee. 13. Now whether the damage received by the assessee can be said to be in respect of transfer of capital asset and if there was a breach of contract and the assessee received damages on account of mere "right to sue" for the damages, can it be held to be transfer of the property. As noted above, Section 6 of the Transfer of Property Act clearly provides that "a mere right to sue cannot be transferred", even if it is to be treated as "property" u/s. 5 of the Transfer Property Act. Transfer of property means the act by which a person conveys a property to another and to transfer property is to perform such act. The mere right to sue may or may not be property but certainly it cannot be transferred as per law. 14. Before coming to the decision of the Hon'ble Bombay High Court as has been referred and relied upon by the ld. PCIT in the case of CIT vs. Vijay Flexible Containers supra, there is another decision of the Hon'ble Bombay High Court in the case of CIT vs. Abbasbhoy D Deghghamwala, 195 ITR 28 (Bom), which held otherwise. The relevant gist of the judgment is as under:- Facts: ....
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....pression 'property of any kind'. iii. S.6 of Transfer of Property Act, 1882 uses the same expression 'property of any kind' in the context of transferability of any property under that Act. iv. The said S. 6 of Transfer of Property Act, 1882 makes an exception for 'a right to sue' while defining property of any kind. v. Such right to sue for damages is held to be not an actionable claim and it cannot be assigned. vi. Transfer of such a right to sue for damages is opposed to public policy as is gambling in litigation vii. It is not correct to say that such a right to such damages is a "Capital Asset" being on interest in property of any kind; viii. Both parties had filed their objections in the suit and but for the compromise, there would have been prolonged litigation and uncertainty about fate of litigation. ix. The right to receive damages accrued on the date of consent decree only and not before. 15. In the case of the assessee also MOU was not capable of specific performance under the Specific Relief Act and was confirmed by the Hon'ble Bombay High Court vide para 9 of the consent decree d....
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....feree. 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). 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 gra....
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....tances, 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 decla....
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............................................................. ........................................................... 29. In such circumstances, we do not think that the Tribunal's finding and from paras 6 to 11 need to be referred to. In this case as well, the specific performance was refused by this Court. In any event, there was enough doubt and the legal position was not clear. This was not a case where power under section 263 of the Income Tax Act could have been exercised. 30. In view of the above, we are of the opinion that the Appeal must succeed. The substantial questions of law, as framed and on debatable issues need to be answered as under:- "Answers to Question Nos. :- (i) The Tribunal was not justified in holding that the order passed by the Assessing Officer under section 143(3) read with section 144 A was erroneous and prejudicial to the interest of the Revenue and, therefore, the Commissioner of Income Tax was justified in exercising the jurisdiction under section 263 of the IT Act. (ii) The answer is in favour of the Assessee and against the Revenue by holding that the amount of compensation received by the Assessee/....
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....as itself aborted. Since the property for which right in the property was claimed, was not in existence, the question of giving up the right in the property does not arise at all. Thus, the judgment of Viay Flexible Containers is not applicable at all and therefore, the ld. PCIT has erred in law and on facts in setting aside the assessment order solely relying upon the judgment of M/s. Vijay Flexible Containers. 20. Apart from that there are various other High Court Judgments directly on this issue wherein, they have held that a damage on account of right to sue is a capital receipt not chargeable to tax. Some of the judgments for the sake of clarity are as under:- 1. C.I.T. Vs. Dalmia (1984) [149 ITR 215] (Del.) Facts: Pursuant to agreement to sell, taxpayer acquired right to the property under construction from builder. Final sale deed was to be executed on completion of construction. Agreement provided purchaser with a right to specific performance. On builder's failure to execute sale deed post completion of construction, taxpayer filed suit for injunction against the builder restraining him for selling or alienating property. After dispute being referr....
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....Baroda Cement & Chemicals Ltd. V/s. C.I.T [158 ITR 636] (Guj.) Facts: Seller company contracted to sell a second hand mill to taxpayer for agreed consideration. In breach of contract, seller company sold the mill to third party. Taxpayer received compensation from seller in settlement of claims of the taxpayer for breach of the contract which was claimed as non-chargeable capital receipt. Held: HC held that once there is a breach of contract and defaulting party not only refuse to perform his part of contract but also disposes of the subject-matter, the injured party has nothing left in the contract except right to sue for damages. A right to sue not being an actionable claim cannot be considered as capital asset and hence, there is no question of it resulted in transfer by extinguishment of taxpayer's right. Also, compensation received does not represent consideration for transfer as for computation under S.45 the taxpayer ought to have incurred cost. If the Revenue fails to show that the taxpayer had incurred a cost as in the present case, it would be impossible to compute the income chargeable to tax under the head 'capital gains' and what ....