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Commissioner of Income-tax, Bombay City-i Vs. Sterling Investment Corporation Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 167 of 1970
Judge
Reported in(1979)12CTR(Bom)263; [1980]123ITR441(Bom); [1979]1TAXMAN396(Bom)
ActsIncome Tax Act, 1922 - Sections 12B; Income Tax Act, 1961 - Sections 2(14)
AppellantCommissioner of Income-tax, Bombay City-i
RespondentSterling Investment Corporation Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.E. Dastur, Adv.
Excerpt:
direct taxation - deduction - section 12b of income tax act, 1922 and section 2 (14) of income tax act, 1961 - whether assessee-company suffered capital loss of rs. 290000 under section 12b - under section 12b pecuniary loss must have arisen to assessee from relinquishment of capital asset - amount of rs. 290000 was forfeiture of part of earnest money - such loss cannot be regarded as having arisen from relinquishment by assessee-company of its capital asset - forfeiture arose by reason of default of purchaser and not identical to relinquishment of capital asset -- held, assessee not entitled to benefit under section 12b. - - the assessee-company, however, was not satisfied regarding the clear title of the vendor and lengthy and protracted correspondence, therefore, ensued between.....desai, j.1. this is a reference at the instance of the commissioner under s. 66(1) of the indian i.t. act, 1922, and the question referred to us in this reference reads as follows : 'where, on the facts and in the circumstances of the case, the assessee-company suffered a capital loss of rs. 2,90,000 within the meaning of s. 12b of the indian i.t. act, 1922 ?' 2. the assessee concerned in this reference is m/s. sterling investment corporation ltd. (hereinafter referred to as 'the assessee-company'). we are concerned in this reference with the assessment year 1959-60. the assessee-company is an investment company which is the owner of a substantial number of immovable properties. on september 19, 1946, the assessee-company entered into an agreement with the treasurer of charitable.....
Judgment:

Desai, J.

1. This is a reference at the instance of the Commissioner under s. 66(1) of the Indian I.T. Act, 1922, and the question referred to us in this reference reads as follows :

'Where, on the facts and in the circumstances of the case, the assessee-company suffered a capital loss of Rs. 2,90,000 within the meaning of s. 12B of the Indian I.T. Act, 1922 ?'

2. The assessee concerned in this reference is M/s. Sterling Investment Corporation Ltd. (hereinafter referred to as 'the assessee-company'). We are concerned in this reference with the assessment year 1959-60. The assessee-company is an investment company which is the owner of a substantial number of immovable properties. On September 19, 1946, the assessee-company entered into an agreement with the Treasurer of Charitable Endowments, Bombay Region, to purchase properties known as, (1) Alexandra Terrace, and (2) Albion Place for a total price of Rs. 11,50,000. The purchase was to be completed within about four months; this, however, was subject to various conditions mentioned in the agreement. The agreement provided for payment of earnest money in the sum of Rs. 1,50,000 which was duly paid. It is also common ground between the parties that on October 15, 1946, the assessee-company paid a further sum of Rs. 1,50,000 to the vendor by way of earnest money. Thus the total amount paid as an by way of earnest money came to Rs. 3 lakhs. As mentioned earlier, the agreement for sale stipulated a period of four months for completing the sale on payment of the balance amount of price after verifying the vendor's title to the properties. The assessee-company, however, was not satisfied regarding the clear title of the vendor and lengthy and protracted correspondence, therefore, ensued between the respective solicitors, in which it was contended on behalf of the assessee-company that the title was not clear and a converse contention was raised on behalf of the vendor. The matters dragged on in this manner till 1957. Although it is the admitted position that considerable correspondence took place between the parties, the same does not appear to have been produced before the Tribunal nor is it annexed to the statement of case. Reference in the statement of case is only to letters of 1957 and 1958 and these also seem to have been produced and annexed selectively. In the statement of case, the Tribunal has annexed five letters commencing with the letter from the Joint Education Adviser (Tech. Edcn.) to the Govt. of India, addressed to the Secretary, Board of Management of Bombay Properties of the Indian Institute of Science (presumably the successors-in-title to the original vendor); it is dated October 25, 1957. Thereafter there are two letters of December 11 , 1957, and December 12, 1957, exchanged between the respective solicitors, both marked 'Without prejudice'. Finally we have letters of August 18, 1958, and August 19, 1958, the first of the two being set up by the solicitors for the vendor and replied to by the assessee-company. The last two letters incorporate the final agreement between the parties. At this stage, we will not advert to the contents of these letters as they would be required to be considered in greater detail a little later on.

3. Ultimately, as a result of the agreement between the parties, only a sum of Rs. 10,000 out of the original amount of Rs. 3,00,000 given to the vendor as and by way of earnest money was returned and this was towards the assessee-company's legal costs, with the result that the assessee-company lost an amount of Rs. 2,90,000 out of the total earnest money or 3 lakhs. The Tribunal in the agreed statement of case has referred to this in the following words :

'... The assessee-company by its letter dated 19-8-1958 addressed to Little & Co., accepted the said proposal and the agreement for sale stood mutually cancelled and Rs. 2,90,000 out of the earnest money stood forfeited by the vendor.'

4. Before the ITO the assessee-company claimed a capital loss of Rs. 3,00,000. The said claim is dealt with the ITO in the following words :

'...... On these facts it vehemently argued that the earnest money of Rs. 3,00,000 should be allowed as a capital loss within the meaning of section 12B inasmuch as the right to purchase was a valuable right and the loss in question has arisen out of its relinquishment. I am unable to agree with this view because the sale agreement if at all stipulates the earnest money of only Rs. 1,50,000 and not Rs. 3 lakhs and even so there is nothing in it to suggest that the initial payment of Rs. 1,50,000 would be forfeited in case the sale is not put through. Moreover, if the titles to the property were not clear, then the assessee itself had an actionable claim against the sellers by virtue of clause 7. It is also open to doubt whether the payment of Rs. 1,50,000 or Rs. 3 lakhs did bring into existence any capital assets belonging to the assessee within the meaning of section 12B. In any case the loss cannot be said to have arisen in the previous year because the agreement clearly stipulated the sale to be completed within four months of its execution. The whole transaction dates as far back as the year 1946 and it has by no means been established that the loss arose in the previous year alone. On these considerations, the same shall be ignored.'

5. It is pertinent to note that the order of the ITO suggests the clear position, which is also borne out by the statement of case submitted to us, that the claim was in respect of the earnest money of Rs. 3 lakhs (or Rs. 2,90,000 to be more accurate) which was forfeited by the vendors.

6. As the ITO had on several grounds rejected the claim of the assessee to be allowed this capital loss which was required to be set off against capital gains accruing to the assessee during the assessment year in question, the assessee carried the matter in appeal to the AAC. There were a number of other points also canvassed in this appeal, but we are only concerned with the disallowance of the said claim for capital loss. As a change, it is found in the present statement of case that the grounds of appeal both before the AAC and the Tribunal have been extracted and annexed to the case as annexs.'C' and 'E' respectively. This should usually be done, but nowadays it is being rarely done by the Tribunal, with the result that at the hearing of the reference anxious inquiries are required to be made to the department and to the parties as to what was the precise ground of appeal being considered by the appellate authorities. Grounds 1 to 4 in the grounds of appeal before the AAC (annex.'C' to the statement of case) deal with the assessee's claim for being allowed the capital loss in the amount of Rs. 3 lakhs; the same may be fully extracted :

'Copy of the grounds of appeal before the Appellate Assistant Commissioner :

1. The ITO erred in not allowing the capital loss of Rs. 3,00,000 being the amount of earnest money and deposit paid in respect of the purchase of properties called Alexandra Terrace and Albion Palace to the Treasurer of charitable Endowments, Bombay Presidency.

2. The ITO failed to appreciate -

(a) that the agreement to purchase the said properties for a consideration of Rs. 11,50,000 was made on 19-9-1946 and a sum of Rs. 1,50,000 was paid by way of earnest money in terms of clause 3 of the said agreements;

(b) that a further sum of Rs. 1,50,000 was paid on 15-10-1946 on further demand from the sellers as additional earnest money;

(c) that under clause 6 of the agreement the sale was to be completed within four months;

(d) that the sale could not be completed because there were defects in the title to the said properties;

(e) that there was considerable lapse of time on the dispute as to title during which the properties not being kept in proper repairs lost considerably in value;

(f) that eventually the appellants decided not to purchase the properties and to allow the sum of Rs. 3,00,000 to be forfeited by the sellers.

3. The ITO failed to appreciate that the appellants in their own interest allowed the forfeiture of Rs. 3,00,000 rather than indulge in litigation with the sellers and be mulcted in costs.

4. The ITO erred in holding that because the agreement to purchase was made in 1946 the loss could not be said to arise in the previous year relating to the assessment year in question......'

7. When the AAC considered the matter, he accepted the submission advanced before him on behalf of the assessee that the matter squarely fell within s. 12B of the Indian I.T. Act, 1922, and a capital loss had resulted to the assessee from the transaction. In his opinion, however, this capital loss had not arisen during the year of account. He took the view that it had arisen in the year 1946 and on this limited plea he rejected the appeal of the assessee. It may be mentioned that in the appeal before the Tribunal, which was obviously at the instance of the assessee, the departmental representative had to concede immediately that the view of the AAC as to the year in which the loss accrued was totally erroneous, and the disallowance was sought to be justified before the Tribunal only on other pleas which had found favour originally with the ITO.

8. As we have extracted grounds 1 to 4 from the grounds of appeal before the AAC, it would appear to be useful also to extract the grounds of appeal pertaining to this disallowance which were filed before the Tribunal; and it is found that ground No. 3 of the various grounds of appeal before the Tribunal (annex.'E' to the statement of case) deals with this claim. The same reads as under :

'3. The AAC failed to appreciate and/or overlooked -

(a) that the agreement to purchase the said properties for a consideration of Rs. 11,50,000 was made on September 19, 1946, and a sum of Rs. 1,50,000 was paid by way of earnest money in terms of clause 3 of the said agreement;

(b) that a further sum of Rs. 1,50,000 was paid by the appellants on October 15, 1946, on further demand from the sellers as additional earnest money;

(c) that although under clause 6 of the said agreement the sale was to be completed within four months, the sale was in fact not completed within that period;

(d) that the sale could not be completed because there was defects in the title to the said properties;

(e) that there was considerable lapse of time and dispute as to title during which the properties were not kept in proper repairs and hence the properties lost considerably in value;

(f) that eventually the appellants decided not to purchase the said properties and to allow the sum of Rs. 3,00,000 to be forfeited by the sellers;

(g) that the final agreement between the sellers and the appellants to treat the sale as cancelled by mutual consent and to allow the sum of Rs. 3,00,000 to be forfeited by the sellers was arrived at in August, 1958, as recorded in the letter dated August 18, 1958, addressed by M/s. Little & Co., Solicitors, on behalf of the sellers to Messrs. Ardeshir Hormusji Dinshaw & Co., the attorneys for the appellants, and confirmed by the appellants in their letter dated August 19, 1958, addressed to Messrs. Little & Co.

(b) that there was absolutely no basis for the finding that the loss arose in the year 1946 or 1947;

(i) that the capital loss in question arose only in August, 1958, and was allowable as such in the assessment year in question.'

9. As stated earlier, the Tribunal applied its mind to the claim on merits and it was expressly conceded on behalf of the revenue that the loss, if any, accrued to the assessee in the assessment year in question and not in 1946, as stated by the AAC. Even otherwise the Tribunal found the position quite clear and observed that there can be no doubt that the AAC was totally wrong in the view that he took that the loss had accrued in 1946, and not in the year of account.

10. The Tribunal has in paras. 7 and 8 of its appellate order considered the question as to whether a capital loss had been suffered by the assessee and, further, whether this fell within what was provided by s. 12B of the Indian I.T. Act, 1922. It held in the first instance that by entering into an agreement of purchase with the vendor in 1946, the assessee had acquired a valuable right, viz., a contractual right to purchase the two properties for a stated price. It observed further that this was an assignable right. In its view the assessee had relinquished the said right by consenting to the mutual cancellation of the agreement for sale. According to the Tribunal by so doing the assessee could be considered to have relinquished the said capital asset within the meaning of s. 12B. It was then found by the Tribunal that the cost of acquiring this capital asset to the assessee was the amount of earnest money paid by the assessee, viz., Rs. 3,00,000 which in the opinion of the Tribunal, was also the loss suffered by the assessee. As out of the amount of Rs. 3,00,000 the sum of Rs. 10,000 was returned and paid to the solicitors of the assessee-company towards legal costs the Tribunal held ultimately that the assessee had suffered a capital loss in the amount of Rs. 2,90,000. It is from this decision of the Tribunal that the reference has been to the High Court at the instance of the Commissioner.

11. Before nothing Mr. Joshi's argument, the relevant portion of s. 12B of the Indian I.T. Act, 1922, may be extracted :

'12B. Capital gains. - (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the day of March 31, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place :.......'

12. If the statutory provision is analysed, it is found that to be the deemed income of the assessee, the capital gain must have arisen from sale, exchange, relinquishment or transfer of a capital asset. In the present case, we would be required to consider, first, whether there was any capital asset which the assessee had acquired. The question which would then arise would be whether the same was relinquished in the year of account and, further, whether any capital gain (or loss) arose from such relinquishment.

13. Mr. Joshi on behalf of the revenue submitted that on all points the relinquishment of s. 12B were not satisfied. According to him, there was no capital asset. Further, according to him, the same was not relinquished by the assessee. Finally, the loss, if any, to the assessee had not arisen from the relinquishment of the said capital asset.

14. As far as the first of these three pleas is concerned, we are in total agreement with the view expressed by the Tribunal, viz., that the contractual right which the assessee had obtained under the contract of sale would be a valuable right and will be required to be considered as property. Under s. 2(14) of the I.T. Act, 1961, and s. 2(4A) which is the corresponding provision under the Act of 1922, a capital asset means property of any kind. The contractual right of such purchaser to obtain title to immovable property for a price, which right is assignable, will be required to be considered both as property and therefore a capital asset. We have expressed similar views in an earlier income-tax reference decided in this very session by us, viz., I.T. Reference No. 10 of 1970 CIT v. Tata Services Ltd., decided January 16, 1979 : [1980]122ITR594(Bom) .

15. Mr. Joshi then submitted that if the right of the assessee under the contract of sale, viz., the right to purchase the said properties and obtain conveyance thereof from the vendor is to be considered to be property, then no capital gain or loss can be said to arise from a subsequent giving up of that right and extinction or abrogation thereof; and for this purpose he relied on certain observations in CIT v. Rasiklal Maneklal (HUF) : [1974]95ITR656(Bom) . The argument was that if the right to purchase is assigned to a third party, then there may be a capital gain (or loss). On the other hand, according to Mr. Joshi, if the right is given up and the vendor is relieved from his obligation, there will not be any capital gains. The relevant observations in Rasiklal Maneklal's case : [1974]95ITR656(Bom) are to be found at page 663 of the report. It has been stated by Kantawala C.J. speaking for the Bench :

'The question then arisen whether there is relinquishment as a result of which capital gains have accrued to the assessee. The word 'relinquishment' is neither defined in the Act nor any other statute to which our attention has been drawn. However, the essential features of a transaction of relinquishment can be clearly specified. In a transaction of relinquishment the property in which interest is relinquished continues to exist; the property continues 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 is either given up or abandoned or surrendered.'

16. Now, properly read, this passage in no way supports the contention of Mr. Joshi. The last sentence in the aforesaid passage on which principal reliance was placed speaks of the interest in the property which is relinquished as something other than and different from property. It is postulated that the property (as distinguished from the interest in the property which is relinquished) must continue to exist; but by its very nature the interest in that property which is relinquished cannot and need not exist subsequent to the transaction. We, accordingly, find no substance whatsoever in this plea of Mr. Joshi.

17. It was then submitted by Mr. Joshi that the Tribunal was in error in applying the provision contained in s. 12B to the pecuniary loss suffered by the assessee, and it was submitted that the amount of Rs. 2,90,000 which had been lost to the assessee was as a result of forfeiture by the vendor of a substantial portion of the earnest money under the contract of purchase and, this being so, it could not be held that it was a capital loss arising from relinquishment by the assessee of its capital asset. In other words, the plea was that bearing in mind the essential nature of forfeiture, the amount lost to the assessee did not arise from the assessee giving up any of its right but was rather occasioned on account of the failure by the assessee to perform its contractual obligation as a result of which the vendor obtained the right to forfeit the earnest money. It was submitted that the claim of the vendor that they became entitled to forfeit the earnest money or at least a substantial part thereof, viz., Rs. 2,90,000, out of Rs. 3,00,000, was acquiesced in by the assessee-company and such acquiescence in forfeiture cannot be equated with a loss arising from the relinquishment of a valuable capital asset as understood by the Tribunal. It becomes necessary in these circumstances to understand the various aspects involved in the concept of forfeiture of an advance or earnest money.

18. The true legal position as regards forfeiture of earnest money of a defaulting purchaser has been indicated by the Supreme Court in a number of cases, but reference may be made to two of them only which are indicated in Pollock and Mulla's Indian Contract Act, 9th Edn. (at pages 596, 597). In Shree Hanuman Cotton Mills v. Tata Aircraft Ltd. : [1970]3SCR127 , the Supreme Court has laid down several principles regarding earnest money. According to the Supreme Court (p. 1994) :

'(1) It must be given at the moment at which the contract is concluded.

(2) It represents a guarantee that the contract will be fulfilled or, in other words, 'earnest' is given to bind the contract,

(3) It is part of the purchase price when the transaction is carried out,

(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser,

(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.'

19. In Maula Bux v. Union of India, : [1970]1SCR928 , the Supreme Court was considering the contention whether such forfeiture of earnest money under a contract for sale of property is a penalty falling with the phraseology employed by s. 74 of the Indian Contract Act or not. It was observed by it that forfeiture of reasonable amount paid as earnest money does not amount to imposing a penalty. It distinguished between money deposited as guarantee for the due performance of a contract and earnest money. We, are, however, not concerned with such distinction on the facts arising in this reference.

20. Mr. Dastur on behalf of the assessee, however raised a fundamental question, viz., that in this case there has been no forfeiture at all, and it was submitted by him that forfeiture postulates some unilateral action on the part of the vendor purporting to forfeit the amount paid to the vendor as earnest money by the purchaser on the plea that the purchaser was at default or had not carried out his contractual obligations under the contract. It was submitted by him that what had been done in the instant case by the two parties amounted to a mutual cancellation of the contract, as a result of which the vendor retained Rs. 2,90,000, out of the sum of Rs. 3,00,000, originally paid to the vendor by the assessee-company as earnest money returning only the balance of Rs. 10,000, and this could not be equated with a case of forfeiture of the earnest money under a contract of sale of property. In connection with this argument, it was submitted by him that what the court had to look at was only the final two letters of August 18, 19, 1968, exchanged between the respective parties, viz., the solicitors for the vendor and the assessee-company; and if those letters are properly perused, then, it was submitted, it would be abundantly clear that there was no forfeiture but merely a mutual cancellation of the contractual rights and obligations and a resolution of the position regarding refund of earnest money in the specified manner indicated in the said two letters. Before dealing with this argument, we may now briefly advert to the correspondence with has been annexed as annexs.'A' to 'A-4' respectively.

21. Annexure 'A' is the letter dated October 25, 1957, from the Joint Education Adviser to the Govt. of India to the Secretary, Board of Management of the Bombay Properties of the Indian Institute of Science, and the addressee may be presumed to be the successor of the original vendor. This will be borne out by the subject-matter of the letter. By this letter Government's concurrence is indicated to the proposal that the contract of sale of the two Byculla properties entered into with the assessee-company could be cancelled but on the condition that the Sterling Investment Corporation will forfeit the entire amount of Rs. 3,00,000 paid by it as earnest money. We then have letters date december 11, 1957, and December 12, 1957, exchanged between the respective attorneys of the vendor and the assessee-company. The letter dated December 11 , 1957, is addressed by the attorneys of the assessee-company to the attorneys for the vendor. The letter sets out in para. 1 thereof the contention of the client (the assessee-company) that the agreement for sale had been duly cancelled long ago by reason of the failure of the vendor making out a marketable title. It is contended accordingly in the said paragraph that by reason of such concellation, the vendor became bound to return to the purchaser the sum of Rs. 3,00,000 which had been paid by the purchaser as earnest and deposit money. It is further claimed that the vendor is liable to pay interest also on this amount. The second paragraph of the letter contains a proposal for cancellation by mutual consent of the agreement for sale on the understanding that the vendor 'shall be entitled to forfeit the sum of Rs. 3,00,000 paid by our client to him as earnest and deposit moneys herein.' There is a further proposal that the legal costs of both the vendor and the purchaser should be paid out of the said sum of Rs. 3,00,000 which is proposed to be forfeited as earlier indicated. To this letter of the attorneys of the purchaser (the assessee-company) the vendor's attorneys then sent a reply dated December 12, 1957, in which it was, inter alia, stated that the agreement for sale had not been cancelled as claimed by the purchaser's attorneys. The contention that the vendor had failed to make out a marketable title was also denied and it was claimed that the vendor had already complied with all the requirements in connection with the sale which the vendor was bound in law to comply with. It was further denied that the vendor had become liable to return the sum of Rs. 3,00,000. It was made clear in the said letter that if the purchaser chose to treat the agreement as cancelled, the vendor would consider adoption of legal proceedings against the purchaser to enforce their rights under the agreement for sale. Thus, after dealing with the legal contentions indicated in the purchaser's attorneys' letter and rebutting and repudiating the same in to, the vendor's attorneys in the ultimate paragraph of their letter have stated that they are obtaining instructions on the proposal made in the purchaser's attorneys' letter.

22. It was contended by Mr. Dastur that the letters are headed 'without prejudice' and a faint submission was made that because of this endorsement they are not to be looked at. There is no substance whatsoever in this plea. In the first place, a letter marked 'without prejudice' at the highest cannot be relied on by the opposite side to which it is sent, particularly if the proposal contained in the letter does not fructify into a final agreement. Where letters are produced before a Tribunal or a court and are made part of the statement of case, there is no restriction whatever on the Tribunal or the court in looking at the letters. Further, if the letters are analysed, they fall into two parts; the first part contains the legal contentions of the party as to what had transpired and the respective answers of the opposite party, and the later part of the letters deals with the proposal for settlement. Fairly looked at, the inscription 'without prejudice' can have reference only to the proposal which is contrary to the express legal contentions found in the earlier part of the letters. On both footings, therefore, there is no substance whatsoever in the plea. Mr. Dastur, however, submitted-and there is some force in this contention-that these two letters which were exchanged between the legal advisors of the parties in October, 1957, cannot be utilised to interpret the agreement ultimately entered into which is contained in the two letters dated August 18, 1958, and August 19, 1958, respectively. We propose, however, to deal with this argument after dealing with the two letters of August 18, 1958, and August 19, 1958.

23. The letter dated August 18, 1958, contains a proposal by the attorneys of the vendor to return the sum of Rs. 10,000 to the purchaser out of the earnest money of Rs. 3,00,000, and two conditions are specified, which were subsequently accepted in the letter of August 19, 1958. The first condition is that on payment of this amount (i.e., on return of this amount which is towards costs) the contract for sale of the properties would be treated as at an end cancelled by mutual consent of the parties, and that the purchaser will have no further claim against the vendor for the balance of the earnest money or any part thereof or for any other amount whatsoever for costs or otherwise. This was confirmed by the assessee-company by its letter dated August 19, 1958.

24. Now, Mr. Dastur on behalf of the assessee-company very strongly relied upon the fact that in neither of the two letters has it been stated that the sum of Rs. 2,90,000 was being forfeited by the vendor. It was submitted by him that this was merely the recording of a mutual decision to treat the contract as cancelled, at which time an agreement had been arrived at by the parties to return part of the earnest money and where under it was further agreed that a substantial part of the earnest money would be retained by the vendor. Thus, in his submission, it was not proper to treat retention of Rs. 2,90,000, which retention was on account of a bilateral decision, as equivalent to a forfeiture of the said amount by the vendor which is normally a unilateral action on his part.

25. We have s number of difficulties in accepting Mr. Dastur's submission. In the first place, it would appear to us that it is not permissible for the assessee-company at this stage to make out for the first time a case that there was no forfeiture, when throughout, the plea of the assessee-company has been that the amount of Rs. 3,00,000 or Rs. 2,90,000 has been forfeited by the vendor and that the assessee-company is entitled to treat the same as a capital loss covered by s. 12B. For this purpose, we have extracted the contention before the ITO, the grounds of appeal before the AAC and the grounds of appeal before the Tribunal, all of which indicate that the assessee-company treated this amount as having been forfeited by the vendor. It is pertinent to point out in this connection that the Tribunal has expressly mentioned that the correspondence has been produced very selectively before it. If it had been urged on behalf of the assessee-company that there had been no forfeiture but a bilateral cancellation of the contract resulting in certain pecuniary consequences, then the Tribunal would have been required to give a finding as to the nature of the retention (by the vendor) and for this finding the Tribunal would have required the entire correspondence between the parties to be brought on record. It is surely not to be permitted to an assessee to keep back the entire correspondence except the few letters produced before the Tribunal, and to proceed before the ITO, the AAC and the Tribunal on a specific footing and then in this court to change front altogether and argue a totally different case. This cannot be permitted to be done.

26. Further, it would appear to us that the assessee-company had properly accepted that this amount was forfeited by the vendor, and this position would be made clear when the earlier letters are referred to. We are not concluded by what the parties have finally chosen to describe the arrangement between them to be in the last two letters. We have to consider the basis or reason for which the amount of Rs. 2,90,000 was retained by the vendor. In order to arrive at the proper conclusion on this aspect of the matter, the correspondence previous to the bargain and the manner in which the bargain was subsequently understood by the parties themselves (and in particular by the assessee-company) would all be material. For this purpose we, therefore, have necessarily to look into the previous letter of December, 1957, as also the manner in which the retention of this amount (to use a neutral phrase) was understood by the assessee-company. The proposal which ultimately results in the bargain is clearly to be found in the correspondence of December, 1957. The mutual stands are clearly indicated in the two letters. According to the assessee-company's attorneys, the contract stood cancelled a long time ago and the assessee had become entitled to the return of the earnest money together with interest thereon. According to the attorneys for the vendor, there was no earlier cancellation of the contract as falsely alleged and that the vendor had carried out all the requirements which in law were cast on them under the contract. According to the vendor's attorneys, then, if the purchaser was resiling from the contract, the vendor had become entitled to forfeit the amount as also to pursue further remedies against the purchaser. It is in this background that the settlement takes place. Now, a fair reading of this correspondence would indicate that the vendor's attorneys had claimed that the contract was subsisting, that the vendor had carried out all their obligations under the contract, that an attempt was being made by the purchaser to resile from the contractual obligations and accordingly the vendor had become entitled to forfeit the amount of earnest money and also to pursue further remedies against the purchaser. These further remedies could be a claim for specific performance of the contract or an alternative claim for damages. It is in the background of this claim that the proposal is being made which ultimately results in the bargain which was struck between the parties in August, 1958. Fairly read, the bargain indicates an acceptance by the purchaser of the vendor's forfeiture not of the full amount of Rs. 3,00,000 but of Rs. 2,90,000 therefrom and giving up by the two parties of all other claims against each other. Thus the vendor gives up the claim for specific performance or damages and the purchaser gives up their claim for return of any part of the amount of Rs. 2,90,000 which is to be retained by the vendor, or interest thereon and for other amounts. There are no other rights which can now arise inasmuch as it is expressly provided in the bargain that the contract is mutually cancelled. This is all that the bargain means and it is not inconsistent with the earlier claim of the vendor that they had become entitled to forfeit the amount of earnest money. The claim of forfeiture will certainly be a claim made by the vendor who would have with him the earnest money or deposit or advance. At the initial stage and in case where the controversy subsists, it will be a unilateral claim which will be resisted by the other side. We may, however, envisage a case-and the present case is one-where the opposite side, viz., the purchaser concedes to the said claim fully or substantially or in part, agreeing further that on such concession being made and a bargain being struck as to the amount of earnest money which is to be retained by the vendor, the parties would not have any further claims against one another save the except under the agreement to return the balance of the earnest money which is not to be retained by the vendor. This is precisely the bargain which has taken place between the parties. In this background, even if it was permissible for the assessee-company to make a volte face at this stage and urge that there was no forfeiture, we would be required to rebut the plea and uphold Mr. Joshi's contention that the amount of Rs. 2,90,000 had been in fact retained by the vendor as forfeited out of the earnest money originally deposited with the vendor by the purchaser.

27. The question still remains whether the assessee-company is entitled to claim a capital loss in respect of this amount. For this purpose, if the assessee-company is to succeed, it must be held that the amount was forfeited as a result of relinquishment of a capital asset by the assessee. When so stated, the absurdity of the proposition strikes one in the face. It is not sufficient, in our opinion, that some pecuniary loss must have occasioned to the assessee-company. The requirements of s. 12B would not be satisfied merely because there is a pecuniary loss and at the same time there occurs the giving up by the assessee of a capital asset or cesser of a capital asset previously held by the assessee. To satisfy the requirements of s. 12B the pecuniary gain or loss must have arisen to the assessee from the relinquishment (and we are concerned only with the case of relinquishment) of its capital asset. In a case, where the vendor forfeits the earnest money or a part thereof, as we have held, it cannot by any stretch of imagination be considered that the forfeiture arise from the relinquishment of a capital asset of the assessee-company. By its nature forfeiture arises by reason of default or failure of the purchaser and it is not possible to accept the submission that this is identical to the case of relinquishment of a capital asset by the purchaser, viz., the assessee-company.

28. In the view that we have taken it is unnecessary to lavish further attention on the question, viz., what was the amount of capital loss or whether the entire portion retained by the vendor could be regarded as a capital loss covered by s. 12B.

29. There remains for consideration one short argument which was urged by Mr. Dastur at the fag end of the discussion, and that was based on the fourth proviso to sub-s. (2) of s. 12B. The said fourth proviso reads as follow :

'Provided further that where the capital asset was on any previous occasion the subject of negotiations for its sale, exchange, relinquishment or transfer, any option or other money received and retained by the assessee in respect of such negotiations shall be deducted in computing the actual cost to him of such asset.'

30. Mr. Dastur submitted that as the vendor was concerned, if it were to subsequently sell these properties or either of them, then the proviso would come into operation and would result in a deduction of the actual cost of the asset which the vendor were to subsequently sell. In his submission, the vendor then would be required in case of such later sale to pay capital gains on the amount of Rs. 2,90,000 which in the view that we have taken might not be available as capital loss to the assessee-company. It was submitted that this would be an inequitable view of the matter and the proviso would indicate a proper approach which was required to be adopted, viz., that the amount would be taken into consideration to reduce the actual cost of the asset as far as the vendor was concerned and should be allowed as a capital loss as far as the purchaser was concerned. We find no substance in this plea. The proviso provides for a special case. It would seem to us that the case contemplated by the proviso will affect the vendor only and whatever be the amount of money which is received or retained by the vendor after the negotiations occasioned by the first infructuous sale would be required to be notionally applied towards reducing the cost of the asset in case of a subsequent successful sale and he would have to pay capital gains tax on this amount (in addition to other actual capital gains), whatever be the nature of the payment of him. Whether the payment is by way of earnest money, part of the advance or part of agreed damages, if the other conditions of the proviso are satisfied, the amount will attract capital gains in the hands of the vendor at the stage of the subsequent sale. This is purely an artificial provision providing for a special contingency and can have no bearing on the general allowance to be made under s. 12B. In the view that we have taken, it would appear to us that the amount of Rs. 2,90,000 retained by the vendor under the final arrangement between the parties was confirmation of forfeiture of a part of the earnest money which had in 1946 been paid by the assessee-company to the vendor; and bearing in mind the true nature of a forfeiture, such loss cannot be regarded as having arisen from the relinquishment by the assessee-company of its capital asset, viz., the right to purchase the properties.

31. In the result, the question is answered in the negative and against the assessee.

32. Normally costs would have followed the event. In this case, however, we are constrained to depart from the normal rule because of a special circumstance which unfortunately is becoming usual in this session of income-tax references. The special circumstance to which we must draw attention is the shabby manner in which the paper books are being prepared on behalf of the revenue, which contain a large number of typing errors or cyclostyling errors which are laboriously required to be corrected after being compared with the original before what is cyclostyled can make sense. In this reference, we are merely using this circumstance to deprive the Commissioner of his costs of the reference but cautioning him that at some later stage if a similar default persists the consequences may be more serious. Accordingly, the parties are directed to bear their own costs of this reference.


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