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Commissioner of Income-tax, Andhra Pradesh Vs. M.D. Manohar Rao - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case Nos. 231 of 1978 and 30 of 1981
Judge
Reported in(1985)48CTR(AP)13; [1985]155ITR696(AP)
ActsIncome Tax Act, 1961 - Sections 5 and 69A
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentM.D. Manohar Rao
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateN.V. Rangandham, Adv.
Excerpt:
direct taxation - capital gain - sections 5 and 69a of income tax act, 1961 - a (assessee) agreed to sale land to b - land notified for acquisition by government - a agreed to part with a portion of compensation amount in favour of b - b had an overriding right to portion of compensation - agreement to sell made b a 'person interested' in acquisition and compensation payable for the land - b entitled to claim compensation in his own right - in view of facts it is concluded that present case is a case of diversion of income under an overriding title before the income reached the hand of assessee and not merely an application of income - contract of sale was not impossible to perform and hence not frustrated on account of acquisition of land - held, capital gains to be assessed taking into.....jeevan reddy, j.1. under s. 256(1) of the i.t. act, 1961, the question referred for the opinion, at the instance of the revenue is : 'whether, on the facts and in the circumstances, capital gains can be computed with reference to the sum of rs. 1,20,000 which the assessee received ?' 2. under s. 256, two more questions have been asked for our opinion, again at the instance the revenue. they are : '(1) whether, on the facts and the circumstances of the case, the tribunal was justified in holding tat capital gain has to be computed by taking into account only rs. 1,20,000 which, according to the tribunal, was actually by the assessee from the land acquisition authorities, or rs. 2,20,220, which is the amount of compensation awarded (2) whether, on the evidence available and the.....
Judgment:

Jeevan Reddy, J.

1. Under s. 256(1) of the I.T. Act, 1961, the question referred for the opinion, at the instance of the Revenue is :

'Whether, on the facts and in the circumstances, capital gains can be computed with reference to the sum of Rs. 1,20,000 which the assessee received ?'

2. Under s. 256, two more questions have been asked for our opinion, again at the instance the Revenue. They are :

'(1) Whether, on the facts and the circumstances of the case, the Tribunal was Justified in holding tat capital gain has to be computed by taking into account only Rs. 1,20,000 which, according to the Tribunal, was actually by the assessee from the land acquisition authorities, or Rs. 2,20,220, which is the amount of compensation awarded

(2) Whether, on the evidence available and the probabilities of the case, the Tribunal was justified in holding that there was a legally enforceable agreement between the assessee and Shri Ponnurangam ?'

3. The assessee was the owner of land admeasuring 4 acres 27 guntas in survey No. 1 situated at Kakaguda in Secunderabad Cantonment. He entered into an agreement of sale with respect to the said land with one A. Ponnurangam of the same village. The agreement of sale is dated June 4, 1971, whereunder the land was agreed to be sold at the rate of Rs. 29,000 per acre. A sum of Rs. 5,000 was paid by way of earnest money. The sale was to be completed on or before March 31, 1972. Ponnurangam is said to be a social worker interested in the welfare of Harijans of that village. On July 28, 1971, Ponnurangam and certain other members of the Scheduled Castes addressed a representation to the District Social Welfare Officer to acquire the said land for proceeding house sites to the members of the Scheduled Castes. Ponnurangam, it appears, succeeded in persuading the authorities to acquire land. On November 23, 1971, the District Social Welfare Officer wrote a letter to the assessee proposing to acquire the land. District Social Welfare Officer intimated that the compensation for the land will be fixed 'keeping in view all the registered sale deeds and potentialities of land'. On the same day, i.e. November 23, 1971, the assessee wrote back to the District Social Welfare Officer agreeing to part with land, provided he is paid necessary rate per sq. yard as per the prevailing market rate in the area and the potentialities of the land at the earliest possible date. This letter is in the hand of one Devarajan, another social worker,and a friend of Ponnurangam. On February 19, 1972, a notification under s. 4(1) of the Land Acquisition Act was issued and published in the Gazette, proposing to acquire the same land. On the same day, notices under s. 9(3) and s. 10 were also issued, calling upon all the persons interested in the land to appear in person or through authorised agent on March 6, 1972, before the Land Acquisition Officer (the District Social Welfare Officer, referred to above, was himself appointed the Land Acquisition Officer under s. 4 notification). On March 6, 1972, Ponnurangam through his lawyer, Sri N. Raghavan, issued a notice to the assessee referring to the agreement of sale consideration stipulated in the agreement and the compensation receivable from the Government should be paid to him. It was asserted that, by virtue of the agreement of sale, Ponnurangam was a person interested in said land. It was stated that in the case the assessee agreed to his demand, ponnurangam would not raise any dispute before the Land Acquisition Officer and, on the other hand he would ensure that the land acquisition proceedings are concluded expeditiously in the assessee's favour. A reply was asked for on before March 12, 1972. According to the assessee, after receiving this notice, an understanding - or agreement , as it is mentioned in the statement of the case - was arrived at between the assessee and Ponnurangam, whereunder the assessee agreed that he would receive only the amount corresponding to the sale consideration as per the agreement of sale between them and that amount over and above the said figure should be paid over to Ponnurangam. Ponnurangam was also to pursue the land acquisition proceedings and have them concluded expeditiously. Indeed, it was found by the tribunal that the assessee did not see the Land Acquisition Officer except on the date of receiving the compensation cheque. The Acquisition Officer passed an award on March 9, 1972, determining the total compensation at Rs. 2,20,220, i.e., at the rate of Rs. 10 per sq. yard. A cheque was prepared for the said amount and handed over to the assessee on the same day ; (counsel for the assessee, however, states that though the award was passed on March 13, 1972, and that, the averment in the statement of the case that the cheque was received by the assessee on March 13, 1972, three cheques were drawn by the assessee Rs. 30,000,Rs. 46,000 and Rs. 29,220 respectively, totalling Rs. 1,05,220. The case of the assessee is that this amount of Rs. 1,05,220 (which included the earnest money of Rs. 5,000 received by him) was paid over to Ponnurangam in pursuance of the understanding /agreement arrived at between them after the receipt of the legal notice dated March 6, 1972, aforesaid and that , he himself received only a sum of Rs. 1,15,000 and nothing more. He, therefore, disclosed a sum of Rs. 1,15,000 alone for the purpose of capital gains.

4. The ITO went into the correctness of the assessee's plea. He examined Ponnurangam, Devarajan and other witness, besides the assessee. Ponnurangam's case was that he received only sum of Rs. 5,000 by the way of return of the earnest money paid by him , and another Rs. 5,000 towards the expenses incurred by him in connection with the land acquisition proceedings, and nothing more. On a consideration of the entire material, the ITO accepted Ponnurangam's case and computed the capital gains on the basis of total compensation of Rs. 2,20,220 in the hands of the assessee. He was of the opinion that the agreement of sale dated June 4, 1971, was frustrated and became unenforceable the moment the land was notified for acquisition under s. 4 of the Land Acquisition Act. He observed that, even if it is assumed that Ponnurangam was paid a sum of Rs. 1,05,220 as alleged by the assessee, even then the said payment cannot be treated as one under an overriding claim or title, because the very agreement became void and unenforceable because doctrine of frustration contained in s. 56 of the Contract Act. He also did not allow any deductions out of the same. On appeal, the ACC agreed with the ITO. On further appeal, however, the Tribunal accepted the assessee's case. The Tribunal posed the basic question arising before if in following words :

'The first basic question of fact to be determined in this case is whether the assessee's version that he had to part with Rs. 1,05,220 and that in fact he did it, is true ?'

5. After discussing the oral evidence and the material on the record, the Tribunal upheld the assessee's case rejecting the version of Ponnurangam. Indeed, the Tribunal went to the extent of holding that the very agreement was entered into by Ponnurangam only with a view to see that land is acquired by the Social Welfare Department and that 'the whole thing seems to have been stage-managed'. The Tribunal observed that Ponnurangam is a very influential person; that he met the Minister and other concerned officers on several occasions to persuade them to acquire this land ; that he was doing all this with a view to share the compensation and not out of any public service/philanthropic considerations. The Tribunal also upheld understandings/agreement which was arrived at between the assessee and Ponnurangam in pursuance of , and after the legal notice dated March 6, 1972, aforesaid. The tribunal further held that virtue of the agreement of sale , Ponnurangam must be held to have received the amount of Rs. 1,05,220 under an overriding title or obligation in his favour. It referred to the decision of the Supreme Court, which says that commercial principles and the principles of the accountancy should guide the determination of the amount actually received by the assessee and, on that basis , held that only a sum of Rs. 1,20,000 was received by the assessee and hence the said amount alone should be taken to consideration for the purpose of assessing the capital gains tax. It is thereafter that the Revenue applied for referring as many as five questions for the opinion of this court ; but , the Tribunal choose to refer only one question , referred to at inception of this judgment. Later, the Revenue obtained a direction from this court to refer the other two questions, referred to hereinbefore, for our opinion.

6. It is contended by Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue , that (i) the amount of Rs. 1,05,220 was paid to Ponnurangam in pursuance of what the learned counsel calls a second agreement' which took place pursuant to the legal notice dated March 6, 1972. Therefore, it cannot be said amount was received by Ponnurangam under any overriding legal title. it is mere case of the assessee agreeing to pay certain amount to Ponnurangam for helping him in the matter of acquisition. It is, therefore, a case of application of income after it is received by the assessee, and not a case of diversion of income under an overriding title before it reached the assessee. Accordingly, it is urged, the entire amount of Rs. 2,20,220 should be treated as income in hands of the assessee for the purpose of capital gains tax; (ii) that the agreement of sale dated June 4, 1971, become void and unenforceable by virtue of the doctrine of frustration contained in s. 56 of the Contract Act. The Tribunal erred in not dealing with this aspect specially, which was dealt with both by the ITO and the AC. once the original agreement of sale became unenforceable, the amount paid to Ponnurangam must be deemed to be only in pursuance of the second agreement, referred to above , in which case it would be a clear case of application, and not of diversion under an overriding legal/obligation; and (iii) the finding of the Tribunal shows that the agreement of the sale was not a bona fide one and that it was entered into only with a view to avail of the services and influence of ponnurangam to get the land acquired and to share the consequent compensation. The agreement is thus illegal and unenforceable , under s. 23 of the contract Act , being opposed to public policy.

7. For the sake of felicity, we may dispose of the third contention of the learned counsel first. Though question no. 2 stated in R.C. No. 30/1981 relates to the enforceability of the agreement between the parties , the only ground upon which the Revenue contended that the sale agreement is illegal and unenforceable under s. 23 of the Contract Act, being opposed to public policy. This contention cannot be said to be pure question of law 'nor can it be said to arise from the order of the Tribunal, more so in view of its finding that the agreement was a bona fide one. We therefore, refuse to entertain the said contention and do not wish to express any opinion on the question whether an agreement of nature suggested by the learned standing counsel - viz., where the real object of the agreement is not the sale and purchase of land but only an agreement to have the land acquired and to share the compensation - would be violative of public policy and, therefore, illegal under s. 23 of the contract Act. For the same reasons, it is unnecessary for us to consider the decision of this court in Ratanchand v. Askar, : AIR1976AP112 .

8. We shall deal with our first contention urged by the learned standing counsel. This contention has to be considered in the context of the facts found by the Tribunal, viz., that the agreement of sale dated June 4, 1971, is a true and bona fide one, and that there was a subsequent understanding arrived at between the assessee and Ponnurangam after the receipt of the legal notice dated March 6, 1972, whereunder the assessee agreed to take only the amount which he entitled to under the agreement of the sale, and agreed to Ponnurangam taking away the rest of the compensation amount. The further finding of fact to be kept in mind is that, as a fact, the sum of Rs. 1,05,220 was paid to Ponnurangam under three different cheques on March 13, 1972, and that the cheques were encashed and the amount thereunder appropriated by Ponnurangam for himself. The first question to be answered on the above facts is whether, it is a case of diversion of income under an overriding title/obligation before the income reached the assessee, or is it mere case of application of the amount after it reached the hands of assessee In our opinion, it is the case of diversion and not application. The reasons for our opinion are the following : once the agreement of sale dated June 4, 1971, is held to be a bona fide one and also enforceable (not being rendered unenforceable by virtue of the doctrine of frustration, as we shall presently show), it must be held that Ponnurangam acquired a legal right to the compensation amount over and above the consideration payable to the assessee under the agreement of sale. The said right is legal right a right which overrides to the entire compensation. By virtue of the said agreement , Ponnurangam also became a 'person interested', within the meaning of said expression as defined in the Land Acquisition Act. The definition reads as follows :

'3. (b) the expression 'person interested' includes all persons claiming an interest in compensation to be made on account of the acquisition of the land under this Act ; and a person shall be deemed to be interested in land if he is interested in an easement affecting the land.'

9. In re The Land Acquisition Act [1913] ILR 37 Bom 76 Macleod J., observed (p.79) :

'Under section 3(b) , the expression 'person interested' includes all persons claiming an interest in compensation to be made on account of the acquisition of land under the Act. It is quite possible that a person may be interested in the compensation money without having an interest in the Land in the legal sense of term. The Act does not indicate how the collector is to effect the apportionment, and, sections 20 to 28, which deal with the proceedings of the court when a reference has been made under section 18, are also silent on the question.......I think what the Collector and the court have to do is to apportion the sum awarded amongst the persons interested as far as possible in proportion to the value of their interest, and it is impossible to lay down any general rule which can be followed. The market value of an interest , if ascertainable, may afford some guide towards ascertaining the amount to be apportioned in respect to that interest, but that can only be considered in relation to the total sum awarded as compensation.'

10. In J.C. Galstaun v. Secretary of State for India in council, (10 CWN 195), it was held that a person holding an agreement of sale is entitled to ask for making a reference under s. 18.

11. Similarly, in Chhuttan Lal v. Mul Chand [1917] 37 IC 822 a Division Bench of the Punjab High Court held that 'the expression 'person interested ' has been defined in section 3(b) of the Land Acquisition Act as including all persons claiming an interest in compensation to be awarded on account of the the acquisition of the land under the Act, and this definition, in our opinion, is wide enough to include the equitable interest that Mulchand claims to have in present case......' It is true that the use of the expression 'equitable interest' in this decision is result of following the English decisions. As pointed out by the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co. [1954] 17 SC 44 in India an agreement of sale does not create an equitable interest in favour of the purchaser, unlike English Law. But this distinction, in our opinion, does not in any manner diminish the correctness of the principle enunciated by the Punjab High Court.

12. Thus, it is clear that Ponnurangam could have filed a claim-petition before the Land Acquisition Officer and, no proof of the agreement and its bona fide nature, he was entitled to compensation amount over and above the consideration mentioned in the agreement. Even if Ponnurangam did not before the Land Acquisition Officer, he would have asked for reference under s. 30 of the Land Acquisition Act, claiming compensation in the measure aforementioned. Even if he did not do this, he was entitled to file a suit against the assessee and recover the said amount due to him through the court. It must be emphasised-and it is significant to notice - that the sale agreement, as modified by the subsequent agreement between the parties (arrived at pursuant to the legal notice dated March 6, 1972), created a legal right in Ponnurangam to the compensation amount in respect of the said land over and above consideration payable to the assessee under the agreement. It was not a case of mere personal right against the assessee to be worked out against him. The agreement of sale, as modified by the subsequent agreement, created a right in Ponnurangam to a portion of the compensation amount payable for that particular land, which was the subject-matter of the agreement of sale. It is true, as contended by the learned counsel, that the agreement of sale does not, and in this case did not create an interest in the property in favour of Ponnurangam ; but, indubitable, it did create a right in Ponnurangam to the compensation relating to that particular land, which entitled him to take away all the compensation over and above the amount payable to the vendor-assessee. We may, in this connection, refer to an unreported Bench decision of this court in C.C.C.A. No.5/1967, date November 25, 1970, Chinnappa Reddy J., speaking for the bench , dealt with a similar argument and after a consideration of the case law, held as follows :

'It is clear that a person having a valid agreement of sale in his favour is a person interested and is entitled to the compensation when the land is acquired. Where he has paid full price to the vendor and is in possession, he is entitled to be paid the full compensation for the land.........'

13. In that case , no doubt, full consideration was paid and the possession too delivered, but, in our opinion, that fact does not make any difference in principle. If possession is also delivered, it may create a 'possessory title' in the purchaser, as held in the said decision, which would clothe him with an additional right. But this decision too agrees that an agreement of the sale does create aright to compensation in the purchaser. The learned standing counsel, Mr. M. S. Murthy, urged that Ponnurangam never filed his objections, nor appeared before the Land Acquisition Officer, nor did he institute any proceedings for establishing his claim. But that, in our opinion, is immaterial. The would have done that, if the assessee had disputed or denied his claim or right. Inasmuch as the assessee conceded his right and claim, he did not think it necessary to appear before the Land Acquisition Officer to assert his right. On this account, it can not be said that Ponnurangam did not have a legal right. The legal right is created by the agreement, and not by the Land Acquisition officer, or by the decree of the court. The court merely affirms or upholds the existing rights ; it does not create right. In the circumstances, therefore, it must be said that Ponnurangam did possess an overriding right to the compensation over and above the consideration amount payable to the assessee under the agreement of sale and that the assessee was under a corresponding obligation not to receive any amount over and above the said compensation amount. It is, therefore, a case of diversion under an overriding title/right/obligation and not a mere case of application. We may now refer to some of the decisions brought to our notice on this aspect.

14. In CIT v. Sitaldas Tirathdas : [1961]41ITR367(SC) the Supreme Court dated the Principle relating to Diversion under overriding title in the following words (p. 374) :

'In our opinion , the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in any case , but it is the nature of obligation which is decisive fact. There is a difference between an amount which a person is obliged to apply out his income and an amount which by the nature of the obligation cannot be said to be part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law , does not follow. It is the first kind of payment which can can truly be excused and not the second. The second payment is merely any obligation to pay another a portion of one's own income, which has been received and is since applied. The first is case in which the income never reaches the assessee, who even if he were to collect it, does not, as part of his income, but for and on behalf of the person to whom it is payable.'

15. The Supreme Court referred to the decision of the Privy council in Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 and distinguished the same. The difference between the facts of these two cases would itself bring out the distinction between the two cases pointed out by the Supreme Court in the above passage. In bejoy Singh's case [1933] 1 ITR 135 the step-mother of the Raja (assessee) had brought a suit for maintenance and a compromise decree was passed under which the step-mother was to paid Rs. 1,100 per month, which amount was declared to be charge upon the properties in the hands of Raja, by the court. The Raja sought to deduct this amount from his assessable income, which was disallowed by the High Court at Calcutta, but was allowed by the charge created upon properties, the amount of maintenance was being diverted to the step-mother under an overriding title; whereas Sitaldas 'case : [1961]41ITR367(SC) before the Supreme Court, the amount payable to the wife towards maintenance, though payable under a decree of the court, was not made charge on any property of the assessee. The decree created only a personal liability. It was, therefore, held that the case before the Supreme Court falls within the latter category, i.e., application of income, and not the former category, i.e., diversion of income. The learned counsel cited several cases decided by various High Courts, but we think it necessary and fruitless to refer to all of them, for, as pointed out by the Supreme Court in Sitaldas' case : [1961]41ITR367(SC) this problem has been approached by various courts from various angles and that, while some have applied the principle correctly, some did not, and for that reason, examining the correctness of the several decisions - which were rendered in the light of their individual facts - would be a futile exercise. While no exception can be taken to a statement of principle, it is in the application of the principle to the particular facts in a given case that the difficulty to the particular facts in a given case that the difficulty rises.

16. Another case cited is in Murlidhar Himatsingka v. CIT [1962] 62 ITR 323 . The Supreme Court held in this case that ,in the case of sub-partnership, it creates a superior title and diverts the income from the main firm before it becomes the income of the partner. In other words, it was held that the partner in the main firm receives the income not only on his behalf , but also on behalf of the partners of the sub-partnership and, therefore, it would be a case of diversion under an overriding title; whereas, in the case of M.K.Brothers Private Ltd. v. CIT : [1972]86ITR38(SC) , it was held that it was only a case of application of income, and not a case of diversion under an overriding title. This was a case where the sole selling agent of Kanpur Cotton Mills resigned his sole agency in favour of the assessee, on condition that the assessee pays 1/7th of the commission accruing to him, to the sole selling agent. For the assessment year in question, the assessee credited a certain amount out of the commission earned by it, to the former sole selling agent and claimed it as a deduction out of its income, which was disallowed by the ITO, the Tribunal, as also by the High Court. The Supreme Court affirmed the decision of the High Court, holding that since the amount was being diverted only by virtue of a mutual agreement, it cannot be said to be a case of diversion under a superior or overriding title.

17. Applying the above principles to the facts of the case, it would be evident that the amount paid to Ponnurangam - no doubt in pursuance of a mutual agreement - was paid under, and on account of, an overriding title in Ponnurangam for the amount over and above the consideration mentioned in the agreement. The fact that the agreement does not create an interest in the property is not really material, because by virtue of the agreement of sale, Ponnurangam became a person interested in the acquisition and the compensation payable for the land, and could claim the said excess amount in his own right, or on the basis of the obligation on the part of the assessee, as the case may be. This would become more clear if we give an illustration. Take a case where the owner of a land enters into an agreement of sale whereunder he receives the entire consideration from the purchaser, but before he executes a registered sale deed and puts the purchaser in possession thereof, the land is acquired. Can it be said in such a case that the compensation will be paid only to the owner who may, in turn, choose to pay it to the purchaser; or, should it be said that, in such a case, the purchaser alone will be entitled to the entire compensation We think the latter view would be correct. We may slightly modify the above illustration. In addition to receiving the full consideration, the owner also puts the purchaser in possession ; but, before the sale deed is executed, the land is acquired. According to law, no doubt, no title passes even in such a case except the right of the purchaser to invoke the doctrine of part performance. Would it be proper even in such a case to say that the purchaser has no legal right to the compensation because there is no sale deed in his favour As pointed out by us hereinbefore, the essential distinction in this case is that the agreement of sale did create a right in the purchaser to share the compensation for the said land - and not merely a personal right against the vendor to recover the said amount. The agreement of sale and the later understanding clothe him with the right to claim the compensation over and above the consideration amount stipulated in the agreement of sale, i.e., the compensation payable for the land which is the subject-matter of the agreement of sale. The situation would be different if the right were mere personal right against the vendor, unrelated to any particular land or its compensation.

18. Now, we take up the second contention of the learned standing counsel. His contention is that the moment the land was acquired, the agreement of sale became frustrated. He points out in this behalf that the agreement of sale did not contain a clause providing for the eventuality of acquisition, and what should happen in case of such acquisition. Counsel relied upon the decision of the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co. : AIR1954SC44 , in support of his proposition. It is necessary to notice the facts of this case and the principle enunciated therein. The defendant-company owned a large tract of land within Greater Calcutta. It started a scheme for development of the said land for residential purposes. Its plan was to enter into agreements with different purchasers for sale of the plots carved out of the said land, accept from the purchasers a small portion of the consideration by way of earnest money at the time of the agreement, then develop the land by constructing roads, drains, etc., and then call upon the purchasers to complete the conveyance by paying the balance of the consideration. It entered into one such contract with the plaintiff on August 5, 1940. On November 12, 1941, a portion of the said land was requisitioned by the Government under the Defence of India Rules. By the date of requisition, the defendant-company had not taken up the development work and had not actually commenced any development work, whether because of the scarcity of materials, or because of the various restrictions in the matter of obtaining materials, as the case may be. In November 1943, the defendant-company wrote to the plaintiff intimating him that, inasmuch as the Government has requisitioned the land and it is not known when the possession of the land would be restored, no development work can be taken up and completed, and hence the agreement between them was cancelled. The plaintiff was called upon to take back the earnest money paid by him. In January, 1946, the plaintiff instituted a suit for specific performance of the agreement of sale, which was resisted, inter alia, on the ground that the contract of sale became frustrated on account of the requisition of the land by the Government. One of the contentions urged before the Supreme Court was that the doctrine of frustration does not apply to contracts for sale of land. The Supreme Court rejected this contention pointing out the distinction between the English law and the Indian law on the subject. The following paragraph brings out the principle (p. 49 of AIR 1954 SC) :

'The second contention raised by the Attorney-General can be disposed of in a few words. It is true that in England the judicial opinion generally expressed is that the doctrine of frustration does not operate in the case of contracts for sale of land - 'Vide Hillingdon Estates Co. v. Stonefield Estates Ltd. [1952] 1 All ER 853'. But the reason underlying this view is that under the English law, as soon as there is a concluded contract by A to sell land to B at certain price, B becomes, in equity, the owner of the land subject to his obligation to pay the purchase money. On the other hand, A in spite of his having the legal estate holds the same in trust for the purchaser and whatever rights he still retains in the land are referable to his right to recover and receive the purchase money. The rule of frustration can only put an end to purely contractual obligations, but it cannot destroy an estate in land which has already accrued in favour of a contracting party.

According to the Indian law, which is embodied in section 54 of the Transfer of Property Act, a contract for sale of land does not of itself create any interest in the property which is the subject-matter of the contract. The obligations of the parties to a contract for sale of land are, therefore, the same as in other ordinary contracts and consequently there is no conceivable reason why the doctrine of frustration should not be applicable to contracts for sale of land in India. This contention of the Attorney-General must, therefore, fail.'

19. The court further observed that whether a contract has been frustrated or not is a matter for the decision of the court and not a matter which can be decided unilaterally by the parties to the contract. This is what the Supreme Court said (p. 49 of AIR 1954 SC) :

'It is well settled and not disputed before us that if and when there is frustration, the dissolution of the contract occurs automatically. It does not depend, as does rescission of a contract, on the ground of repudiation or breach, or on the choice or election of either party. It depends on the effect of what has actually happened on the possibility of performing the contract : Per Lord Wright in - Denny, Mott & Dickson Ltd. v. James B. Fraser & Co. 1944 AC 265 at p. 274'. What happens generally in such cases and has happened here is that one party claims that the contract has been frustrated while the other party denies it. The issue has got to be decided by the court 'ex post facto' on the actual circumstances of the case-'[1944] AC 265 at p. 274'.'

20. In the facts of that particular case, the Supreme Court pointed, the contract was not frustrated. The most important reason for holding so was that there was absolutely no time-limit within which the roads and drains were to be constructed. It was pointed out that the first requisition order was passed nearly 15 months after the agreement between the parties and that, by the time, apparently no work was done by the defendant-company on the said land. The second circumstances taken note of by the court was that, even at the time of the agreement, the war was on, and the order of requisition taking temporary possession of the land for war purposes was a normal event during the period. The third circumstances noticed was that, because of the war, there was scarcity of construction materials and there were several restrictions in the matter of obtaining those materials. It was, therefore, held that all these factors must have been in the contemplation of parties and that is why they did not prescribe any definite time-limit for completing the roads, drains and other development work. In the light of the background, the court held that the contract could not be said to have become frustrated, more particularly because the requisition order was temporary in nature. At the same time, the Supreme Court pointed out that, if there had been a definite time-limit agreed to between the parties within which the development work was to be completed, then it could be said with perfect propriety that delay for an indefinite period would make the performance of the contract impossible within the specified time and this would seriously affect the object and purpose of the venture, in which case there would be room for applying the doctrine of frustration.

21. Following the above decision, it must be held that the doctrine of frustration does not apply to contracts of sale. It must, accordingly, be held that in a contract of sale simpliciter, where the parties do not expressly provide for the contingency of acquisition and what is to happen in such an eventuality, or where it cannot be said that the acquisition of the land was not within the contemplation of the parties, the agreement of sale becomes frustrated if the land is acquired by the State before the execution of the sale deed. In cases, however, where the parties expressly provide for such contingency, or even in cases where there is no such express stipulation but in the facts and circumstances of that case, it can be said that the acquisition of land was within the contemplation of the parties at the time of entering into the agreement of sale, the contract cannot be said to have become frustrated. Where, of course, the contract expressly provides for the eventuality of acquisition and what should happen in the case of such an eventuality, such a stipulation has to be respected and enforced. But where the parties do not so expressly provide but can be said to have kept the probability of the acquisition within their contemplation, then it is for the court to decide how the rights of the parties should be worked out vis-a-vis the compensation payable.

22. Applying the above principle to the facts of this case, it would be evident that though the contract of sale in this case does not expressly provide for the eventuality of acquisition and what should happen in the case of the land being acquired, it is clear beyond any doubt from the material on record that the probability of acquisition was very much within the contemplation of the parties. Ponnurangam entered into the agreement more with a view to create a base for himself to persuade the authorities to acquire this land. Indeed, according to the finding of the Tribunal, Ponnurangam entered into this agreement only with a view to see that the land is acquired by the Social Welfare Department and that he stage-managed the whole affair exclusively with that end in view. It cannot, therefore, be said that because of the acquisition of the land, the agreement of sale in this case became frustrated. Now, in this case, there is no occasion for the court to apportion the compensation between the assessee and Ponnurangam, because that apportionment they themselves had arrived at and we do not wish to express any opinion on the aspect whether the manner and method according to which they have apportioned the compensation money between themselves is the correct method according to law, or not. Suffice it to note, for the purpose of this case, that the contract of sale did not become impossible of performance because of the acquisition of the land - the subject - matter of the agreement - in the particular facts and circumstances of this case.

23. For the above reasons, we answer all the three questions, referred to us, in the affirmative, i.e., in favour of the assessee and against the Revenue. We hold that the capital gains had to be computed only by taking into account the sum of Rs. 1,20,000 actually received by the assessee. No costs.


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