1. The following question has been referred to this court under s. 256(1) of the I.T. Act, 1961 (for short 'the Act'), by the Income-tax Appellate Tribunal, Delhi Bench 'D', New Delhi :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,02,500 is assessable as capital gains other than long-term capital gains in the hands of the assessed ?'
2. The case pertains to a property which was under construction in Greater Kailash, New Delhi. M/S. Satish Kumar Sood and Sons (hereinafter referred to as 'the contractors') were the owners of this property. They entered into anagreement, to sell, with one Krishan Prasad. This was on November 29, 1966. The price was settled at Rs. 4,95,000. An earnest money of Rs, 20,000 in cash was paid by Krishan Prasad to the contractors at that time. The construction was to be completed in accordance with certain specifications, which were annexed to the agreement to sell. The agreement provided that the sale deed could be got executed by Krishan Prasad either in his own name or in the name of his nominee or nominees. It was further provided that if the contractors failed to execute the sale deed, the purchaser would be entitled to get the sale deed executed by specific performance through a court of law at the risk and cost of the contractors, and, in that event the contractors would also be liable to pay damages to the purchaser in accordance with the prevalent make price. By a letter dated December 26, 1966, Kishan Prasad informed the contractors that he had irrevocably nominated J. Dalmia (karta of the joint Hindu family) as his nominee to purchase the property in question. It was mentioned in this letter that after the nomination, Krishan Prasad would have to concern with the purchase of the property and that the contractors would deal directly with the nominee. The balance of the sale consideration, being Rs. 4,75,000 was to be paid by the nominee at the time of execution of the sale deed. A letter was also addressed on the same date by J. Dalmia to Krishan Prasad. It was mentioned in this letter that J. Dalmia was to pay Rs. 20,000 to Krishan Prasad at the time of final execution of the sale deed between him (J. Dalmia) and the contractors. No other consideration was expressed to be payable to Krishan Prasad, though it was mentioned in this letter that in case of default on the part of J. Dalmia to get the sale deed executed he would pay Rs. 20,000 to Krishan Prasad, and in case default was committed by the contractors, the sum of Rs. 20,000 was nevertheless payable by J. Dalmia to Krishan Prasad but only after the success of J. Dalmia in court. All the legal expenses were to be in the account of Krishan Prasad. On March 15, 1967, J. Dalmia wrote to the contractors drawing their attention to the letter of December 26, 1966, of Krishan Prasad to them and also to the agreement to sell dated November 29, 1966. The contractors were asked to intimate the progress of the building and the notice regarding completion of the for the purpose of execution of the sale deed. On April 18, 1967, a notice was got sent to the contractors by J. Dalmia calling upon them to in J. Dalmia regarding obtaining of the completion certificate so that J. Dalmia could arrange to have the sale deed executed in terms of the agreement. When no reply was received, J. Dalmia filed a suit for injunction against the contractors to restrain the contractors from selling, alienating or in any other way transferring the property in question. Krishan Prasad was also imp leaded as a defendant and it was averred that he was necessary and proper party as J. Dalmia, the plaintiff, had acquired the title and interest through him. It was stated in the plaint that though the contractors had obtained the completion certificate, they had failed to intimate the plaintiff regarding the completion of the construction and that the contractors were trying to sell the property to a third party in breach of the agreement referred to above.
3. It appears that an ex parte injunction was obtained by J. Dalmia and when the matter came up for hearing before the court on June 6, 1967, the parties entered into an agreement referring their dispute and differences to the sole arbitration of Shri D. P. Kapoor, chartered accountant. It was, however, specifically mentioned that J. Dalmia had agreed to give up his claim for the specific performance of the contract dated November 29, 1966, which relieved the contractors from their undertaking in the court not to sell the property. J. Dalmia retained his claim and rights for damages only in accordance with law against the contractors. The arbitrator gave his award on July 14, 1967. He awarded a sum of Rs. 1,02,500 'as damages or compensation for breach of the contract' payable by the contractors to J. Dalmia, and the contractors were further held liable to refund Rs. 20,000 to Krishan Prasad, which amount had been received by the contractors from him. A sum of Rs. 1,000 was also awarded as costs to J. Dalmia, being the costs of legal proceedings which J. Dalmia had to taken in the court against the contractors. Thus, a sum of Rs. 1,03,500 was awarded to J. Dalmia.
4. When J. Dalmia (HUF) the assessed, filed the return of income for the assessment year 1968-69, it was claimed that the sum of Rs. 1,02,500 received from the contractors was in nature of a windfall or a casual gain. It was claimed that the amount was not capital gains as there was neither any capital asset not the relinquishment thereof. The ITO rejected this contention and included this sum as 'capital gains' other than long-term 'Capital gains' in the taxable income of the assessed. The AAC, however, accepted the contention of the assessed, and held that no capital gains had accrued to the assessed. The matter was thereafter taken to the Income-tax Appellate Tribunal by the Revenue. The Tribunal by its order dated February 24, 1973, dismissed the appeal. The Tribunal held that 'such rights but only rights of a personal nature which cannot be comprehended within the meaning of the term 'capital asset' in s. 2(14).' The Tribunal also rejected the alternative argument of the Revenue holding that even 'if the rights under the contract represent a capital asset in this case, there was no transfer of such capital asset so as to attract capital gains tax.' The Tribunal, however, did not deal with another contention of the assessed that even if there was a capital asset, there was no actual cost to the assessed that even if there was a capital asset, there was no actual cost to the assessed in acquiring the same.
5. At the instance of the Revenue, the Tribunal has referred the question set out in the beginning of this judgment for the decision of this court.
6. It will thus be seen that in case of default by the contractors, under the agreement for sale, the purchaser could claim specific performance of the agreement and in addition could also claim damages in accordance with the prevailing market rate. Reference may be made to s. 21 of the Specific performance of a contract, may also claim compensation for its breach, either in addition to, or in substitution of, such performance. In determining the amount of compensation, the court is guided by the principles ciples specified in s. 73 of the Contract Act, 1872. It may, however, be noticed that the suit filed by J. Dalmia was not for specific performance of the contract where he could also claim damages. It was a suit for permanent injunction wherein it was prayed that the contractors be restrained for selling, alienating or in any other way transferring the property in question and from executing the transfer in the name of any person other than J. Dalmia. The parties, instead of proceeding with the suit, agreed to refer their disputes to arbitration. J. Dalmia as well as Krishan Prasad gave up their claim for specific performance of the contract but retained their claim and right for damages only in accordance with law. For this no consideration passed from the contractors to J. Dalmia and krishan prasad. What was referred to the arbitrator was the question regarding the quantum of damages in respect of breach of the contract committed by the contractors. This rights was in addition to, and not in lieu of, the right of specific performance as provided in the contract.
7. We are, thereforee, left with the question as to whether the right to claim damages in the instant case is a 'property of any kind' and thus a 'capital asset' under s. 2(14) of the Act. The further question as to whether there was a transfer of such a 'capital asset' would arise only if the right to claim damages is held to be a 'capital asset'. But, again, it will have to be examined if such a right could be transferred. Relying on the decision of the Bombay High Court in CIT v. Tata Services Ltd. : 122ITR594(Bom) , it was contended by Shri Wadhera, learned counsel for the Revenue, that any right which can be called property will be included in the definition of 'capital asset' and that a contract for the sale of land is capable of specific performance and is also assignable, and he referred to s. 15 of the Specific Relief Act, 1963. thereforee, according to Shri Wadhera s. right to obtain conveyance of immovable property is clearly a 'property' as contemplated by s. 2(14) of the Act. This argument overlooks the fact that the right to specific performance had been specifically given up by the assessed, J. Dalmia, and what was left was a mere right to sue for damages. In the Bombay case, there was an agreement to purchase a residential plot and the purchaser had paid Rs. 90,000 as earnest money. The vendor was, however, in branch of the agreement, as he wanted to sell this property to a third party at a higher price. Finally, there was a tripartite agreement between the purchaser (the assessed), the vendor and the third party, and the purchaser was returned the earnest money as well as paid a sum of Rs. 5,00,000 being the amount of consideration for the transfer and assignment of his right, title and interest under the contact for sale. It was held that the amount of Rs. 5,00,000 was received by the assessed as consideration for assigning his rights under the agreement and these rights, which had been assigned, clearly fell with in definition of 'capital asset'. It will thus be seen that the facts of this case are quite different and the authority does not help Shri Wadhera. It may however, be noticed at this stage that Krishna Prasad constituted J. Dalmia as his nominee under the agreement and assigned his rights to J. Dalmia without any consideration. J. Dalmia as the nominee could maintain a suit for specific performance. We need not go into the validity of the nomination though it was argued that the contract between Krishan Prasad and J. Dalmia whereby the rights under the contract for sale were assigned to J. Dalmia was void being without consideration. The parties, however, did not dispute the right of J. Dalmia as a nominee under the contract for sale. In a recent decision of this court in R.F.A. No. (OS) No. 3 of 1977, Hari Dass Sood v. Narinder Singh Oberoi, decided on December 16, 1983, it was held that a nominee could maintain suit for specific performance. No doubt, the nomination in that case was not without consideration.
8. Shri Harihar Lal, learned counsel for the assessed, however, contended that a mere right to sue is not property and it cannot be transferred. He referred to s. 6 of the Transfer of Property Act. Relying on a decision of the Supreme Court in Swami Motors Transports (P.) Ltd. v. Sri Sankarswamigal Mutt, : AIR1963SC864 , he also submitted that the right of the assessed under the contract for sale of immovable property was not in the nature of property in that the assessed was having to interest or right of property. The Supreme Court was concerned with the question of right to purchase property by a tenant under the Madras City Tenants Protection Act with reference to article 19(1)(f) of the Constitution. Reliance was placed on the following passage of the judgment (p. 874) :
'The law of India does not recognize equitable estates. No authority has been cited in support of the contention that statutory right to purchase land is, or confers, an interest or a right in property. The fact that the right is created not by a statue cannot make a difference in the content or the incidents of the right : that depends upon the nature and the scope of the right conferred. The right conferred is a right to purchase land. If such a right conferred under a contract is not a right of property, the fact that such a right stems from a statute cannot obviously expand its content or make it any the less a non-proprietary right. In our view, a statutory right to apply for the purchase of land is not right of property. It is settled law that a contract to purchase a property does not create an interest in immovable property'.
9. This is, however, not the question in the present case. We are not concerned whether the assessed acquired any interest in the immovable property by virtue of the contract for sale. Under s. 54 of the transfer of property Act, a contract for sale of immovable property does not by itself create any interest in or change on such property. In Sidhrajbhai v. State of Gujrat AIR 1963 SC 540, it was held that the word 'property' in article 19(1)(f) must doubtless be extended to all those recognized types of interest which have the insignia or characteristics of proprietary rights. We are to determine whether damages received by the assessed were in respect of transfer of a 'capital asset'. There was a breach of contract and the assessed received damages in satisfaction thereof. He had a mere right to sue for damages. Assuming the same to be 'property' this could not be transferred under s. 6(e) of the Transfer of Property Act. The relevant provisions may be reproduced.
'6. Property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force :
(e) A mere right to sue cannot be transferred'
10. We do not find any exception under the I.T. Act, through the word 'transfer' in relation to capital asset has been defined in s. 2(47) of the Act, which includes 'sale, exchange or relinquishment of the asset or the extinguishment of any rights therein'. The damages which were received by the assessed cannot be said to be on account of relinquishment of any of his assets or on account of extinguishment of his right of specific performance under the contract for sale.
11. Under s. 5 of the Transfer of Property Act, transfer of 'property' means an act by which a person conveys property to another and 'to transfer property' is to perform such act. A mere right to sue may or may not be property but it certainly cannot be transferred. The cannot by any dispute with the proposition that in order that a receipt or accrual of income may attract the charge of tax on capital gains the sine quo non is that the receipt or accrual must have originated in a 'transfer' within the meaning of s. 45 read with 2(47) of the Act. Since there could not by any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by thee assessed as damages was not assessable as capital gains.
12. It was also argued on behalf of the assessed that the cost to the assessed of the acquisition of his aforesaid right under the contract for sale was nil. As such, the transfer would be outside the scope of s. 48 of the Act and in this context reliance was placed on a decision of the Supreme Court in CIT v. B. C. Srinivasa Setty : 128ITR294(SC) . But, the view which we taken makes it unnecessary to go into this question.
13. Accordingly, we answer the question in the negative and in favor of the assessed. We leave the parties to bear their own costs.