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Commissioner of Income-tax Vs. Dhanraj Dugar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 135 of 1978
Judge
Reported in[1982]137ITR350(Cal)
ActsIncome Tax Act, 1961 - Sections 45, 47 and 48
AppellantCommissioner of Income-tax
RespondentDhanraj Dugar
Appellant AdvocateB.L. Pal and ;Prabir Majumdar, Advs.
Respondent AdvocateR.N. Bajoria and ;S. Chakraborty, Advs.
Excerpt:
- .....on the facts and in the circumstances of the case, and on a proper interpretation of the terms of agreement dated the 15th october, 1959 and 2nd june, 1971, the tribunal was right in holding that the sum of rs. 1,00,000 received by the assessee arose not out of the normal business as a broker but out of the distribution of capital assets of the firm or other association of persons within the meaning of section 47(ii) of the income-tax act, 1961?'2. the assessment year involved in this case is 1972-73. in that assessment the ito noted that the assessee's system of accounting was mercantile. the assessee is an individual and he derived his income from the business as a broker of land and building. the assessee had shown a sum of rs. 1,00,000 in part ii of the return and had.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, and on a proper interpretation of the terms of agreement dated the 15th October, 1959 and 2nd June, 1971, the Tribunal was right in holding that the sum of Rs. 1,00,000 received by the assessee arose not out of the normal business as a broker but out of the distribution of capital assets of the firm or other association of persons within the meaning of Section 47(ii) of the Income-tax Act, 1961?'

2. The assessment year involved in this case is 1972-73. In that assessment the ITO noted that the assessee's system of accounting was mercantile. The assessee is an individual and he derived his income from the business as a broker of land and building. The assessee had shown a sum of Rs. 1,00,000 in Part II of the return and had claimed that it was a capital receipt not liable to income-tax. The assessee contended that there was an agreement dated the 15th October, 1959, to which we shall refer later, between the assessee and three others, viz., Sri Banwarilal Pasari, Sri Purushottamdas Pasari and Sri Sankarlal Pasari in respect of the purchase and sale for profit of permises No. 12-A and 12-B, Russel Street, Calcutta. It would be relevant in view of the contentions that have been raised before us to refer to some of the clauses of the agreement. The agreement, after setting out the names of the parties, inter alia, provided as follows:

'That the first, second; third, and fourth parties will purchase the properties known as 12-A and 12-B, Russel Street, Calcutta, at or for a sum of Rs. 8,00,000.'

3. It may be mentioned that Dhanraj Dugar who is named as the party of the fourth part is the assessee before us. Other relevant clauses of the agreement are as follows:

'That money required for the purchase of the properties, registration and other expenses and for the developments, etc., will be provided by the parties as and when required interest whereon will be allowed at the rate of 6 per cent. per annum. Provided, however, that the fourth party shall not be required to make any contribution for the money as aforesaid.

That this agreement is not to be regarded as a partnership agreement; the parties merely agreeing to do jointly in the manner laid down herein one particular transaction, i. e., to purchase the properties known as 12-A and 12-B, Russel Street, Calcutta, and to resell the same in one or several lots observing the terms and conditions mentioned herein.

That if the parties hereto cannot agree upon the question of development, letting out, resale or the management of the properties, such of them will be, entitled to get the properties partitioned in equal one-fourth share and that in case such partition takes place, each of the parties will pay for his share of the total money expended if not already paid.'

4. There was another clause which provided for a reference to arbitration in case of disputes and differences. As an attempt to arbitration failed in this case it is not necessary for us to refer to that clause in detail.

5. As we have mentioned before it appears that the said agreement essentially provided that in case there was a difference of opinion amongst the four persons after the aforesaid premises were purchased in developing the property or working out the joint venture, the premises involved in the agreement, viz., the premises No. 12-A and 12-B, Russel Street, Calcutta, were to be partitioned into four equal parts and allotted to thefour persons. As the arbitration attempt failed and a difference of opinion arose, the assessee filed a suit on the 3rd December, 1963, in the Calcutta High Court claiming a partition under the said clause. In the said suit the plaintiff, viz., the assessee in this case, had set out the history and thereafter alleged that the two premises in question were purchased and made several allegations, which are not necessary for our present purpose to refer in detail, and the defendants had failed to perform their part. The plaintiff averred that the plaintiff had been ready and willing to pay his share of the money spent on the property or otherwise perform his obligation under the said agreement referred to hereinbefore. The plaintiff had further alleged that the plaintiff was entitled to one-fourth share and was willing to pay his share of the money expended. Thereafter, the plaintiff claimed reliefs as follows:

(a) a declaration that the plaintiff and defendants Nos. 1 to 3 were each entitled to one-fourth share in the said premises Nos. 12-A and 12-B, Russel Street, Calcutta, as provided in the agreement dated October 15, 1959;

(b) partition of the said premises in accordance with the shares of the parties therein as provided in the said agreement, and separate possession;

(c) if necessary specific performance of the said agreement dated October 15, 1959, or so much thereof as was appropriate, and damages or compensation in addition to specific performance ;

(d) possession ;

and other consequential reliefs.

6. After protracted negotiations, terms of settlement were put in on June 2, 1971. By the said terms of settlement, the said suit was settled. The said terms of settlement, inter alia, contained the following terms :

'2. The defendant No. 2 agree to pay to the plaintiff a sum of Rs. 1,00,000 (rupees one lakh) on or before the signing of these terms of settlement and the plaintiff has agreed to accept the said sum in full and final settlement of all his claims and costs which are the subject-matter of this suit.

3. It is declared that the plaintiff shall have no right title or interest in the said premises Nos. 12-A & 12-B, Russel Street, Calcutta. And the said agreement dated 14th/15th October, 1959, which is the subject-matter of this suit, is hereby cancelled.

4. Save as mentioned in clause 2 hereinbefore, the plaintiff has no claim whatsoever against the defendants Nos. 1, 2, 3 and 4 or against any of them nor the said defendant Nos. 1, 2, 3 and 4 or any of them has any claim whatsoever against the plaintiff in respect of the said premise orunder the said agreement dated 14th/15th October, 1959, or on any account whatsoever.'

7. The ITO, in these circumstances, did not accept the assessee's contention and taxed the income. The ITO in his assessment order dealing with the contentions of the assessee observed, inter alia, as follows ;

'Assessee's contention as above cannot be accepted since the decision relied on by the assessee is distinguishable from the facts of the present case. First, the assessee was never a partner under the agreement made with the Pasaris on 15-10-59. In clause No. 4 of the said agreement, it has been specifically stated that this agreement is not to be recorded as a partnership agreement, the parties merely agree to do jointly in the manner laid down herein one particular transaction, i. e., to purchase a property known as 12-A & 12-B, Russel Street, Calcutta, and to resell the same in one or several lots. Thus it would appear from the recital of the above agreement that it was never meant to be a partnership deed. As such, the receipt by the assessee of Rs. 1,00,000 could not be capital receipt on the dissolution of partnership firm which was non-existent.

Again 1/4th share of the property of 12-A & 12-B, Russel Street, would certainly exceed Rs. 1,00,000 and would be valued at a much higher price than that which has been shown by the assessee. Thirdly, clause No. 8 of the aforesaid agreement clearly indicate that the agreement was mainly made for the profit or loss on resale of the properties as above which were to be shared by all in equal proportion. Finally, the assessee did not finance the purchase of the property at 12-A & 12-B, Russel Street, Calcutta, the entire finance was made by Sri Banwarilal Pasari, Sri Purushot-tamdas Pasari, Sri Sankarlal Pasari. The only thing which the assessee did was to negotiate with Kanailal Dalui & Ors., for the sale of the property at 12-A & 12-B, Russel Street, Calcutta, and for the service as broker of land and buildings the assessee had been paid during the accounting period his remuneration amounting to Rs. 1,00,000. As such the said money should be termed as the assessee's income from business as broker in land and buildings.

Since the aforesaid money did not represent any receipt of capital nature in the hands of the assessee, the question of any capital gains did not arise.'

8. The ITO further observed that the terms of the settlement appeared to be a clever ruse to divert the attention of the Revenue from the substance of the real transaction which might have been a collusive one though later on this finding was not pursued.

9. There was an appeal before the AAC. The AAC, in substance, also agreed with the views of the ITO and dismissed the assessee's appeal.

10. There was a further appeal before the Tribunal. The Tribunal observed after setting out the facts, as mentioned hereinbefore, that the first question that had to be decided was whether the receipt in question could be said to arise out of the normal brokerage business of the assessee. The Tribunal noted that the assessee's right to receive the sum arose not out of services rendered as a broker in the year either 1959 or 1960, but because of the compromise of the suit in the year 1971. As we have mentioned hereinbefore, the assessee was following the mercantile system of accounting and the assessee's regular course of business was brokerage in the land. A perusal of the plaint filed by the assessee would indicate that the assessee was not claiming any remuneration for the services rendered by him as a broker. The settlement was not in settlement of his claim for brokerage. The assessee was claiming, as we have noticed, specific performance of the agreement dated 15th October, 1959. His claim was to have possession of one-fourth of the two different premises to which he had become entitled by virtue of the agreement dated 15th October, 1959, because the joint venture or the partnership attempt did not fructify and the properties could not be developed and let out. Therefore, the money that was paid to him in settlement of the claim could, in no circumstances, be relatable to the normal business carried on by the assessee as broker. The receipt had no direct or even indirect connection with the brokerage business. The Tribunal held, in our opinion, rightly, that it did not arise in the course of normal business of the assessee. However, the question that the Tribunal considered was whether it could be assessed as income from any other business activity, as envisaged under the agreement dated 15th October, 1959. After a perusal of the agreement, the Tribunal was of the view that there was an element of mutual agency and in essence all the ingredients of a partnership were present. But as the partnership venture did not succeed, the suit was filed in terms of the agreement to get the assessee's share under the agreement and the suit was settled. The Tribunal was of the view that this was not the income of the assessee assessable to tax. In those circumstances, the questions, which we have indicated hereinbefore, have been referred to this court. It may incidentally be mentioned that the Revenue had sought to raise two questions of law to be referred to this court. Those questions were as follows :

'(i) Whether, on the facts and in the circumstances of the case, and on a proper interpretation of the terms of the agreement dated the 15th October, 1959, the Tribunal was right in holding that the sum of Rs. 1,00,000 was not liable to be taxed as income which arose in the normal course of the assessee's business ?

(ii) If the answer to question (i) be in the affirmative, then, whether on the facts and in the circumstances of the case and on a proper interpretation of the terms of settlement arrived at in the suit filed by the assessee, the Tribunal was right in holding that no capital gains arose in view of section 47(ii) of the Income-tax Act, 1961 ?'

11. But the Tribunal had thought it right to refer the question, as we have indicated before.

12. There is a finding of fact that the income, in question, did not arise from the assessee's normal course of business. That finding of fact has not been challenged. Furthermore, we find that, in the facts and circumstances of the case, the Tribunal had ample materials and had considered all the relevant materials to come to that finding of fact. If that is the position, then the sum could not be taxed as a revenue receipt in the facts and circumstances of this case. On behalf of the Revenue, however, our attention was drawn to Section 2(47) of the I.T. Act, 1961, in aid of the submissions that even if the receipt in question was not a receipt on account of brokerage it would be a receipt in respect of a transfer of capital asset. On this aspect several contentions were sought to be urged before us. It is difficult to appreciate the relevancy of those contentions. Even assuming that by the document in question, viz., the terms of settlement, there was any transfer of any interest of the assessee in the capital asset as envisagedunder Section 2(47), which we do not find, there was, as we shall presently discuss, that by itself would not in any way affect the question of the taxability of the amount unless by the transfer there was any gain to the assessee. Even if it be held that the amount paid to the assessee represented the value for the transfer of the assessee's interest in the premises in question or in the partnership venture, the amount could not be taxed unless it could have been said that a gain had resulted therefrom, in terms of Section 45 of the Act. In order to attract that provision, again, it would be necessary to compute the amount by the procedure envisaged by Section 48 of the Act. That has not been done and that could not indeed be done because the assessee had not paid any money. He agreed to render certain services and as opportunity to render these services were not given effect to or were not availed of and the partnership venture failed in its project, the assessee had to file the suit for damages. Therefore, even if there was any transfer of assets, whatever it might be, it had not cost the assessee anything in terms of money and in such a case the question of computation of capital gains could not arise. In this connection, reference may be made to the ratio of the decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) .

13. Apart from that, in our opinion, there was no question of any transfer in this case because there was no question of either retirement from or dissolution of any partnership because the suit was for the assessee's claim for damages and by the terms of settlement the assessee was not transferring any interest of the asset--either in the immovable property or in the joint venture to the other partners. Learned advocate for the Revenue drew our attention to the decision of the Bombay High Court in the case of CIT v. Tribhuvandas G. Patel : [1978]115ITR95(Bom) , where the Division Bench of the Bombay High Court held thatunder Section 2(47) of the I.T. Act, 1961, the transfer in relation to a capital asset included the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under the law. This definition gave an artificial extended meaning to the term 'transfer' by including within its scope two types of transactions which would not ordinarily constitute transfer in the accepted connotation of that word, viz., relinquishment of capital asset and extinguishing any of the rights in it. In the case before the Bombay High Court, having regard to the particular mode employed by the assessee and the continuing partners to effect and bring about the retirement of the assessee from the partnership, the Bombay High Court felt that the transaction would have to be regarded as amounting to transfer. But the facts in that case and in the instant case are entirely different. Similar or more or less were the facts in the other decision of the Bombay High Court in the case of CIT v. H. R. Aslot : [1978]115ITR255(Bom) , where, following the ratio of the previous decision of the Division Bench of the Bombay High Court, it was held that there was transfer. But the facts of that case were entirely different from the instant. While the Madras High Court in the case of CIT v. Abdul Cader Motor Service : [1980]122ITR812(Mad) held, in the facts of that case, that it was a case of retirement of C from the partnership under the decree, though not in the manner contemplated by Section 32 of the Indian Partnership Act, and the satisfaction of the debt could not be taken as a payment of the sale price for taking over a bus so as to attract the provision of Section 41(2) of the I.T. Act, 1961. Moreover, the terms of the compromise did not show that there was a sale of any particular item of the assets of the partnership. There also the facts were entirely different. This court had also on a different set of facts an occasion to consider this question as to what would be the consequence of retirement or dissolution of partnership in the case of CIT v. Bhupinder Singh : [1981]128ITR67(Cal) , where the two previous decisions of the Bombay High Court were noted. As we have indicated before, here that question does not arise at all because there was no question either in the form of a dissolution or by the retirement of any partner. Here the assessee was really getting thedamages for the failure of the partnership venture to succeed or to fructify. That sum in the facts and circumstances of the case cannot, in our opinion, be considered as a gain attracting the provisions of Section 45 of the Act. In that view of the matter, in our opinion, the Tribunal was right in the conclusion which it arrived at and the question must be answered in the affirmative and in favour of the assessee.

14. In the facts and circumstances of the case, the parties will pay and bear their own costs.

C.K. Banerji, J.

15. I agree.


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