Whether when interim order entitles assessee to receive damages and settles suit for claim of specific performance, it is to be construed as relinquishment of right in property - YES: HC

THE issue before the Bench is - Whether when interim order entitles assessee to receive damages and settles suit for claim of specific performance, it is to be construed as relinquishment of right in property. YES is the answer.

Facts of the case

The assessee company is engaged in the business of rendering engineering and construction management services. The assessee had entered into an oral agreement with one M/s. Eastern Ceramics Limited (ECL) to purchase a factory premises at Goregaon, Mumbai along with a vacant piece of land for a total consideration of Rs.5.80 crores and for that purpose, paid Rs.5 lacs as earnest money on 21st July, 1989. The main purpose for making this investment was to give the property on lease and earn lease rent. Around Feb, 1990, the assessee again entered into an agreement of lease with Classical Electric Limited (CEL) for granting lease of the said property, which was purchased from the said ECL on terms and conditions contained in the MOU dated 23rd Feb, 1990. During the period relating to the A.Y 1990-91, number of meetings took place between the assessee and the ECL for finalizing the Sale Agreement, but ultimately, the ECL backed out of the said oral agreement. The assessee thereafter filed a suit praying for specific performance and in the alternative, for grant of damages for breach of the said agreement. After prolonged litigation between the assessee and the ECL, there was a settlement between the parties outside the Court and Consent Decree dated 19th Aug, 1994 was passed, under which, the ECL agreed to pay Rs.5 crores to the assessee by way of damages. In the meanwhile, the CEL was pressing the assessee for the lease of the said property. Resultantly, a dispute arose between the assessee and the CEL and the matter was referred to the Arbitrator, after which an arbitration award was passed requiring the assessee to pay Rs.15 lakhs to the CEL as compensation or damages for breach of the said agreement.

On being advised by the counsel, the assessee filed its return treating the amount of Rs.5 crores received under the Consent Decree from the ECL was by way of damages, as capital receipt. The AO however, making an intimation u/s 143(1), treated the said damages of Rs.4.95 crores as taxable by making prima facie adjustment. Thereafter, subsequently he felt that taxability of the said sum was highly debatable and could not be subject matter of prima facie adjustment. Accordingly, he made a reference to the CIT, who confirmed his view and directed him to decide this issue in regular assessment proceedings after discussing the matter with Range DCIT. The assessee accordingly, filed an application to the DCIT u/s 144A requesting him to issue necessary directions to the AO with regard to taxability of the receipt of Rs.4.95 crores. The DCIT gave necessary directions to the AO for treating the said receipt of damages as not taxable in the hands of assessee neither as business income nor as capital gains, nor as casual or non recurring receipt. Accordingly, the AO completed the assessment. Consequent to this, the CIT exercising his powers u/s 263, issued notice to the assessee informing that the order passed by AO was erroneous as well as prejudicial to the interest of the Revenue. Accordingly, the CIT passed an order overturning the assessment order, following the decision of Division Bench of this Court in the case of Vijay Flexible Containers. On appeal, the Tribunal confirmed the order of the CIT.

Having heard the parties, the High Court held that,

++ it is seen that the question of law in the case of Vijay Flexible Containers was, "whether the right conferred upon the assessee by the sale agreement of "property of any kind?" It is in that context that the Division Bench arrived at the conclusion that the right acquired is not a mere right to sue. The assessee acquired under the said agreement for sale the right to have the immovable property conveyed to him. He was, under the law, entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right. What he acquired under the said agreement for sale was, therefore property within the meaning of the IT Act and consequently a capital asset. In the Suit that he filed, a settlement was arrived at, at which point of time, the assessee gave up his right to claim specific performance and took only damages. His giving up of the right to claim specific performance by conveyance to him of the immovable property was relinquishment of the capital asset. There was, therefore, a transfer of a capital asset within the meaning of the IT Act. However, the Division Bench while deciding the issue in the case of Abbasbhoy A. Dehgamwalla and Ors. noted that once the assessee's claim to specific performance of the agreement was rejected, then, the alternative claim for damages for breach of agreement even if worded, the receipt of that sum could be taxed as the assessee's income under the head capital gains. That could not have been taxed as such after the assessee's right to obtain specific performance was extinguished when the Court refused to grant such a relief. Thereafter, the alternate argument of the Revenue that the right to receive damages for breach of contract represented the consideration of the original right has been dealt with. The Division Bench concluded that even if the widest possible interpretation accepted, still the amount of damages cannot be taxed as capital gains. That has been held to be a compensation in money for breach of the contract. That, as appearing in this case, is something which will be the substitution for the original relief. It is in lieu of specific performance. There is no right then to claim the property but to be compensated for breach of an agreement to transfer the immovable property and in future. Once such a transfer cannot be obtained, as the Decree for specific performance has been refused, then, the receipt of monetary sum cannot be taxed as claimed by the Revenue;

++ in the present appeal, the Tribunal failed to note that in this case as well that the specific performance of the agreement was refused. It is erroneously held that the claim of the assessee regarding specific performance had never been rejected by this Court. A reading of the order passed by the Division Bench cleares that such a Decree was expressly denied. The Consent Terms may constitute an agreement or contract between the parties, however, a Consent Decree is passed after the agreement is placed before the Court and the Court applies its mind and records a satisfaction that the terms are not contrary to law or public policy. That they can be accepted and based on that a Decree can be passed. Therefore, it is not an agreement between the parties, by which the Suit was disposed of but on that agreement there is a seal of approval or satisfaction of the Court. In such circumstances, even if there was any interim order in favour of the assessee in the present case, eventually the Suit ended in the assessee's claim for specific performance being refused and he being entitled to receive the sum stipulated in this Court's order in lieu of the specific performance. In these circumstances, the assessee was right in urging that he has no right, title or interest in the immovable property. The Tribunal has completely misread and misconstrued this Court's order. In the Consent Terms, which are drawn up and based on which the Suit is decreed by the Court, it does not deal with the rival cases on merits. There is no requirement of the Court then passing an order and Judgment on merits of the claim of the parties. The Court is required to apply its mind and consider as to whether the arrangement reached by the parties can be accepted by it. Once it is accepted and an order or decree is passed in terms thereof, then, it is an order of the Court. Thus, the Court has not undertaken any mechanical exercise or has not casually and lightly accepted the terms and approved the same. It has performed a conscious act and in terms of Order XXIII Rule 3 of the Civil Procedure Code, 1908. This clearly means that the relief was refused. One cannot then pick up a stray sentence or observation from the Judgment of this Court and apply it to the given fact situation. The assessee's right got extinguished once the specific performance was refused. Even if the refund of earnest money or compensation is the relief granted, it is apparent on a reading of the Specific Relief Act, 1963 that the Court has power to grant relief of possession, partition or refund of earnest money if any person sues for specific performance of a contract for the transfer of immovable property;

++ the agreement for sale of immovable property itself does not create any right, title or interest in the immovable property, which is subject matter of such agreement but creates a right to obtain performance of the agreement by approaching Court of law and seeking a Decree of specific performance in terms of the Specific Relief Act. It is that limited right which is recognised by law and the difference between contract for sale of an immovable property and sale as emerging from section 54 of the Transfer of property Act, 1882 is thus explained. In such circumstances, this was not a case where power u/s 263 of the Income Tax Act could have been exercised.