S.P. Bharucha, J.
1. This reference is made at the instance of the Revenue. The question raised reads thus :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the amount of Rs. 1,00,000, being the compensation received by the assessee from Messrs. B. V. Dhuru and others, cannot be treated as 'capital gains' in the hands of the assessee ?'
2. The reference relates to the assessment year 1972-73.
3. The assessee, which is a firm, entered into an agreement with one Captain B. V. Dhuru and others on November 10, 1959, whereunder, the assessee agreed to purchase from the said Dhuru and otheres the immovable property described in the schedule thereto at the rate of Rs. 35 per sq.yd. to be paid in the manner set out. Upon the execution of the said agreement for sale, the assessee paid to the vendors. As required by the said agreement for sale, the sum of Rs. 17,500 as earnest money. The assessee was constrained to file a suit in this court (being Suit No. 361 of 1964) for specific performance of the said agreement for sale or, in the alternative, for damages for its breach. Consent terms were arrived at in the suit and a decree was passed in favour of the assessee for the sum of Rs. 1,17,500 and interest.
4. The sum of Rs. 1,17,500 was received by the assessee during the course of the previous year relevant to the assessment year 1972-73 The Income-tax Officer held that the right that the assessee had acquired under the said agreement for sale was a capital asset. Upon the extinguishment of that right, the assessee had received the sum of Rs. 1,17,500. Deducting the cost of acquisition of the capital asset in the amount of Rs. 17,500 and expenses and legal charges in the sum of Rs. 17,904, the income-tax Officer found the capital gain to be Rs. 82,086. The Appellate Assistant Commissioner allowed the appeal preferred by the assessee holding that the said agreement for sale did not bring a capital asset into existence, the Revenue preferred an appeal against his decision before the Income-tax Appellate Tribunal. The Tribunal upheld the decision.
5. The question posed to us arises out of the Tribunal's judgment.
Section 45 of the Income-tax Act, 1961, makes any profits or gains arising from the transfer of a capital asset chargeable to income-tax under the head 'Capital gains'. A capital asset is defined by Section 2(14) to mean 'property of any kind held by an assessee', the word 'transfer' in relation to a capital asset is defined by Section 2(47) to include 'the sale, exchange or relinquishment of the extinguishment of any rights therein'. The Surpeme Court held the word 'property' in Ahmed G. H. Ariff v. CWT : [1970]76ITR471(SC) , to be 'a term of the widest import and signifying every possible interest which a person can clearly hold or enjoy'.
6. The issue that arises in this reference is : Is the right conferred upon the assessee by the said agreement for sale 'property of any kind' ?
7. Under the provisions of Section 54 of the Transfer of Property Act, 1882, acontract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties and it does not, of itself, create any interest in or charge on such property. Section 40 states that where a third person is entitled to the benefit of an obligation arising out of contract and annexed to the ownership of immovable property, but not amounting to an interest therein or easement thereon, such right or obligation may be enforced against a transferee with notice thereof or a gratuitous transferee of the property affected thereby, but not against a transferee for consideration without notice of the right or obligation, nor against such property in his hands. The illustration to Section 40 reads thus :
'A contracts to sell Sultanpur to B. While the contract is still in force he sells Sultanpur to C, who has notice of the contract. B may enforce the contract against C to the same extent as against A.'
8. In the case of Ram Baran Prasad v. Ram Mohit Hazra, : [1967]1SCR293 , the Supreme Court held that it was manifest that a contract for the sale of immovable property did not create any interest in the immovable property. In Soni Lalji Jetha v. Soni Kalidas Devchand, : [1967]1SCR873 , the Supreme court came to the conclusion that a contract for sale of immovable property, while it did not create interest in immovable property, created a personal obligation of a fiduciary character which could be enforced by a suit for specific performance not only against the vendor but also against a purchaser for consideration with notice. The Madras High Court, in Venkateswara Aiyar v. Kallor Illath Raman Nambudhri, AIR 1917 Mad 358, held that an executory contract for conveyance of land was not a mere right to sue. The right sue was no doubt involved in it on breach of on its stipulations, but before breach there was also the right to have the land conveyed. A mere right to sue was applicable only to cases where there had been a breach sounding in damages and where the specific enforcement of the contract could not be obtained.
9. The aforegoing discussion leads, we think, to the conclusion that the right to obtain a conveyance of immovable property falls within the expression 'property of any kind' used in Section 2(14) of the Income-tax Act and is, consequently, a capital asset.
10. The very issue arose before this court in CIT v. Tata Services Ltd. : [1980]122ITR594(Bom) . The assessee there had entered into an agreement with A to purchase land and had paid earnest money. A was reluctant to complete the conveyance. Ultimately, a tripartite agreement was entered into between the assessee, A and X whereunder the assessee transferred and assigned in favour of X its right, title and interest under the agreement and received the sum of Rs. 5,00,000 as consideration and a further sum of Rs. 90,000 being the refund of earnest money. The question before the court in reference was whether the transaction which brought to the assessee the sum of Rs. 5,00,000 involved the transfer of a capital asset and gave rise to a capital gain. The court noted the definitions of 'capital asset' and 'transfer' under the Income-tax Act. It noted that a contract for the sale of land was capable of specific performance and was assignable and, in this behalf, relied upon the Madras High Court judgment aforementioned Venkateswara Aiyar v. Kallor Illath Raman Nambudhri AIR 1917 Mad 358. It concluded that a right to obtain conveyance of immovable property was property as contemplated by Section 2(14) of the Income-tax Act. It held that the amount of Rs. 5,00,000 had been received by the assessee as consideration for assigning its rights under the agreement, which fell within the wide definition of 'capital assets' in the Income-tax Act. It also held that the earnest money paid by the assessee to A was the consideration for which the property under the agreement had been acquired.
11. The decision in the case of Tata Services Ltd. : [1980]122ITR594(Bom) , was followed by this court in CIT v. Sterling Investment Corporation Ltd. : [1980]123ITR441(Bom) . This was a case where the assessee had entered into an agreement to purchase immovable property and had paid earnest money. Matters dragged on. Ultimately, an agreement was reached and only the sum of Rs. 10,000 was returned to the assessee. The assessee claimed before the tax authorities that it had lost the balance of the earnest money that it had paid and that this was a capital loss. This court was called upon on a reference to decide whether this was correct. It considered the definition of 'capital asset' under the Income-tax Act and held that the contractual right of the purchaser to obtain title to immovable property for a price, which right was assignable, had to be considered to be 'property' and, therefore, a 'capital asset.' In this behalf, reference was made to the judgment in the case of Tata Services Ltd. : [1980]122ITR594(Bom) . The court rejected the argument that if the right to purchase was given up and the vendor was relieved of his obligation, there would be no capital gain. The court approved of what had been said in the case of CIT v. Rasiklal Maneklal (HUF) : [1974]95ITR656(Bom) , in regard to the essential features of a transaction of relinquishment, namely, that the property in which the interest was relinquished continued to exist; it continued 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 was given up or abandoned or surrendered. The court held that the loss to the assessee which had arisen out of the foreiture of the earnest money that had been paid by it was not allowable as a capital loss.
12. The decisions in the cases of Tata Services Ltd. : [1980]122ITR594(Bom) and Sterling Investment Corporation Ltd. : [1980]123ITR441(Bom) negative all the three submissions that have been made before us by Mr. Zaveri, learned counsel for the assessee, namely, that no capital asset was acquired by the assessee as a result of the said agreement for sale; that, in the alternative, there was no transfer of a capital asset; and that, in the further alternative, there had been no capital gain because there had been no cost of acquisition of the capital asset. Mr. Zaveri, therefore, attempted to persuade us to take a view different from that taken by this court in the aforementioned cases. While we are not persuaded to do so, we must record that it is his industry which has brought to our attention the decisions that we refer to in this judgment.
13. The Delhi High Court in the case of CIT v. R. Dalmia : [1987]163ITR517(Delhi) , considered the question as to whether the right acquired by the assessee under agreements to sell immovable property was not a proprietary right. Following the earlier judgment of the Delhi High Court in CIT v. J. Dalmia : [1984]149ITR215(Delhi) , it was held that the right acquired by the assessee under the agreements to sell had to be held not to be a proprietary right and, hence, not a capital asset. In the earlier judgment of the Delhi High Court, the facts were that one 'K' had entered into an agreement with contractors for the constrrction of a building upon land owned by them and the sale thereof to him. Earnest money was paid. In exercise of the right to have the conveyance executed in the name of a nominee, the assessee was nominated. The assessee was constrained to file a suit against the contractors for an injunction against selling the property to third parties and he obtained an injunction. When the suit reached hearing, the parties agreed to go to arbitration and the assessee gave up his claim for specific performance of the agreement and retained his right to claim damages. The arbitrator awarded damages in the sum of Rs. 1,02,500. The question before the court was whether the amount of Rs. 1,02,500 could be assessed to tax as a capital gain. The Delhi High Court noted the judgment of this court in the case of Tata Services Ltd. : [1980]122ITR594(Bom) and distinguished it on the facts. The court said that, in the case before it, it had to determine whether the damages received by the assessee were in respect of a capital asset. There was a breach of contract and the assessee received damages in satisfaction thereof. He had a mere right to sue for damages. Assuming the same to be property, it could not be transfered under Section 6(e) of the Transfer of Property Act.
14. Having regard to the statutory provisions and the authorities which we have cited above, we cannot, with respect, agree that the right acquired under an agreement to purchase immovable property is 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 Income-tax Act and, consequently, a capital asset. When he filed the suit in this court against the vendors, he claimed specific performance of the said agreement for sale by conveyance to him of the immovable property and, only in the alternative, damages for breach of the agreement. A settlment was arrived at when the suit reached hearing 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 a relinquishment of a capital asset. There was, therefore, a transfer of a capital asset within the meaning of the Income-tax Act. We may, at this stage, also deal with the further argument that there was no consideration for the acquisition of the capital asset. In our view, this court was right in the view that it took that the payment of earnest money under agreement for sale was the cost of acquisition of the capital asset.
15. Our attention was invited by Mr. Zaveri to the judgment of the Andhra Pradesh High Court in CIT v. Barium Chemicals Ltd. : [1987]168ITR164(AP) . The facts there were that the assessee had entered into an agreement with an English company for the erecton of a plant. Trial runs of the plant showed that the plant was defective. In the meanwhile, the English company had left the erection site. Negotiations resulted in a settlement whereby the English company paid to the assessee sums aggregating to Rs. 47,20,939. As a condition, the assessee waived its claim against the English company. The court held that these sums could not be brought to tax as capital gains. This decision was rendered in the context of the findings that the business of the assessee was in the chemicals that the plant was expected to produce, that the settlement could not be treated as being in the ordinary course of the businesss of the assessee and that there had been a sterilisation of the assessee's capital assets in that the English company had not erected the plant according to stipulation. The decision was, therefore, rendered upon the particular facts of that case, which are not akin to the facts before us.
16. In CIT v. Ashoka Marketing Ltd. : [1987]164ITR664(Cal) , the Calcutta High Court held upon the facts that there had been no element of cost in the acquisition of which the sum of Rs. 1,00,000 was paid as liquidated damages under an agreement to purchase the property. In CIT v. Dhanraj Dugar : [1982]137ITR350(Cal) , the facts before the Calcutta High Court were unusual. The assessee was a broker of immovable property. He entered into an agreement with three other persons for the purchase of an immovable property which was to be developed and resold. The assessee was not to pay any part of its purchase price. There were disputes between the four persons and the assessee filed a suit claiming partition. Upon a settlement, the assessee received Rs. 1,00,000. The question was whether the sum of Rs. 1,00,000 was received by the assessee from his normal business as a broker or upon a distribution of a capital asset. The court held that even if there was any transfer of a capital asset by reason of the settlement, it had not cost the assessee anything in terms of money so that the question of computation of a capital gain could not arise. This decision was rendered upon its own facts.
17. There remains for consideration a decision of the Gujarat High Court in CIT v. Hiralal Manial Mody : [1981]131ITR421(Guj) , which Mr. Zaveri cited. The question in this case was whether the damages received by the assessee for breach by the seller of an agreement to purchase immovable property was a revenue receipt. The assessee had been held by the Tribunal not to be a dealer in immovable property. The court found that the Tribunal had applied the correct legal tests in arriving at its conclusion that the assessee had not been proved to be a dealer in immovable property and, accordingly, it held that the amount which he had received by way of damages was not a revenue receipt. Having regard to the nature of the controversy before the court, this case does not render us any assistance.
18. We see, with respect, no convincing reason to take a view other than that which has been taken by this court in the cases of Tata Services Ltd. : [1980]122ITR594(Bom) and Sterling Investment Corporation Ltd. : [1980]123ITR441(Bom) . We must hold, therefore, that the assessee acquired a capital asset by reason of the said agreement for sale, that there was a transfer of the capital asset when the assessee entered into consent terms and relinquished it, and that the capital asset had been acquired for the cost of Rs. 17,500 paid as and by way of earnest money under the said agreement for sale.
19. The question that is posed asks whether the amount of Rs. 1,00,000 can be treated as a capital gain in the hands of the assessee. We find that the Income-tax Officer had deducted from out of the total sum of Rs. 1,17,500 received by the assessee under the consent terms the amount of Rs. 17,500 as being the cost of acquisition of the asset and the sum of Rs. 17,904 on account of expenses and legal charges. The assessment was made by him rightly on the basis that the capital gain was of Rs. 82,086. Accordingly, we answer the question thus : the amount of Rs. 82,086 shall be treated as a capital gain in the hands of the assessee.
20. There shall be no order as to costs.