1. These cross appeals are directed against the order of the CIT (Appeals)-I, Bombay and relate to the assessment year 1983-84. For the sake of convenience, these appeals are consolidated and disposed of together by a common order.
2. The assessee is a closely held company. Earlier it was engaged in the manufacturing activities. During the relevant assessment year, its manufacturing activities remained suspended. The relevant accounting year ended on 31-12-1982. The assessment was completed under Section 143(3) of the IT Act (hereinafter called the Act). A sum of Rs. 58,78,814 was added under the head 'capital gains'. Vide note to the statement of total income enclosed with the return and the balance sheet for the relevant period, a sum of Rs. 51,44,000 was reflected as receipt. It was stated that this amount was received in respect of property in the occupancy at Cadell Road, Bandra. The receipt was stated to be of capital nature, hence, not exigible to tax. The Assessing Officer took the view that the receipt of Rs. 51,44,000 under the two agreements and the value of the flat granted to the assessee on ownership basis is capital gains arising out of the transfer of its rights acquired by the assessee under a legally enforceable contract.
3. Indisputably, the assessee received an amount of Rs. 51,44,000 for surrendering its rights in the properties. The Income-tax Officer brought this amount of Rs. 51,44,000 to tax plus Rs. 7,31,750 being estimated cost of the flat allotted to the assessee. Thus, the Income-tax Officer brought to tax the total amount of Rs. 58,75,750.
This amount was taxed under the head 'capital gains'.
4. The lease agreement dated 15-10-1963 was executed between the assessee-company and one Shri C.C. Jhaveri. This was effective from 1-10-1963. The assessee was required to pay vide the terms of the agreement, ground rent of Rs. 620 per month to the lessor one Shri C.C.Jhaveri. Later, the rent was increased to Rs. 1,000 after the expiry of the term of 10 years for which the lease was initially operative. The assessee was entitled to build or construct on the leased premises, sheds, factories, godowns etc.
5. In June 1975, the assessee held discussions with Mrs. Nitina C.Jhaveri, one of the co-owners of the leased premises acquired by the assessee. There was an offer and acceptance in regard to the sale of the said leasehold premises to the assessee. Mrs. N.C. Jhaveri, agreed to sale the property for a consideration of Rs. 2,51,000. A cheque of Rs. 5,000 as a token of acceptance of the proposal was sent through one Shri Ramnikbhai K. Kapadia. The receipt of the cheque was acknowledged by Smt. Nitina C. Jhaveri. Thereafter, there was exchange of correspondence between the solicitor of the assessee-company and those of Smt. N.C. Jhaveri. Certain steps were taken to effectuate the agreement. This correspondence lasted from 29-8-1975 to 24-4-1978, when a legal notice was given on behalf of the assessee to Smt. Nitina C.Jhaveri and other co-owners of the property. In that notice the owners of the property were called upon the honour the commitment made during the negotiations held in 1975 between Smt. Nitina C. Jhaveri, her son-in-law Shri Ramnikbhai K. Kapadia and other members of the family regarding the transfer of reversionary rights in the two plots of land occupied by the assessee-company for a total consideration of Rs. 2,51,000. Reference was also made to the payment of Rs. 5,000 as advance and the recording of the agreement to sale and purchase the property.
6. Thereafter, the assessee-company filed a suit in the Bombay High Court for the specific performance of the agreement reached between the assessee and the owners of the property for sale as aforesaid. In the alternative, it had claimed damage of Rs. 5,00,000.
7. During the pendency of the suit, the various co-owners of the property entered into an agreement with Maryland Construction Co. Pvt.
Ltd. dated 3-7-1981 for the sale of the said land to that company for a consideration of Rs. 24 lakhs. The said agreement contained a reference to the suit filed by the assessee-company against the owners and it was specifically provided that the purchaser's right to the property under that agreement was subject to the outcome of the suit and that the purchaser would not be entitled to claim refund of the purchase price or any part thereof even in the event of a decree for a specific performance being passed in favour of the assessee in that suit.
8. On 11-3-1982, a tripartite agreement was entered into between the assessee-company, the various owners of the property and Maryland Construction Co. Pvt. Ltd. Under this agreement the assessee-company agreed to surrender their occupancy right and/or rights as tenants holding over in respect of the aforesaid property as well as to treat the agreement for sale as contained in the letter dated 26-6-1975 by the assessee-company to Smt. Nitina C. Jhaveri as cancelled, terminated and/or put to an end for ever. This was in consideration of the payment by Maryland Construction Co. Pvt. Ltd. of Rs. 38 lakhs to the assessee.
In addition to the aforesaid cash consideration, Maryland Construction Co. Pvt. Ltd. were also to provide permanent alternative accommodation to the assessee on ownership basis. This accommodation was to consist of office premises measuring 1,000 sq. ft., carpet area on the ground floor of the building to be constructed on the property occupied by the assessee together with parking space measuring 120 sq. ft. By a supplementary agreement between the assessee and Maryland Construction Co. Pvt. Ltd., the aforesaid tripartite agreement was modified to the extent that the assessee agreed to accept a similar but smaller accommodation than that stipulated in the tripartite agreement in a different building: In consideration of the assessee-company's accepting alternate accommodation, they were paid a consideration of Rs. 13,44,000.
9. The net result of the aforesaid transactions was that the assessee-company received a cash consideration of Rs. 51,44,000. In addition, they received a flat measuring 975 sq. ft. with certain amenities. The cost of this flat was estimated by the Income-tax Officer at Rs. 7,31,750. The total consideration received by the assessee, thus, comes to Rs. 58,75,750.
10. The crux of the issue is what was the nature of rights which were surrendered by the assessee in consideration of a sum of Rs. 58,75,750.
11. Shri Y.P. Trivedi, Id. counsel for the assessee appeared before us.
Relevant documents and papers were filed. It was vehemently contended by Shri Trivedi, that the assessee was owning only possessory rights in the said premises by virtue of being a tenant. The consideration which the assessee received was for surrendering the possessory rights. There could be no other rights except the possessory rights. The mere fact that a suit was filed on behalf of the assessee and the said suit was pending before the Hon'ble Bombay High Court is not enough to create any right in the said property. It was pointed out that there was no contract existing between the parties. The letter given along with the cheque was addressed to one of the co-owners. She was not owning any power of attorney to dispose of the property on behalf of other co-owners. Her act cannot bind the other co-owners in regard to the sale of the property. There is absolutely no material to show that the other co-owners assented or ratified the transaction. Besides, it cannot be construed to be a contract as the essential ingredients of contract are lacking. For a contract, there must be an offer or acceptance, legal relationship, parties must be capable, there must be free consent, there must be proper consideration, formality of writing and registration is also essential. In the instant case, one of the co-owners orally agreed to sell the property for a sum of Rs. 2,51,000.
There was no written agreement, therefore, on the basis of the letter given to one of the co-owners along with the cheque of Rs. 5,000, it was not possible on the part of the assessee to get any claim. It was further argued that the assessee could have got the damage of Rs. 5 lakhs, beyond that nothing was possibi.e., Assuming for a moment that consideration received by the assessee involves consideration for withdrawing the suit, the value of this amount can under no circumstance exceed to Rs. 5 lakhs as the maximum damage claim was Rs. 5 lakhs. The balance amount is not exigible to capital gains tax in view of the decision of the Apex Court rendered in the case of CIT v.B.C. Srinivasa Setty [1981] 128 ITR 294. Further, it was argued that the assessee did not pay any amount to acquire the possessory rights.
When the cost of acquisition is nil capital gain cannot be charged, Shri Trivedi, further relied on CIT v. Mangtu Ram Jaipuria [1991] 192 ITR 533 (Cal.) wherein it was held that the Tribunal was justified in holding that there was no cost of acquisition of tenancy rights. It was further stated that the Supreme Court in the case of A. Gasper v. CIT [1991] 192 ITR 382 observed that since in view of the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra) the appellant had a good case. The prayer was rejected in that case on a technical ground. But the Apex Court held that it would be open to the appellant to apply to the CBDT for relief by abstaining from recovering the tax levied and the Board would consider the application sympathetically. It was further submitted that right to suit cannot be transferred and no capital gains arise to the assessee on the receipt of damage. To support this proposition, Shri Trivedi relied on the ratio laid down in the case of CIT v. J. Dalmia [1984] 149 ITR 215 (Delhi).
12. Shri Keshav Prasad, Id. Departmental Representative submitted that the assessee got the amount not only for surrendering the possessory rights but other rights also which came into being by virtue of agreement for the purchase of property at Rs. 2,51,000. This feet finds mention even in the tripartite agreement. According to Id. Departmental Representative the fact remains that the assessee got Rs. 58,75,750.
The Id. Departmental Representative invited our attention on the ratio laid down by the jurisdictional High Court in the case of CIT v. Vijay Flexible Containers [1990] 186 ITR 693' (Bom.) wherein it was held 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 Act, and is, consequently, a capital asset. The payment of earnest money in order to obtain such a right constitutes its cost of acquisition. Where such a right is given up, there is a transfer of a capital asset. Our attention was also invited on the provision of Section 53A of the Transfer of Property Act.
13. We have heard the rival submissions in the light of material placed before us and precedents relied upon. The task before us is to determine the nature of right surrendered by the assessee. It was contended on behalf of the assessee that the consideration received was in lieu of surrendering the occupancy rights for which acquisition cost was "nil". On the other hand, the contention of the revenue is that the amount which the assessee received was for surrendering the other valuable rights which came into being by virtue of an agreement for the sale of property at a consideration of Rs. 2,51,000. It is, therefore, to be decided whether any valuable right came into being by virtue of an agreement with Mrs. Nitina C. Jhaveri. In this context it is also to be examined whether the agreement was having any legal sanctity. Right is a legally protected interest. Each and every right of a citizen is protected by the law. Wherever there is any infringement of right, law comes for the rescue and prevails over the wrong doer. Various remedial measures are enunciated under the law to protect the right of a citizen. The well known dictum of the law prescribes, "UBI JUS IBI REMEDIUM", which purport that wherever there is right, there is remedy.
In order to put the right within the four corners of the law, it is, sine qua non, that required norms for the growth of the right as contemplated in that particular jurisprudence must be present. Since in the present case, we are concerned with the growth of contractual right, first, we would like to deal with the enforceability of that agreement.
14. All contracts are agreement but all agreements are not contract.
Only those agreements come within the category of contract which are legally enforceabi.e., In order to form a contract, there should be offer and acceptance, legal relationship, proper consideration, parties must be capable, there must be free consent, if required by the law, contract must be in writing and also registered, there should be possibility of performance etc. etc.
15. An offer is to an acceptance what a lighted match is to a train of gunpowder. Once the lighted match comes into contact with the train of gunpowder, explosion is inevitable, however, if the gunpowder is dampened due to time factor, the lighted match may not be effective.
Similarly, if the offer is accepted immediately or within the time allowed the same may give rise to a valid contract.
However, if it is not accepted within the time it dampens like a gunpowder, the agreement may not be effective. In the instant case, we find that there was an oral agreement pursuant to that a cheque of Rs. 5,000 was forwarded to Mrs. Nitina C. Jhaveri, one of the co-owners.
The cheque was sent through Shri Ramnikbhai K. Kapadia, a relation of Smt. N.C. Jhaveri. The cheque was accepted. This shows that a valid agreement was there between the concerned parties.
15.1 Smt. C. Jhaveri, was one of the co-owners. It is not known whether she got any power of attorney, expressed or implied to bind the other co-owners by her act. However, there were exchange of communication between the concerned parties. The claim for the purchase was made. It was not accepted. The matter went up to the High Court. Before the High Court the assessee made a claim for specific performance, alternatively for a damage of Rs. 5 lakhs. When the tripartite agreement was executed, the claim of the assessee was pending before the High Court.
It was stipulated in the tripartite agreement that in consideration of the amount as discussed above the assessee will surrender the possession and shall also withdraw the suit which at the relevant time was pending before the High Court. From this, it can be concluded that the agreement of the assessee with Smt. Nitina C. Jhaveri had some force, and in the fixation of the amount of "consideration", the existence of the said agreement assumed significance. There is a Shastric Dictum: "Vachan Sate Napi Vastononaya Karanashakte". The purport of this dictum is that a fact cannot be altered by hundred text. The fact is that the assessee got money for withdrawing the suit pending before the High Court. It is beyond the scope of this appeal to enquire the chances of success in that appeal. When the opponent accepted the right of the assessee and made a compense for the same, there is no exigency to test the assessee's right on the touchstone of strict legal norms. The law is the harbinger of justice. It is not a brooding omnipotence in the sky but a pragmatic tool of social order.
So, if without the interference of the legal agencies, the right of a citizen gets due cognition, it won't be proper, not to call it, "a right" as such. It is quite possible that while entering into a tripartite agreement, there was lurking fear in the minds of the owners, of the adverse decision, which might have guided them in setting the terms of the agreement.
16. It is a well known fact, that the possession is the nine point of owenrship. The possessor has got right in regard to the property which he is holding against the whole world except the true owner. The ownership is a right over a determinate thing, indefinite in point of user, unlimited in point of duration and unrestricted in point of disposition. The ownership bereft of the possessory rights carries little value. This is evident as the owners of the property agreed to sale their ownership right in the property for a consideration of Rs. 24 lakhs. Whereas, possessory rights along with some other rights fetched a consideration of Rs. 58,75,750.
17. At this stage, it would be useful to make some enquiry as to the claim of the assessee. The mere fact that the agreement was not registered, does not put bar on the claim of the assessee. The Doctrine of part performance embodied in Section 53A of Transfer of Property Act, 1882 is an equitable Doctrine. The object of this section is to prevent a transferor from taking any advantage on account of the non-registration of the document, provided the transferee has performed his part of the contract and in pursuance thereof has acted in the like manner. In view of the fact that the right of the assessee was recognised, it is not necessary to discuss with the implication of the provision. It is just to support the proposition that the assessee, apart from having possessory rights had some other rights also. We will call them "dormant rights" of the assessee in the said premises waiting for activation by the courts order. We, now, come to the question of assessing the value of such dormant rights (which arose out of the agreement entered with Smt. Nitina C. Jhaveri). The first and foremost prayer of the assessee was for the specific performance. Assuming for a moment, that such a prayer would have been granted by the court, the assessee could have got this property for Rs. 2,51,000. Similar right was surrendered for a consideration of Rs. 24 lakhs.
18. It is an imponderable factor whether the Court would have dismissed the suit filed by the assessee or ordered specific performance or awarded damages of Rs. 5 lakhs. In case the suit would have been dismissed, the value of the assessee's right would have been 'nil', whereas it would have been nearly Rs. 24 lakhs if specific performance would have been ordered, but it would have been only Rs. 5 lakhs, if damages would have been awarded. In the facts and circumstances of the case, it becomes necessary to estimate the value of the right, within these parameters and we make this estimate at a figure of Rs. 15 lakhs.
This amount is exigible to capital gains tax being the amount of consideration received by the assessee for surrendering the "dormant rights". We, therefore, direct that capital gains should be computed on the estimated sale price of Rs. 15 lakhs, for surrender of the "dormant rights" of the assessee in the said premises, waiting for activation by the Court's order.
19. The balance amount of consideration received by the assessee was for surrender of possessory rights, for which the cost of acquisition was 'nil'. The balance amount is therefore beyond the ken of capital gains tax.
20. The other grounds, concerning the deducibility of shifting charges and professional fees were not seriously pressed. However, we have gone through the records. We do not find merit in the same. Accordingly, we dismiss the claim of the assessee, 21. Coming now to the revenue's appeal, we find that the alternative permanent accommodation provided along with the cash consideration was not a consideration resulted in surrendering the right to purchase the property. It does not seem to be a convincing argument for holding that the amount of Rs. 7,31,750 representing the value of the alternative accommodation of 975 sq. ft. should be brought to tax as short term capital gains. The whole transaction was a composite transaction and the entire consideration, the value of which was computed by the Income-tax Officer at Rs. 58,75,750 has to be treated as one single transaction and does not admit of bifurcation. In any case, it is not supported by any evidence on record. Accordingly, we set aside the impugned order and direct the Income-tax Officer to modify the order.