A.M. Ahmadi, J.
1. The facts of this case lie in a narrow compass. The assessee, an incorporated company, was at all material times, engaged in the manufacture and sale of sugar and certain chemicals. Some time in February, 1970, Messrs K.C.P. Limited, Madras, contracted to sell a second hand GHH Mill from out of its Vuyyuru Sugar Factory to the assessee company for an agreed price. Subsequently, the vendor committed a breach of the contract by defaulting to sell the machinery, etc., to the assessee company. There is no dispute regarding the validity of the contract or the factum of its breach. The breach of the contract entitled the assessee to the remedies arising ex contractu, e.g., specific performance of the contract or damages; in the present case, the first was ruled out because the subject-matter had been sold by the vendor to a third party. The assessee was, therefore, entitled to seek compensation for the breach of the contract from Messrs K.C.P. Limited. In about April, 1971, that is, during the previous year relevant to the assessment year 1972-73, the assessee and Messrs K.C.P. Limited settled the claim for a sum of Rs. 1,40,000 and the latter paid the said amount to the former in full and final settlement of all claims arising ex contractu on account of the breach of the contract.
2. The assessee, relying on the decision of the Supreme Court in CIT v. Vazir Sultan & Sons : [1959]36ITR175(SC) and Divecha (P. H.) v. CIT : [1963]48ITR222(SC) , claimed that the receipt was a non-recurring capital receipt and being casual, was not liable to tax. The Income-tax Officer, while agreeing that it was in the nature of a capital receipt, held that the payment resulted in extinguishment of the assessee's right to acquire the subject-matter, an intangible asset, and was, therefore, covered by section 2(47) read with section 45 of the Income-tax Act, 1961 (for short 'the Act'), and was liable to tax as short-term capital gain. In appeal, the Appellate Assistant Commissioner held that the agreement did not bring into existence any capital asset or any right in the capital asset which could have been transferred. The creation of an obligation for specific performance, he held, did not create any property and, therefore, there was no question of 'transfer' of a capital asset or any right therein. In his view, the payment, therefore, represented a capital receipt only which was not liable to tax as capital gains. He, therefore, reversed the order of the Income-tax Officer. The Revenue carried the matter in appeal to the Tribunal. The Tribunal held that the right which the assessee had acquired was a capital asset within the meaning of section 2(14) of the Act and on the settlement of the claim, there was extinguishment of the said right amounting to 'transfer' under section 2(47) of the Act. Quoting profusely from the decision of this court in CIT v. Amin : [1971]82ITR194(Guj) , the Tribunal concluded that there was a 'transfer' of a capital asset and hence the receipt of Rs. 1,40,000 was liable to capital gains tax. Feeling aggrieved, the assessee sought a reference under section 256(1) of the Act. The following question has been referred to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount received by the assessee company by way of damages for breach of contract of sale of movable property was chargeable to tax under the head 'Capital gains' ?'
3. Section 2(14) of the Act defines the term 'capital asset' to mean property of any kind held by an assessee, whether or not connected with his business or profession. Certain properties enumerated in clauses (i) to (v) have, however, been excluded from the definition of 'capital asset' and since the subject-matter of the contract in question does not attract any of these clauses, it is not necessary to set them out. Section 2(47) defines the term 'transfer', in relation to a capital asset, to include (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment. Under section 45, any profits or gains arising from the transfer of a capital asset effected in the previous year, save as otherwise provided ill sections 53 54 54B 54D 54E and 54F, are made chargeable to income-tax under the head 'Capital gains' and such income is to be deemed to be the income of the previous year in which the transfer took place. Section 48provides the machinery for computing income chargeable under the head 'Capital gains'. It provides that such income shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :
(i) expenditure incurred wholly or exclusively in connection with such transfer; and
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.
4. In other words, from the full value of the consideration received or accruing on the transfer of the capital asset, the amounts stated in (i) and (ii) above have to be deducted and the balance becomes chargeable to income-tax as capital gains and must, therefore, be treated as the income of the previous year in which the transfer took place. The two basic requirements to be satisfied are : (i) there must be a transfer of a capital asset; and (ii) profits or gains must have arisen from the transfer after making deductions as provided by section 48 of the Act. The case of the Revenue is, that on the breach of the contract by Messrs K.C.P. Limited, the assessee was entitled to the remedies arising ex contractu and this right became extinguished on payment of Rs. 1,40,000 by the defaulting party; there was, therefore, a 'transfer' of a capital asset for valuable consideration and hence the same was chargeable under the head 'Capital gains'. Since the expression 'capital asset' is defined to mean property of any kind, it would include the right which the assessee had on the breach of the contract and on the extinguishment of the right, there was 'transfer' of that capital asset for Rs. 1,40,000 in favour of the defaulting party under section 45 of the Act. The Revenue, therefore, supports the view taken by the Income-tax officer and approved by the Tribunal.
5. The assessee counters this line of reasoning by pointing out that on the breach of the contract by Messrs K.C.P. Limited and on the transfer of the subject-matter to a third party, the right which survived in the assessee was a mere right to sue which under section 6(e) of the Transfer of Property Act was not transferable. In order to understand this contention, a few provisions of the Transfer of Property Act may be kept in mind. Section 3 defines the expression 'actionable claim' to mean a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. This expression was originally defined by section 130 but it was amended and inserted in section 3 by Act 2 of 1900. Section 5 then defines the expression 'transfer of property' without attempting to define the term 'property'. It would, however, suffice to say that the term 'property' is used in its widest and most generic legal sense so as to include all actionable claims. Section 6 states that property of any kind may be transferred, except as otherwise provided by this Act or by any other law in force for the time being. Clauses (a) to (i) which immediately follow enumerate what cannot be transferred. Clause (e) with which we are concerned states that 'a mere right to sue cannot be transferred'. This clause also underwent a change by the Amending Act 2 of 1900. Before its amendment, it provided that 'a mere right to sue for compensation for a fraud or for harm illegally caused cannot be transferred'. The underlined words were deleted with a view to widening the scope of the clause. Lastly, section 130, as it now stands, provides that an actionable claim can be transferred only by an instrument in writing signed by the transferor.
6. The Contention of the assessee is that on the breach of the contract by Messrs K.C.P. Limited and the sale of the subject-matter to a third party, the only right which survived in the assessee was a right to sue for one or more of the reliefs available on the breach of contract. This right was not an actionable claim within the meaning of section 3, Transfer of Property Act, since it could not be said to be a debt or a beneficial interest in movable property not in the possession of the assessee. It was a mere right to sue which could not be transferred by virtue of section 6(e) referred to earlier. In any case, assuming without admitting that it was a transfer of ar. actionable claim, since the facts do not disclose that the said transfer was effected by the execution of an instrument in writing signed by the transferor or his duly authorised agent as required by section 130, the court should refuse to hold that the rights and remedies of the transferor vested in the transferee and should refuse to take notice thereof.
7. When a contract is broken, it gives rise to a civil wrong which may entitle the injured party to sue the wrongdoer for damages liquidated or unliquidated or for specific performance and in some cases for restitution or even an injunction. In an action for damages, the injured party seeks compensation in money for the other's failure to perform. Where a defaulting party commits a breach of the promise to do or desists or forbears from doing a certain act, the injured party may bring an action to compel actual performance thereof. Since the law does not confer a right to actual performance but leaves it to the discretion of the court, an alternative remedy seeking damages is ordinarily sought. The traditional view being that specific performance will not be ordered where award of damages is an adequate relief, the relief for specific performance is generally refused of contracts for the sale of commodities or specific goods unless the goods are unique or their substitutes are not easily available in the market. When a contract is broken after one party to the contract has wholly or partly performed his part thereof without counter-performance by the other party, the relief of restitution may be granted so that the defaulter does not reap an unjust benefit from his own wrong, e.g., money paid in advance towards the price of the goods contracted to be purchased. And lastly, the court may grant an injunction to restrain a party from committing an apprehended breach or from disposing of the subject-matter of the contract with a view to defeating specific performance thereof. All said and done, these are different remedies which an injured party has on breach of contract. But once there is a breach of contract and the defaulting party not only refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. The amendment of clause (e) of section 6 by the deletion of the underlined words has brought into sharp focus the distinction between property and a mere right to sue. Before the amendment, only the right to sue for damages arising out of a tortious act fell within the ambit of the said clause. The right to sue arising ex contractu, therefore, did not fall within the mischief of the clause even if it were a mere right to sue. After the amendment a mere right to sue, whether arising out of tortious act or ex contractu, is not transferable. In Mulla's Transfer of Property Act, seventh edition, at page 68, we find the following statement :
'But a debt or actional claim must be distinguished from a right to sue for damages. After breach of a contract for the sale of goods nothing is left but a right to sue for damages which cannot be transferred. But before breach the benefit of an executory contract for the sale of goods may generally be transferred and the buyer has the right to sue for the goods.
8. This statement lends support to the view that once a contract for the sale of movables is broken and the subject-matter thereof is disposed of by the defaulting party, the only right which survives in the injured party is the right to sue for damages. Even if the subject-matter is not disposed of, once there is a breach of the contract which is complete, the injured party has merely the right to sue for one or more of the reliefs indicated earlier. There is no other right flowing from the contract except the right to complain about breach and sue for damages or for specific performance of the contract with or without injunction as well as restitution of the benefit which the defaulting party has received from the injured party. The word 'mere' indicates that if the right to sue is accompanied with any other right under the contract, it would not be hit by section 6(e) of the Transfer of Property Act. If a contract is to be performed by a particular date and before that date one party to the contract commits a breach or conveys his desire not to perform his part of the contract, the injured party is entitled to keep the contract alive till the date stipulated for performance and would also be entitled to transfer his rights therein along with the light to sue in the event of non-performance by the defaulting party by the stipulated date. In such cases, what is transferred is not merely the right to sue but also the rights under the contract since the injured party has exercised the option to keep the contract alive. Even though the other party has committed a breach or has conveyed his desire not to perform his part of the contract, since the contract is kept alive, it would be open to him to change his mind and perform the contract in which event, the other party would not be entitled to sue for breach of contract. However, when the contract is finally broken and is no more alive for performance, the injured party has merely the right to sue for one or more of the aforementioned remedies and nothing more. In the instant case, the facts show that Messrs. K.C.P. Limited had not only committed a breach of the contract but had also put the subject-matter thereof beyond the reach of the assessee by disposing it of to a third party, presumably a bona fide purchaser. There was a total cessation of the contract and the only right which survived in the assessee was a right to sue the defaulting party which could not be transferred by virtue of the embargo contained in section 6(e) of the Transfer of Property Act. The case law also lends support to this view.
9. In Syud Tuffuzzool Hossein Khan v. Rughoonath Pershad [1871] 14 Moore's Indian Appeals 41, the Privy Council was required to construe section 205 of Act VIII of 1859, which used the words 'and all other property whatsoever, movable or immovable'. These words would indicate that scarcely any kind of property was exempt from its operation. While construing this provision, Lord Justice James, who spoke for the Privy Council, observed [1871] 14 MIA 49 :
'The 205th section uses the word 'property', not claim or right. A mere right of suit is not property, but a title to recover future property.'
10. In Abu Mahomed v. S.C. Chunder ILR [1909] 36 Cal 345, the facts were that Messrs Ebrahim Haji Sulaiman & Company had under a contract dated December 2, 1904, purchased from S. C. Chunder 2,25,000 gunny bags for delivery in equal portions during the months of January to May, 1905, each month's delivery to be considered a separate contract, Delivery was duly given of the January and February portions, but there was a default so far as the March instalment was concerned causing damage to Messrs. Ebrahim Haji Sulaiman & Company. Subsequently, the purchasers became insolvent and the firm's estate vested in the official assignee who by a deed of assignment dated June 6, 1906, assigned all actionable claims arising from the transactions and the benefits of all contracts entered into by the firm to one Sulleman Cassim Peroo Mahomed, who in turn transferred his rights therein to the appellant, Abu Mahomed. The transferee thereupon instituted a suit to recover a sum of Rs. 1,112-8-0, the amount of damage which had resulted from the failure to give delivery of the March instalment to the original purchasers before they became insolvent. The suit was dismissed on August 6, 1908, by Stephen J. holding that the transferee had acquired a mere right to sue and was, therefore, not entitled to maintain an action. The plaintiff carried the matter in appeal. Dealing with the contention regarding the transferee's right to maintain the action, Maclean C.J. observed as under ILR [1909] 36 Cal at 351 :
'If we look at section 3 an 'actionable claim' means a claim to any debt; but this is not a claim to any debt; this is a claim to damages of an unascertained amount resulting from a breach of contract on the part of one of the parties to that contract. Is it then a claim to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent ?' I do not think that we can properly bring a mere claim for damages for breach of contract within those words. Now, if it does not fall within the definition of 'actionable claim', what is it except a mere right to sue, a mere right to sue for damages resulting from an alleged breach of contract. It seems to me that it is not anything; more or less than that; and if so, that cannot be transferred.
It is clear, whatever the principle may be underlying it, that according to the English law, an assignment of damages for an alleged breach of contract would not entitle the assignee to sue; and, if one may speculate, the words, 'a mere right to sue cannot be transferred' in the Transfer of Property Act are based upon the same principle.'
11. Harington J. concurred with the learned Chief Justice and observed that when the seller failed to effect delivery in the month of March, 19O5, the result was that the benefit with regard to the contract for delivery during the month of March, was 'at an end'; and all that the buyer was to do was to sue the seller for damages for breach of the contract, which the seller had failed to perform. Proceeding further, the learned judge stated ILR ([1909] 36 Cal 352:
'The question really resolves itself into this; was this right to recover damages for the breach of contract which could no longer be fulfilled, an actionable claim or merely a right to sue. In my opinion, it was merely a right in the buyer to sue for such damages as he might be able to prove he had sustained.... If that were so, then that right could not be passed under the assignment, by virtue of the provisions of section 6 of the Transfer of Property Act, clause (e), and, moreover, the assignment does not purport to pass anything more from the buyer than the actionable claims to which he was entitled. Then, if the definition of 'actionable claim', given in the Transfer of Property Act, is looked at, it is clear, I think, that a right to sue for damages-unascertained damages, consequent upon a breach of contract, does not fall within that definition.'
12. The learned judge, therefore, came to the conclusion that on the breach of contract, nothing except a mere right to sue for damages survived in the injured party and that right could not be transferred in view of the prohibition contained in clause (e) of section 6 of the Transfer of Property Act. It was also not an actionable claim within the meaning of section 3 of the said statute. Fletcher J., without dissenting, (at p. 353 ILR 36 Cal) expressed a doubt if the statute meant to limit the right of a person to assign his right under a contract by the fact that the other party to the contract had broken it. He, however, did not state what he thought to be the correct position in law. He merely expressed a doubt without dissenting from the view expressed by the learned Chief Justice and Harington J.
13. A Division Bench of the Bombay High Court had an occasion to consider the correctness of the legal position enunciated by the Calcutta High Court in Hirachand Amichand Gujar v. Nemchand Fulchand Marwadi, AIR 1923 Bom 403. In that case, the firm of Jivraj Amichand had entered into contracts for the purchase of specified goods at various rates from Laxmi Mills. The same firm then contracted to sell the goods to Messrs Nemchand Gulabchand at a profit. Messrs Jivraj Amichand then complained that Messrs Nemchand Gulabchand failed to take delivery and purported to sell the goods to a third party. This resulted in a loss of Rs. 13,000 and odd to Messrs Jivraj Amichand. It was open to that firm to file a suit for damages for breach of contract but instead of so doing, one of the partners of the firm transferred the right to the appellant, Messrs Hirachand Amichand. The suit was dismissed on the ground that there was no breach of contract. In appeal, it was held that the right to claim damages could not be transferred under section 6(e) of the Transfer of Property Act. The Division Bench, relying on the legal position stated by Maclean C.J., reproduced earlier, observed (at p. 403) : 'With due respect, that reasoning seems obviously right'. The appeal was, therefore dismissed upholding the view that on the breach of the contract, what survived was a mere right to sue which could not be transferred under section 6(e) of the Transfer of Property Act and the transferee was, therefore, not entitled to sue since what was transferred was not even an action able claim under section 3, being neither a debt nor a beneficial interest movable property. This decision is clearly binding on us.
14. Chagla C.J. had an occasion to consider this aspect of the law in Iron & Hardware Co. v. Shamlal & Bros. : AIR1954Bom423 . The learned Chief Justice observed as under (at p. 425);
'It is well settled that when there is a breach of contract, the only right that accrues to the person who complains of the breach is the right to file a suit for recovering damages. The breach of contract does not give rise to any debt and, therefore, it has been held that a right to recover damages is not assignable because it is not a chose-in-action. An actionable claim can be assigned, but in order that there should be an actionable claim, there must be a debt in the sense of an existing obligation. But inasmuch as a breach of contract does not result in any existing obligation on the part of the person who commits the breach, the right to recover damages is not an actionable claim and cannot be assigned.'
15. Proceeding further, the learned Chief Justice stated (at p. 425);
'In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.
As already stated, the only right which he has is the right to go to a court of law and recover damages. Now, damages are the compensation which a court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the flat of the court. Therefore, no pecuniary liability arises till the court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the court is doing is ascertaining a pecuniary liability which already existed. The court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination, there is no liability at all upon the defendant.'
16. It would appear from the above observations that on breach of contract, the defaulter does not incur any pecuniary liability nor does the injured party become entitled to any specific amount, but he only has a right to sue and claim damages which may or may not be decreed in his favour. He will have to prove (i) that the opposite party had committed breach of contract, and (ii) that he had suffered pecuniary loss on account thereof.
17. The above observations of Chagla C.J. were quoted with approval by The Supreme Court in Union of India v. Raman Iron Foundry : [1974]3SCR556 . In paragraph 9 of the judgment, the Supreme Court considered the claim for liquidated damages for breach of contract between the parties. Pointing out that so far as the law in India is concerned, there is no qualitative difference in the nature of the claim, whether it be for liquidated damages or unliquidated damages, the Supreme Court proceeded to state the law as under (at p. 1273) :
'When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach become entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred.'
18. Quoting the statement of law enunciated by Chagla C.J., which is extracted earlier, the Supreme Court stated (at p. 1273) : 'This statement in our view represents the correct legal position and has our full concurrence.'
19. It would seem well-settled from the above discussion that after there is a breach of contract for sale of goods, nothing is left in the injured party save the right to sue for damages or specific performance which cannot be transferred under section 6(e) of the Transfer of Property Act since it is a mere right to sue and not an actionable claim.
20. Counsel for the Revenue, however, placed considerable reliance on three decisions : (i) Rajah Bahadur Narasingerji Gyanagerji v. Raja Panugandi Parthasaradhi Rayanim Garu, AIR 1921 Mad 498; (ii) Bana Gopal v. P. K. Banerji, ( : AIR1949All433 ); and (iii) Benumetcha Gangaraju v. Veluri Gopala Krishnamurthi, AIR 1957 AP 190. So far as the Madras case is concerned, the question which arose was whether the three plaintiffs, as auction purchasers of the right, title and interest of the second defendant, were entitled to redeem the suit lands in the possession of the first defendant on the footing that the transaction was a mortgage by conditional sale, or in the alternative, to reconveyance of such lands from the first defendant on the footing that the transaction was a sale with an agreement to reconvey and the price was duly tendered but refused. The court came to the conclusion that in view of the language of section 58, Transfer of Property Act, it was difficult to say that the transaction was a mortgage. The alternative contention was countered on the ground that the plaintiffs were not entitled to sue because what was attached and brought to sale was only the right to a reconveyance and that was a mere right to sue incapable of transfer under section 6(e) of the Transfer of Property Act. In the first place, the court took the view that the amendment in section 6(e) of the Transfer of Property Act ought not to be construed as affecting the attachment and sale of property provided for in the Code of Civil Procedure. Section 60 of the Code makes every property of a judgment-debtor liable to attachment except a mere right to sue for damages. It was, however, observed that a right to get a reconveyance and possession of property worth Rs. 15 lakhs for a payment of Rs. 6 lakhs seemed to be property of a very valuable kind which was attachable under the Code, notwithstanding the amendment of the Transfer of Property Act. But counsel for the Revenue placed reliance on the following observations AIR 1921 Mad 502 :
'A contract to sell or lease land is assignable both, in England and in India and does not cease to be assignable and become a mere right to sue, as contended before us, merely because the other party to the contract has refused to perform it.'
21. These observations have to be read in the light of the fact that the court was dealing with a right to get reconveyance which was already attached under section 60 of the Code and put to court sale. The court felt that the prohibition on transfer in section 6(e) ought not to be read as invalidating transfers such as the one in question which would not be regarded as transfers of a mere or a bare right to sue in England. It must be realised that since the court had attached the right, title and interest of the judgment-debtor in the property, it must be taken to have assumed that the property was not a mere right to sue for damages. After the attachment thereof, it was put to auction sale and was purchased by three plaintiffs. Since it was permitted to be attached, it was held to be something more than a mere right to sue for damages which could not otherwise have been attached under section 60 of the Code of Civil Procedure. The court, therefore, held that the right to get a reconveyance was property of a valuable kind which could be attached and sold under the Code notwithstanding the amendment of the Transfer of Property Act. Read in this background, the observations on which counsel for the Revenue relies only mean that what was attached and sold was not a 'mere' or a 'bare' right to sue and was, therefore, transferable, notwithstanding section 6(e) of the Transfer of Property Act.
22. The facts of the Allahabad case reveal that the applicants had entered into a contract with two brothers, Sham Behari Lal and Kunj Behari Lal, on December 29, 1939, for the purchase of twenty-five bales of gunny bags, the date of delivery having been fixed as January 25, 1940. The applicants failed to take delivery of the goods contracted for whereupon a suit was filed on January 23, 1943, for damages in the sum of Rs. 2,126. While that suit was pending, the plaintiffs applied on January 13, 1944, for being declared insolvents. Pending that application, Mr. P. K. Banerji, Official Receiver, was appointed an interim receiver on January 15, 1944. The suit was adjourned for compromise on February 18, 1944, but on that date, it came to be dismissed for default as the plaintiffs remained absent. When the interim receiver became aware of the dismissal of the suit, he applied for restoration on the ground that the original plaintiffs and the defendants had colluded with a view to defrauding the general body of the creditors. The application was resisted on the ground that the interim receiver had no right to apply for restoration. The plaintiffs were ultimately adjudicated insolvents on November 10, 1944, and thereafter the restoration application was allowed and the order of dismissal of the suit was set aside and the suit was restored to file. It is against that order that the defendants had approached the High Court in revision.
23. It was argued before the High Court that the interim receiver had no locus standi to apply for restoration of the suit because (i) the order of adjudication was not made at the time when the application was filed and the insolvency court had not granted any special power to the interim Receiver to prefer such an application, and (ii) the subject-matter of the suit was a mere right to sue for damages which did not vest in the receiver. The first point was rejected as not sound on the ground that once an order of adjudication is passed, it relates back to the date of the insolvency petition under section 28(7) of the Provincial Insolvency Act and, therefore, the official receiver's application seeking restoration of the suit was competent. The court then proceeded to consider whether the subject-matter of the suit vested in the Official Receiver under section 28 of the said statute. Two questions had to be answered, namely, (i) is the subject-matter of the suit 'property' and (ii) is it such property as is exempted by the Code of Civil Procedure or any other enactment from liability to attachment and sale in execution of a decree The definition of 'property' in section 2(d) included 'any property over which or the profit of which any person has a disposing power which he may exercise for his own benefit'. The definition of the word 'property' being inclusive was rightly held to be not exhaustive. The court then proceeded to consider the different senses in which the word 'property' was used and after quoting from Salmond on Jurisprudence, it held that the word 'property' cannot be confined to material objects, it must include rights in and over that object. These jure in re aliena were held to be 'property' of the person owning them, though the material object is owned by another. In that sense 'benefits arising out of a contract' stood included in the term 'property'. The court then observed :
'The right to claim damages for breach of contract is one of the benefits of a contract.'
24. The learned judge then made the following observations in paragraph 14 of the judgment :
'A claim for damages on account of breach of contract is a right arising out of contract and is an obligation qua the person who is guilty of breach and his property.'
25. With respect, this observation does not seem to be consistent with the view of Chagla C.J. extracted earlier wherein he said that a person who commits a breach of contract does not incur any pecuniary liability nor can the injured party claim any amount as due to him. Even the Supreme Court in the case of Raman Iron Foundry : [1974]3SCR556 , observed 'the law is well settled that a claim for unliquidated damages does not give right to a debt until the liability is adjudicated and damages assessed...' That is so because a breach of contract does not ipso facto confer a right to any sum by way of damages, it merely confers a right to sue but the injured party would be entitled to pecuniary compensation only if it has on account of the breach suffered pecuniary loss and not otherwise. That is why the Supreme Court has said it is not an actionable claim.
26. The learned judge of the Allahabad High Court then proceeded to consider the significance of the word 'mere' in section 60(a) of the Code of Civil Procedure. Pointing out that all rights are either substantive or procedural and all substantive rights are either 'antecedent' or 'remedial', he observed that the right to the delivery of goods under a contract is an 'antecedent right', while a right to damages on breach is a 'remedial right'. An antecedent right may or may not be a right of property. According to him, if the remedial right arises out of an antecedent right which is one of property, it is not a 'mere' right to sue for damages but if the former is not a right of property, the remedial right may be a 'mere' right to sue for damages. In cases where the antecedent right is severed from the remedial right, the latter would again be a 'mere' right to sue for damages. A contract for delivery of goods gives rise to an antecedent as well as a remedial right, the latter right being a benefit of the contract. So, even in cases of non-performance, the contract remains in force till the remedial rights arising therefrom are performed. In other words, according to the learned judge, even in the case of breach, both the antecedent as well as the remedial rights remain alive till the latter is satisfied. On this line of reasoning, the learned judge disapproved the observations of Maclean C.J. in Abu Mahomed's case ILR [1909] 36 Cal 345, that after the breach nothing remains in a contract but the mere right to sue for damages which is not an actionable claim and is not transferable and observations of Harington J. that after the breach the contract is 'at an end'. But, with respect to the learned judge, the question of exercise of the remedial right to sue for damages can arise only when the antecedent right is denied and is rendered unenforceable. The view expressed in Abu Mahomed's case ILR [1909] 36 Cal 345, has been approved by the Supreme Court in Raman Iron Foundry : [1974]3SCR556 , wherein their Lordships observed (para. 9 at p. 1273) : 'The only right which the party aggrieved by the breach of the contract has is the right to sue for damages'. The Supreme Court has also approved the view that it is not an actionable claim and, therefore, cannot be transferred. On the same line of reasoning and for the reason that the case did not arise under the Insolvency Act, the Allahabad High Court did not approve the decisions which were based on the ratio in Abu Mahomed's case : [1974]3SCR556 , including the decision of the Bombay High Court in Hirachand's case, AIR 1923 Bom 403. Needless to say that the ratio of Abu Mahomed's case was later approved by Chagla C.J. and the Supreme Court in the aforementioned cases without specific reference thereto. With respect, therefore, it is not possible to accept the line of reasoning of the learned judge of the Allahabad High Court.
27. In the case before the Andhra Pradesh High Court, the plaintiff purchased the property from one S who had secured an eviction decree in respect of that property against the defendants. After purchase, the plaintiffs applied for possession and successfully executed the decree. For the period of occupation prior to the date of delivery of possession, the defendants did not make any payment for which the plaintiff made a claim. Several defences were raised but the suit was decreed for Rs. 375, interest and proportionate costs. In appeal, the defendants raised a new contention whether transfer of profits in respect of the period prior to the sale was hit by section 6(e) of the Transfer of the Property Act. The Full Bench rightly held that it was not hit because what was transferred was not a mere right to sue for mesne profits but all rights in the property, including the right to claim mesne profits for the said period of occupation. This decision, therefore, turns on its own facts and cannot be pressed into service to negative the assessee's contention.
28. In view of the above discussion, the assessee's contention that on the breach of the contract and disposal of the machinery to a third party it merely had a right to sue for damages which could not be transferred in view of section 6(e) of the Transfer of Property Act appears to be well founded.
29. The assessee had undoubtedly a right to sue Messrs K.C.P. Limited for damages for breach of contract. Instead of litigating in a court of law, the parties arrived at a settlement whereunder compensation in the sum of Rs. 1,40,000 came to be paid in full and final satisfaction to the assessee. Counsel for the Revenue contends that the compromise/arrangement resulted in extinguishment of the assessee's right to sue for damages within the meaning of section 2(47) of the Act. While accepting this contention, the Tribunal has placed reliance on the decision of this court in R. M. Amin's case : [1971]82ITR194(Guj) . In that case, this court observed that the use of the word 'include' in the definition of the word 'transfer' in section 2(47) was intended to enlarge the meaning of 'transfer' beyond its natural import so as to include extinguishment/relinquishment of rights in the capital asset for the purpose of section 45 of the Act. Since the transfer contemplated by section 45 is one as a result whereof consideration has passed to the assessee or has accrued to him, extinguishment of the right must relate to that 'capital asset', corporeal or incorporeal. It is, therefore, obvious that a transfer of a capital asset in order to attract liability to tax under the head 'Capital gains' must be a 'transfer' as a result whereof some consideration is received by or accrues to the assessee. If the transfer does not yield any consideration, the computation of profits or gains as provided by section 48 of the Act would not be possible. If the transfer takes effect on extinguishment of a right in the capital asset, there must be receipt of consideration for such extinguishment to attract liability to tax. Now, in legal parlance, the terms 'consideration' and 'compensation' or 'damages' have distinct connotations. The former in the context of sections 45 and 48 would connote payment of a sum of money to secure transfer of a capital asset; the latter would suggest payment to make amends for loss or injury occasioned on the breach of contract or tort. Both sections 45 and 48 postulate the existence of a capital asset and the consideration received on transfer thereof. But, as discussed earlier, once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee's rights therein, since such a transfer would be hit by section 6(e) of the Transfer of Property Act. In any view of the matter, it is difficult to hold that the sum of Rs. 1,40,000 received by way compensation by the assessee was consideration for the transfer of a capital asset.
30. On the plain language of section 48, in computing the income liable to tax as capital gains, the expenditure incurred in connection with the transfer as well as the cost of acquisition and improvement of the capital asset has to be deducted from the full consideration received or accruing to the assessee as a result of transfer. Does that mean that the income derived by the assessee on the transfer of a capital asset in the acquisition whereof the assessee did not incur any cost is liable to capital gains The income chargeable under the head 'Capital gains' must be computed in accordance with section 48 of the Act which, inter alia, provides that the cost of acquisition of a capital asset must be deducted from the full consideration received by or accruing to the assessee on the transfer thereof. Counsel for the assessee, therefore, urged that assuming there is a transfer of a capital asset, the law envisages that the assessee must have incurred some cost in acquiring the said capital asset but since, in the instant case, there is no evidence to show that the assessee had incurred any cost in acquiring the same, there can be no question of charging the receipt to tax. Ex facie, the argument appears to be attractive. However, in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, this court held that even where a capital asset is self-created, e.g., goodwill of a business, it would be covered by section 48 even though the assessee is not shown to have spent anything for acquiring it. It was held in that case that if a capital asset has cost nothing to the assessee, there would be no question of deduction of cost of acquisition of that capital asset under section 48, clause (ii), and the full value of consideration would be brought to tax.
31. The Calcutta High Court took a contrary view in CIT v. Anglo India Jute Mills Co. Ltd. : [1981]129ITR352(Cal) . It held that on a conjoint reading of sections 45 and 48 of the Act, it is clear that if the assessee has not spent or laid out anything for acquiring the capital asset, the transfer of such a capital asset cannot yield anything by way of capital gains. In CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) , the Supreme Court specifically disapproved of the view expressed by this High Court in the case of Mohanbhai Pamabhai [1973] 91 ITR 393. The Supreme Court held that the charging section and the computation provisions together constitute an integrated code and when there is a case to which the computation provisions cannot apply at all, such a case must be taken as not intended to be covered by the charging section; otherwise, the situation would be that while a given income falls within a charging section, there is no computation machinery provided therefor. After referring to the provisions of sections 45 and 48 of the Act, the Supreme Court observed as under : [1981]128ITR294(SC) ) :
'All transactions encompassed by section 45 must fall under the governance of 0its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge.'
32. Proceeding further, the Supreme Court held that what was contemplated by the said provisions was 'an asset in the acquisition of which it is possible to envisage a cost'. It, therefore, held that the goodwill generated in a new business cannot be described as an 'asset' and hence its transfer would not attract section 45 of the Act. The ratio of this decision is that the asset referred to in section 45 must be one in the acquisition whereof the assessee had incurred a cost. If the Revenue fails to show that the assessee had incurred a cost as in the present case, it would be impossible to compute the income chargeable to tax under the head 'Capital gains' and what the Revenue would be charging would be the capital value of the asset and not any profit or gain.
33. Counsel for the assessee placed reliance in Ratanchand Hirachand v. CIT : [1960]38ITR76(Bom) . The facts of that case revealed that the assessee had entered into a contract for the purchase of property for Rs. 4 lakhs. The assessee found that the house which he had agreed to purchase was 'Waghmukhi'. He, therefore, decided to back out of the contract because of the superstition that such a house brings ill-luck to the owner. In order to get out of the contract, the assessee procured two customers who agreed to purchase the house for Rs. 3,45,000. The owner executed a sale deed in favour of the said two purchasers with the assessee as a confirming party. The balance of Rs. 55,000 was paid by the assessee to make up the total consideration of Rs. 4 lakhs. The assessee claimed this amount as a business loss and alternatively a capital loss. The assessee claimed that this loss should be allowed in the computation of its business income or as set-off against other income, respectively, under section 12B of the Indian Income tax Act, 1922. The High Court held that the payment was in substance to avoid the obligation to purchase the property and was not in any sense loss arising from the sale, exchange, relinquishment or transfer of a capital asset. In conclusion, the court observed (at p. 80) :
'By no stretch of imagination, in our judgment, can compensation or damages paid for failing to carry out a contract to purchase a property be regarded as a loss arising from sale, exchange, relinquishment or transfer of a capital asset within the meaning of section 2(4A) of the Income-tax Act.'
35. These observations lend support to the submission that payment by way of compensation or damages is distinct from consideration paid for complying with the contract.
36. Counsel for the Revenue, however, placed reliance on three decisions : (i) CIT v. Vania Silk Mills (P.) Ltd. ( : [1977]107ITR300(Guj) ; (ii) CIT v. Tata Services Ltd. ( : [1980]122ITR594(Bom) and (iii) CIT v. Shantilal P. Ltd. ( : [1983]144ITR57(SC) ). In the first case, the assessee company had purchased machinery and had given it on hire to a third party. While it was in the possession of the third party, it was destroyed by fire. Out of the insurance money received by the third party, it paid a certain amount which was in excess of the book value to the assessee. This excess amount was sought to be taxed as capital gains. In the context of these facts, this court observed that definition of 'transfer' in section 2(47) covers cases which result in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights-qualitative or quantitative-which the assessee has in a capital asset. This decision can be of no assistance to the Revenue because in that case there was existence of property rights in the capital asset, the capital asset was acquired for a price, the rights in that asset were lost or destroyed or extinguished and the assessee received a sum in excess of the book value for that asset. Thus, all the requirements of sections 45 and 48 of the Act were satisfied for charging the surplus to tax under the head 'Capital gains'.
37. In the second case, Tata Services Limited : [1980]122ITR594(Bom) , the facts disclose that the assessee had entered into an agreement on July 31, 1961, with Anandji Haridas for the purchase of 5,000 sq. yards of land at Rs. 75 per sq. yard and had paid Rs. 90,000 as earnest money, the time stipulated for completion of purchase being six months. The vendor had to obtain permission for the sub-division of the main plot from the public authorities. If the vendor failed to obtain the permission, the assessee was entitled to cancel the contract and claim back the earnest money. The vendor desired to cancel the contract on the ground. that the local authority had not granted permission to sub-divide the plot. The assessee, however, did not accept this and, ultimately, with the consent of the vendor, transferred his rights to Messrs. Advani and Batra for Rs. 5,90,000 (Rs. 5 lakhs as consideration and Rs. 90,000 as refund of earnest money). The assessee was sought to be taxed under the head 'Capital gains'. It may be noticed that the assessee had kept the contract alive by refusing the vendor's suggestion to cancel the contract as the local authority had refused permission for sub-division of the plot. The High Court, therefore, rightly held that the contract was assignable and hence the receipt was not by way of compensation or damages for breach of contract. This decision is, therefore, not an authority for the proposition that payment of compensation or damages for breach of contract would also attract the application of section 45 of the Act.
38. In the last case, Shantilal P. Ltd. : [1983]144ITR57(SC) , the assessee had contracted to sell 200 kg. of folic acid within three months to Messrs. Medical Service Centre at the rate of Rs. 440 per kg. In the meantime, the rates of folic acid shot up to Rs. 2,000 per kg. The assessee, therefore, did not perform the contract. Messrs. Medical Service Centre filed a suit and the dispute was referred to arbitration. As a result of arbitration, the assessee was required to pay Rs. 1,50,000 by way of compensation to Messrs. Medical Service Centre. The assessee claimed it as a business loss. The Income-tax Officer rejected the claim and held the transaction to be speculative under section 43(5) of the Act. In appeal, both the Appellate Assistant Commissioner and later the Tribunal reversed the decision and upheld the assessee's plea. In a direct reference to the Supreme Court, that court held that a transaction under which compensation is paid or received for breach of contract is not a 'speculative transaction' within the meaning of section 43(5) of the Act. Reliance was, however, placed on the following observations (at page 60) :
'The award of damages for the breach of a contracts not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. It may be that in a general sense the layman would understand that the contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. The law, however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts instead of it any satisfaction which he thinks fit. We are concerned with the sense of law, and it is that sense which must prevail in sub-section (5) of section 43.'
39. These observations, on the contrary, support the view put forward on behalf of the assessee.
40. These were all the submissions made before us and for reasons which we have indicated above, the question referred for opinion must be answered in the negative, that is, in favour of the assessee and against the Revenue. The reference is disposed of accordingly with no order as to costs.