COMMISSIONER OF INCOME TAX Vs. DALMIA J

JUDGEMENT

(1.) THE following question has been referred to this Court under S. 256(1) of the INCOME TAX ACT, 1961 (for short 'the Act') by the Tribunal, Delhi Bench 'D', New Delhi:

(2.) THE case pertains to a property which was under construction in Greater Kailsh, New Delhi. M/s Satish Kumar Sood & Sons (hereinafter referred to as "the contractors") were the owners of this property. They entered into an agreement to sell with one Krishan Prasad. This was on 29th Nov., 1966. The price was settled at Rs. 4,95,000. An earnest money of Rs. 20,000 in cash was paid by Krishan Prasad to the contractors at that time. The construction was to be completed in accordance with certain specifications, which were annexed to the agreement to sell. The agreement provided that the sale deed could be got executed by Krishan Prasad either in his own name or in the name of his nominee or nominees. It was further provided that if the contractors failed to execute the sale deed the purchaser would be entitled to get the sale deed executed by specific performance through a court of law at the risk and cost of the contractors, and in the that event, the contractors would also be liable to pay damages to the purchaser in accordance with the prevalent market price. By letter dt. 26th Dec., 1966, Krishan Prasad informed the contractors that he had irrevocably nominated J. Dalmia (Karta of the joint Hindu family) as his nominee to purchase the property in question. It was mentioned in this letter that after the nomination Krishan Prasad would have no concern with the purchase of the property and that the contractors would deal directly with the nominee. The balance of the sale consideration, being Rs. 4,75,000 was to be paid by the nominee at the time of execution of the sale deed. A letter was also addressed on the same date by J. Dalmia to Krishan Prasad. It was mentioned in this letter that J. Dalmia was to pay Rs. 20,000 to Krishan Prasad at the time of final execution of the sale deed between him (J. Dalmia) and the contractors. No other consideration was expressed to be payable to Krishan Prasad, though it was mentioned in this letter that in case of default on the part of J. Dalmia to get the sale deed executed he would pay Rs. 20,000 to Krishan Prasad, and in case default was committed by the contractors, the sum of Rs. 20,00 was nevertheless payable by J. Dalmia to Krishan Prasad but only after the success of J. Dalmia in Court. All the legal expenses were to be in the account of Krishan Prasad. On 15th March, 1967, J. Dalmia wrote to the contractors drawing their attention to the letter of 26th Dec., 1966 of Krishan Prasad to them and also to the agreement to sell dt. 29th Nov., 1966. The contractors were asked to intimate the progress of the building and the notice regarding completion of the building for the purpose of execution of the sale deed. On 18th April, 1967, a notice was got sent to the contractors by J. Dalmia calling upon them to inform J. Dalmia regarding obtaining of the completion certificate so that J. Dalmia could arrange to have the sale deed executed in term of the agreement. When no reply was received, J. Dalmia filed a suit for injunction against the contractors to restrain the contractors from selling, alienating or in any other way transferring the property in question. Krishan Prasad was also impleaded as a defendant, and it was averred that he was a necessary and proper party as J. Dalmia, the plaintiff, had acquired the title and interest through him. It was stated in the plaint that the contractors though had obtained the completion certificate, they failed to intimate the plaintiff regarding the completion of the construction and that the contractors were trying to sell the property to a third party in breach of the agreement referred to above.

(3.) WHEN J. Dalmia (HUF), the assessee, filed the return of income for the asst. year 1968 -69, it was claimed that the sum of Rs. 1,02,500 received from the contractors was in the nature of a windfall or a casual gain. It was claimed that the amount was not a capital gain as there was neither any capital asset nor the relinquishment thereof. The ITO rejected this contention and included this sum as "capital gains" other than long -term "capital gains" in the taxable income of the assessee. The AAC, however, accepted the contention of the assessee, and held that no capital gains had accrued to the assessee. The matter was thereafter taken to the Tribunal by the Revenue. The Tribunal by its order dt. 24th Feb., 1973 dismissed the appeal. The Tribunal held that "such rights as the assessee acquired in this case were not proprietary rights but only rights of a personal nature which will not be comprehended within the meaning of the term 'capital asset' in S. 2(14)". The Tribunal also rejected the alternative argument of the Revenue holding that even "if the rights under the contract represent the capital asset in this case, there was no transfer of such capital asset so as to attract capital gains tax". The Tribunal, however, did not deal with another submission of the assessee that again even if there was a capital asset there was no actual cost to the assessee in acquiring the same.