RUSTOM SPINNERS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee filed return of income on 4th June, 1982 for the asst. year 1982 83 showing loss of Rs. 40,282. By the assessment order dt. 27th March, 1985 passed under S. 143(3) of the Income tax Act, 1961 (hereinafter referred to as 'the Act'), the ITO taxed an amount of Rs. 6,94,232 under the head 'short term capital gains' on the ground that the assessee had acquired the right under the sale agreement dt. 12th Aug., 1980, to a consideration of Rs. 5 lakhs and subsequently received surplus of Rs. 9 lakhs on the assignment of rights so acquired and, therefore, that receipt was a capital gain and further that the assessee had incurred expenses amounting to Rs. 2,05,768 partly for acquiring the rights and partly for assignment thereof. The ITO held that the receipt of Rs. 9 lakhs by the assessee as the assignment charge of its rights was a capital gain which was a short term capital gain. In the appeal filed by the assessee against the action of the ITO in taxing the amount of Rs. 6,94,232 under the head "Short term capital gains", the CIT(A) IV, Ahmedabad, by his order dt. 3th June, 1986, holding that it cannot be said that the value of the right transferred was "nil" and that the cost of acquiring the right and expenditure incurred in acquiring the right had been rightly taken into account by the ITO, dismissed the appeal confirming the order of the ITO. In appeal before the Tribunal, it was urged on behalf of the assessee that there was frustration of the original agreement of sale between the assessee and the vendor and consequently there was nothing which could be assigned with the result that there was no transfer and, therefore, no capital gain at all. It was also urged that, since the cheque for the amount of earnest money of Rs. 5 lakhs had been returned to the assessee by the vendor, the assessee had not incurred any cost for the acquisition of the rights which were assigned by him and, therefore, there was no capital gain which could be taxed. The Tribunal, by its order dt. 13th Oct., 1989, rejected these contentions and dismissed the appeal.

(2.) IN the above background, the Tribunal has referred to the High Court for its opinion, out of the four questions suggested, the following three questions under S. 256(1) of the Act :

(3.) THE ITO, however, holding that the assessee had incurred the cost by virtue of having given the cheque for Rs. 5 lakhs by way of earnest money to the vendor and the expenditure of Rs. 2,05,768 which was incurred for acquiring the rights and assigning them, came to the conclusion that the decision of the Supreme Court in CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) : TC20R.148, was not applicable to the case of the assessee. The ITO had added up the said amount of Rs. 5 lakhs to the amount of Rs. 9 lakhs and from the total of Rs. 14 lakhs, deducted the amounts of Rs. 5 lakhs and Rs. 2,05,768 holding the balance to be taxable as a short term capital gain and that order came to be confirmed by the CIT(A) and the Tribunal.