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Income‑tax Reference No. 66 of 1958, decided on 30th June 1959.
Ss. 2 (4‑A), 12‑B, 24 (2‑A)-- Capital gains‑Capital loss‑Set‑off‑ Contract to purchase property ‑‑Assessee not willing to complete transaction‑Assessee being confirming party to transfer of property to another and paying balance of consideration‑Payment whether capital loss.
The assessee entered into an agreement for the purchase of a piece of land together with a building thereon for Rs. 4 lakhs. The assessee was later unwilling to complete the transaction but was however a confirming party to the sale of the property to a third party and purported to convey his rights under the agreement. The purchasers paid only Rs. 3,45,000 and the assessee paid the balance of Rs. 55,000 to the vendors to make up the consideration of Rs. 4 lakhs and further incurred certain other costs in respect of the transaction. The assessee claimed to set off under section 24 (2‑A) of the Income‑tax Act these amounts as capital loss against capital gains under section 12‑B.
Held, that the sum of Rs. 55,000 paid by the assessee was in substance consideration for being permitted to avoid the obligation to purchase the property and was not, in any sense, logs arising from the sale, exchange, relinquishment or transfer of a capital asset within the meaning of section 12‑B read with section 2 (4‑A) of the Income‑tax Act and that the loss suffered by the assessee was not "a loss falling under the head capital gains' " within the meaning of section 24 (2‑A).
By this application, the assessee requires the Appellate Tribunal to refer to the High Court some 16 questions of law, which are said to arise out of the Tribunal's order in I. T. A. No. 6006 of 1956‑57. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66 (1) of the Income‑tax Act.
2. On September 18, 1946, the assessee entered into an agreement with Kesarbai and others for the purchase of property at Walkeshwar Road for a sum of Rs. 4 lakhs. Under the agree ment, a copy of which is annexure A' and forms part of the case, the assessee had to complete the sale by April 30, 1947.
3. It was stated that the assessee found that the house which he had agreed to purchase was vagmukhi, he therefore, decided to get out of the contract of purchase. There is a common superstition among some people that a vagmukhi house brings ill‑luck to the owner.
4. On April 11, 1947, the assessee was able to procure two customers Kantilal A. Patel and K. A. Patel, who agreed to take over the contract at Rs. 3,45,000. The assessee's other costs amounted to Rs. 21,598. Thus the assessee suffered a total loss of Rs. 76,598. A copy of the agreement dated April 11, 1947, is annexure 'B' and forms part of the case. A copy of the sale deed dated May 19, 1947, in which the assessee is described as a confirming party, is annexure C' and forms part of the case.
5. The assessee claimed that the loss arising to him in respect of this transaction was a loss from business and should have been taken into account in computing the business income. The alternative contention of the‑ assessee was that the loss was a capital loss and should be set off against other income assessable under section 12‑B of the Income‑tax Act. The income‑tax authorities rejected the assessee's contention that the purchase of the house was a business venture. The assessee accepted this stand of the Department before the Tribunal as no appeal was filed to the Tribunal on this point. The only contention urged at the time of the hearing of the appeal was that the assessee had suffered a capital loss and it should have been set off against other capital gains brought to assessment in the year of account, as provided under section 24 of the Income‑tax Act.
6. The Tribunal held that the loss suffered by the assessee was for non‑fulfilment of an agreement of purchase and that there was no capital asset as such which had been sold or transferred by the assessee. The Tribunal, therefore, refused to allow the assessee a set‑off against other income assessable under section 12‑B of the Act. A copy of the Tribunal's order is annexure D' and forms part of the case.
7. The question of law that arises is:
"Whether on the facts and in the circumstances of the case, the loss of Rs. 76,598 is a loss falling under the head capital gains' within the meaning of section 24 (2‑A) of the Income-tax Act "
8. Parties accept the statement of the case. A copy of the order of the Appellate Assistant Commissioner is made a part of the case at the request of the assessee. It is annexure E'. No other suggestions are offered.
Samarth and P. R. Gandhi for the Assessee.
G. N. Joshi with R. J. Joshi for the Commissioner.
.‑On the 18th of September 1946, the assessee entered into an agreement with one Kesarbai and others to purchase a piece of land together with a house standing thereon., at Walkeshwar Road, Bombay, for Rs. 4 lakhs. Under the agree ment of sale, the transaction was to be completed by the purchaser within 3 months. After having entered into the agreement, the assessee was unwilling to complete the transaction because the house which he had agreed to purchase was popularly described as vagmukhi and it was a common superstition that a vagmukhi house brings ill‑luck to the owner. On the 11th of April 1947, the assessee procured two other persons who agreed to purchase the property and executed a contract to sell the house to those persons for Rs. 3,45,000. Thereafter, a sale deed was executed by Kesarbai and others of the property to which the assessee was a confirming party, whereunder Rs. 3,45,000 were paid by the pur chasers and the balance was paid by the assessee as a confirming party. In the assessment of income‑tax, the assessee claimed to deduct the amount paid by him and certain costs incurred in respect of this transaction from his total income as a loss from business. In, the alternative, he claimed that it was a capital loss and the same was liable to be set off under section 24 against capital gains under section 12‑B of the Income‑tax Act. The Income‑tax Officer rejected the contention of the assessee, holding that the agreement to purchase the house was not in the course of a business conducted by the assessee and that the amount of consideration paid by the assessee under the deed of sale was not liable to beset off as a capital loss under section 12‑B of the Income‑tax Act. That order was confirmed by the Appellate Assistant Commissioner: Before the Tribunal, the assessee acquiesced in the view of the income‑tax authorities that the transaction entered into by the assessee was not in the course of his business. He merely claimed the benefit of section 12‑B of the Income‑tax Act. The Tribunal held that by entering into an agreement of purchase, the assessee did not become the owner of the property and it was not possible to assume that the agreement to purchase the property under which the "assessee was bound to lose could by itself be styled as a capital asset." They further observed that the loss of the assessee was due to non‑fulfilment of the agreement to purchase the property and that such a loss was not covered by section 12‑B of the Income‑tax Act.
At the instance of the assessee, the Tribunal has referred the following question;
"Whether on the facts and in the circumstances of the case, the' loss of Rs. 76,598 is a loss falling under the head 'capital gains' within the meaning of section 24 (2-A) of the Income-tax Act "
The assessee after entering into a contract to purchase the property on the 18th of September 1946, was admittedly unwilling to complete the contract and he wanted to be absolved of the liability to purchase the property for consideration. Even after the period of the agreement expired, the assessee purported to convey his rights under the agreement on the 11th of April 1947, and paid a sum of Rs. 55,000 under the conveyance dated the 19th of May 1947, to make up the consideration which the vendors had to receive. This is not a case in which after having paid the price for purchasing the property the assessee had sold his rights at a loss. If the transaction had taken the form of sale of the rights under an agreement at a loss, it would have been necessary for us to consider whether the benefit of an agreement to purchase immov able property may be regarded as "property" within the meaning of section 2 (4‑A) read with section 12‑B of the Indian Income-tax Act. In the present case, in substance the transaction between the vendors, the assessee and the ultimate purchasers appears to have assumed the form under which the property was conveyed to the ultimate purchasers and the assessee made up the difference between the price stipulated to be paid by him and the price paid by the purchasers. The consideration paid by the assessee was in substance consideration paid for being permitted to avoid the obligation to purchase the property. By no stretch of imagina tion, 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 (4‑A) of the Income‑tax Act.
We, therefore, answer the question in the negative.
The assessee to pay the costs of the Commissioner.
Question answered in the negative.
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