ITAT Delhi held that to burden assessee with capital gain arising out of transfer of immovable property or an interest in it, the cost of acquisition is necessarily to be established. Here, cost of acquisition of so called right of preemption is considered as NIL. Hence, computation provisions fail, therefore capital gains could not have been calculated.
Facts- During the year under consideration, the assessee has received Rs.20,40,00,000/- in a settlement in the court, which the assessee has claimed as non – taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio.
AO vide notice u/s 142(1) of the Act dated 26.02.2016, enquired from assess that the right of Preemption/right of first priority of purchase of the premises falls under the definition of “Capital Asset” u/s 2(14) of the Act and the relinquishment of the said right falls under the definition of “Transfer” as per the Act. Therefore, why the amount of Rs. 20,40,00,000/-received from M/s. Kandhari Infrastructures Pvt. Ltd. should not be treated as Long Term Capital Gain arising from such transfer.
AO concluded the same as receipts taxable as capital asset. CIT(A) sustained the addition. Being aggrieved, assessee has preferred the present appeal.
Conclusion- To burden assessee with capital gain arising out of transfer of immovable property or an interest in it, the cost of acquisition is necessarily to be established. Mumbai Bench of Tribunal in the case of DCIT vs. Star Chemicals (Bom.) P. Ltd. 110 TTJ 753 (Mum) has held that for want of acquisition cost capital gain tax would not arise. In the present case, AO himself has considered the cost of acquisition of the so called right of preemption to be Nil. Thus, the computation provisions fail, therefore, capital gains could not have been calculated. This too establish that a mere right to sue in regard to immovable property cannot be subject to Income Tax under the head ‘Capital Gains’ as restricted by Section 6(e) of the Transfer of Property Act 1882, laying that a mere right to sue cannot be transferred.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal has been filed by the Assessee against order dated 12.06.2017 passed in appeal no. 18/10010/2016-17 for assessment year 2015-16, by the Commissioner of Income Tax (Appeals)-18, New Delhi (hereinafter referred to as the First Appellate Authority or in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 30.3.2016 u/s 143(3) of I.T. Act, 1961 (hereinafter referred to as ‘the Act’) passed by DCIT, Central Circle-54(1), New Delhi (hereinafter referred as Ld. Assessing officer or in short ‘Ld. AO’).
2. The assessee is a firm having income from Business or Profession. The assessee filed return of income on 30.09.2013 declaring an income of Rs.46,89,452/-. The case was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) of the Act dated 03.09.2014 was issued and duly served upon the assessee. Subsequently, notice u/s 142(1) along with questionnaire was issued on 31.08.2015 and served upon the assessee.
2.1 During the year under consideration, the assessee has received Rs.20,40,00,000/- in a settlement in the court, which the assessee has claimed as non – taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio.
2.2 The assessee vide letter dated 09.10.2015, filed the following sequence of events which led to the receipt of Rs. 20,40,00,000/-:
“SEQUENCE OF EVENTS
(i) 19.04.2004: The assessee firm (LESSEE), took on lease the entire property comprising of Easement Floor, Ground Floor, First Floor, Second Floor, Third Floor and Terrace, with parking area, on Plot bearing No. 73 Ring Road, Lajpat Nagar, New Delhi, (LEASED PROPERTY), (approx area 22,000 sqft), from one Sh Parvinder Singh Chopra (LESSOR), vide lease deed executed at New Delhi on the 19th day of April, 2004, on a monthly lease amount of Rs.9,00,000/- effective from 01.06.2004. Copy of the lease deed is filed at Pages …to…. of these submissions. The LEASE DEED was registered in the Office of the Sub Registrar V New Delhi, as document No. 4581, in Book No 1 Volume No 3963 on Pages 122 to 134. The LESSEE took on lease The LEASED Property to carry on its business.
The lease was renewable every 3 years, with 15% increase in the rent amount at the time of each renewal. The LESSEE paid The LESSOR, Rs. 45,00,000 by way of security deposit, refundable at the time of vacation of the Leased premises, AND Rs. 45,00,000/- as advance rent for 5 months The LESSEE, with the consent of The LESSOR, could make reasonable alterations / changes in the LEASED PROPERTY to meet its business requirement.
Clause 13 of the Lease deed, reads as under:
That in case the “LESSOR” intends to sell the premises, first priority of purchase of the premises shall be given to “LESSEE” and if “LESSEE” does not avail the offer and in the event of transfer of demised premises by “LESSOR” to a third party, the “LESSOR” shall be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements present and such purchaser shall be bound by all the terms and conditions concerning this arrangement including the return of security amount paid by The “LESSEE” after deducting arrears and dues or otherwise in same manner as the “LESSOR” was and as if no transfer had taken place. In case the purchaser further sells to any other purchaser or purchasers, the present arrangements will also be binding on them. Relations between The LESSOR and The LESSEE in due course began to detoriate. The LESSOR alleged that the LESSEE delayed in the payments of the rent amounts, and made structural changes in the premises against what was provided in the Lease Deed. The LESSEE on the other hand alleged that it was unable to effectively carry on business in the LEASED PREMISES because of interference by The MCD Authorities etc.
(ii) 19.10.2005 : The LESSOR committed breach of clause 13 of the LEASE DEED. Without making the first offer to the LESSEE, as was’ provided in clause 13 of the LEASE DEED, the LESSOR sold the entire property to one M/s KANDHARI INFRASTRUCTURES PVT LTD., 177-F, Industrial Area Phase I, Chandigarh, for a consideration of Rs Six crores. The sale deed was registered with The Sub Registrar V, New Delhi, as document No. 15980 in Book No 1 Volume No. 5492 at pages 1 to 192. The LESSOR did not.
(iii) 26.09.2006 : The assessee firm (LESSEE) then instituted suit No. CS(OS) No. 1863 of 2006, before The High Court of Delhi, at New Delhi, “For Preemption and/or for specific performance Of Agreement to sell and for permanent Injunction”. A copy of the suit filed is listed at Pages 40 to 47 of these submissions. Mr. Parvinder Singh Chopra (LESSOR) and M/s Kandhari Infrastructures Pvt Ltd were made the two Defendants. M/s Kandhari Infrastructures Pvt Ltd, as Owner of The LEASED PROPERTY, also filed a Civil Suit No CS (OS) No 101 of 2007 before The Delhi High Court, against the assessee firm, seeking decree of ejectment / possession of the property as also arrears of rent, damages and mesne profits.
(iv) 06.08.2007:The Hon’ble Delhi High Court, passed an interim order in CS (OS) No101 of 2007,And required the assessee firm to hand over possession of The LEASED PROPERTY to M/s Kandhari Infrastructures Pvt Ltd. The Hon’ble Court also appointed a Local Commissioner.
(v) 25.04.2012 : The Hon’ble Court referred both the above suits to Meditation. Sh K VENKATRAMAN, Advocate, was appointed as the Mediator. Several meetings were held between the parties to the suit and The Mediator on 30.04.2012, 10.05.2012, 23.05.2012 and 29.05.2012.
(vi) 29.05.2012 : A settlement was reached between the assessee firm and M/s Kandhari Infrastructures Pvt Ltd. Copy of the settlement agreement is filed at Pages H & to £ & of these written submissions. The parties, which had been litigating since 2006, wished to put an end to litigation and have peace of mind. They therefore resolved to compromise and amicably settle their disputes and compromise. M/s Kandhari Infrastructures Pvt Ltd., offered to pay Rs. 20,40,00,000 (Rs. Twenty crore Forty Lakhs) to the assessee firm, which the assessee firm accepted. The parties agreed not to pursue their right to sue against each other. M/s Kandhari Infrastructures Pvt Ltd. paid Rs. 20,40,00,000 (Rs. Twenty crore Forty Lakhs) to the assessee firm. It is this amount that the assessee firm claims is a Non Taxable capital receipt.”
2.3 Thus the Ld. AO vide notice u/s 142(1) of the Act dated 26.02.2016, enquired from assess that the right of Preemption/right of first priority of purchase of the premises falls under the definition of “Capital Asset” u/s 2(14) of the Act and the relinquishment of the said right falls under the definition of “Transfer” as per the Act. Therefore, why the amount of Rs. 20,40,00,000/-received from M/s. Kandhari Infrastructures Pvt. Ltd. should not be treated as Long Term Capital Gain arising from such transfer.
2.4 To this vide letter dated 26.02.2016, received on 29.02.2016, the assessee filed the following submissions :
“(i) The Assessing Officer has erroneously observed that “The right of Preemptive/right of first priority of purchase of the premises “73, Ring Road, Lajpat Nagar, New Delhi” falls under the definition of “Capital Asset” u/s 2(14) of The Income Tax Act, 1961″. It does not fall so.
(ii) The Assessing Officer has further erroneously observed that the assessee had relinquished any right. The assessee having not relinquished any right, the other observations of the Assessing Officer that ” The relinquishment of the said right falls under the definition of “Transfer” as per the provisions of Section 2(47) of The Income Tax Act, 1961″ becomes meaningless and inappropriate.
(iii) It would be incorrect and against law to hold that the amount of Rs. 20,40,00,000/- received by the assessee from M/s Kandhari Infrastructures Pvt Ltd. should be treated as Long Term Capital Gain arising from such transfer, chargeable to tax in the hands of the assessee firm.”
The assessee further submitted that :
“Kind attn. is drawn to the following salient and important issues :
(i) The premises in question viz “73, Ring Road, Lajpat Nagar, New Delhi” stood transferred on 13.10.2015, when the LESSOR Sh. Parvinder Singh sold the property under a registered deed to M/s Khandhari Infrastructures (P)Ltd.
(ii) On 13.10.2015, Sh. Parvinder Singh (LESSOR) ceased to be the owner of the premises M/s. Khandhari infrastructures(P) Ltd. became the new owner of the premises, and continues to remain so as on date of the submissions. The assessee firm was neither the owner nor the Transferor or the Transferee of the premises. The assessee firm was not a party and was not associated in any manner with the transfer of the property. The assessee firm was not also a beneficiary to the consideration exchanged on the transfer of the property between the BUYER and the SELLER. Rs. 20,40,00,000 received by the assessee firm is not therefore against the transfer of the premises. The provisions of section 2(14), 2(47) and other related / applicable provisions of The Income Tax Act, 1961, governing the taxability of Capital Gains tax on transfer of an asset, being an immovable .asset, are not applicable and are not attracted.
(iii) The Hon’ble Delhi High Court, vide its interim order passed On 06.08.2009, required the assessee firm to vacate the premises in question and hand over vacant possession of the premises to M/s Khandhari Infrastructures (P) Ltd the new and present owner of the premises in question. The tenancy right and possession of the premises in question with the assessee stood extinguished and ceased to exist from 06.08.2009. Rs. 20,40,00,000 received by the assessee firm is not for surrender of any tenancy rights. This sum is also not received against handing over of vacant possession of an immovable asset. The provisions of section 2(14), 2(47) and other related / applicable provisions of The Income Tax Act, 1961, governing the taxability of Capital Gains tax for surrender of any tenancy rights or for giving vacant possession of an immovable asset are not applicable and are not attracted.”
2.5 Thereafter taking into consideration of the claim of the assessee the Ld. AO observed that;
“To determine the taxability of the receipt of Rs.20,40,00,000/-, the following questions need to be Considered :
I. Whether there was any ‘capital asset’ as per the definition of ‘capital asset’ u/s 2(14) of the Income Tax Act, 1961?
II. Whether there was a ‘transfer’ as per the definition of ‘transfer’ u/s 2(47) of the Income Tax Act, 1961 ?
III. Whether the receipt of Rs. 20,40,00,000/- is taxable?
IV. Computation of Capital Gain.
2.6 So in order to determine the existence of a capital asset, Ld. AO having taken into consideration definition of capital asset in section 2(14) of the Act concluded that the term property has to be understood in the widest amplitude and it includes movable assets / immovable assets, tangible / intangible asset, incorporeal rights and chose in action. He concluded that ‘rights’ are included in the term property.
2.7 Referring to definition of transfer u/s 2(47) of the Act Ld. AO went on to observe that use of words ‘relinquishment’ of rights in section 2(47) of the Act include right of pre-emption or first right of purchase. He observed that this is an additional right upon the assessee and is distinct and separate from the assessee’s tenancy rights. Thereafter, considering the clauses of lease deal in favour of the assessee and the litigation initiated by the assessee in the form of suit for specific performance/ for pre-emption, the Ld. AO observed that assessee has given up all its right by virtue of settlement agreement. Ld. AO observed that, the withdrawal of the suit which was filed for the enforcement of the right of pre-emption by the assessee as part of settlement agreement shows that when the assessee gave up all its rights as part of the said agreement, it also relinquished its “right of preemption” which was the premises for the suit. Ld. AO also considered the issues framed by Hon’ble Delhi High Court in the suit instituted by the assessee to conclude that since it was an enforceable right it was a capital asset.
2.8 Thereafter based on the sequence of events, litigation and settlement, the Ld. AO considered it as relinquishment of asset for the purpose of clause (i) of section 2(47) of the Act. Ld. AO observed that if a person either gives up, abandons and surrenders interest of that person in a property but the property in which interest is relinquished continues to exist and continues to be owned by some person or persons after the transaction of relinquishment, then the case of assessee would be of relinquishment in terms of settlement agreement.
2.9 Thereafter, Ld. AO calculated the receipt of Rs. 20,40,00,000/- as taxable in the hands of assessee regardless of the fact that amount was paid by the subsequent purchaser. The ld. AO considered the date of lease deed 19.04.2004 to be the date of acquisition of capital asset, as there was no cost of acquisition of the right of preemption the cost of acquisition of the capital asset was taken as Nil. The date of transfer was considered to be 31.05.2012 as per the settlement agreement and thus the sale consideration was arrived at Rs. 20,40,00,000/- as received under the settlement agreement.
2.10 Ld. AO has distinguished the law cited by the assessee primarily on the basis that the judgments relied were in regard to damages being received in a civil suit while in the case in hand there was a suit for specific performance on the basis of right of preemption and not damages for breach of contract.
3. The ld. CIT(A) has sustained the addition with following relevant findings in para 5.5.31:-
“5.5.31 On the basis of above discussion made in the factual premises of our case and on the anvil of law enunciated, it is quite apparent that the assessee has received Rs. 20.4 crores for relinquishing at least two rights, one, the right of pre-emptive purchase and the right to perpetual lease. The contentions of the appellant that he has lost the tenancy right upon surrender of possession to M/s. Khandhari is not correct, as discussed in detail above. The mere vacation of the property when the appellant agreed to do so under Court direction is only to facilitate the adjuciation before the Hon’ble HC, the question of its valuable rights still remains to be adjudicated and subsists as on the date of settlement. This only got extinguished when the consideration of Rs. 20.4 cr. was received by the appellant. Even otherwise, when the sale consideration of the property was Rs. 6 crores, it would be novice to accept a contention that it has been paid Rs. 20 crore voluntarily and not in connection for extinguishment of pre-emptive right to purchase or surrender of tenancy right. The contention that such a huge and disproportionate amount was paid just like that voluntarily is not acceptable. This flies in the face of common sense. The question then remains is what was the compensation for. The AR has preferred to prevaricate the issue. (See his submission dt 9/6/2017 discussed at para 5.5.33 infra) Law of evidence mandate that when the best evidence is not produced, the issue has to be decided against the appellant.
(b) Be that as it may, the contention of the AO that such a high compensation was for pre-emptive right to purchase also is not plausible. It could be for a host of factors and the entirety of facts are close to the chest of the appellant which is kept under cover. The fact remains that the right of lease in perpetuity was relinquished and the consideration also attributable to it. Furhter, the transfer of tenancy right is exigible to capital gain tax, without doubt.
(c) In any case, the appellant has not submitted the basis of consideration of Rs. 20.4 cr. received by it. The onus to prove that it is capital receipt not liable to be taxed has also not been discharged. Even otherwise, such contentions are bound to fail in view of the discussion made above.
(d) The upshot of the entire discussion is that the appellant has transferred valuable rights (capital asset) of pre-emptive right to purchase and also right to lease in perpetuity. It is liable to be exigible to capital gain for the entire amount of Rs. 20.40 cr. The same is held. Penalty proceedings u/s. 271(1)(c) is to be initiated for furnishing of inaccurate particulars leading to concealment of taxable income.”
4. Therefore the assessee is in appeal raising following grounds :-
“1. That the learned CIT (A) has erred both on facts and in law in confirming the order of assessment and upholding the addition made of Rs. 20,40,00,000/-.
2. That the learned CIT (A) has failed to appreciate that the assessee held no asset, much less any transferrable asset and there being thus, no transfer of any such asset, the provision of section 45 of the Income Tax Act could not have been invoked to conclude that a sum of RS. 20, 40, 00, 000/-received by the assessee firm was an income from capital gain and was thus, liable to be included in the income of the assessee.
3. That the learned CIT (A) has overlooked that the assessee being a lessee took on lease on 19.04.2005 a property with a ‘condition’ that the lessor, if proposes to sell the property would make first offer to the assessee, the lessee and such a condition could not be regarded as preempting right acquired by the assessee to be assessed within the meaning of section 2(14) of the Act. There being no justification to hold that such a condition was either an acquisition of any preempting right and was a capital asset.
4. That on the facts and circumstances of the case the CIT (A) has further completely overlooked that there being no transfer made by the assessee in the instant year and even if there was for the sake of an argument any transfer on breach of the condition by the lessor then the same related to the FY 2005-06 and as such there being no income accrued to the assessee in the instant year, any addition made to the total income was wholly unwarranted.
5. That the learned CIT (A) has further erred in sustaining the levy of penalty u/s 234D of the Act.
6. That the learned C1T (A) has further erred in initiating proceedings u/s 271(l)(c) of the Act despite the fact such proceedings had been initiated by the AO and were pending for adjudication before him.
7. That the learned CIT (A) has failed to appreciate that
8. there could have been no double jeopardy and as such, the initiation of proceedings under section 271(l)(c) of the Act was wholly unwarranted and untenable in law.”
5. Heard and perused the record.
5.1 On behalf of the assessee, primarily the contention of Ld. Sr. Counsel was that Ld. Tax Authorities below have fallen in error in not understanding the nature of right of pre-emption. It was submitted that this right is a mere right to sue and cannot be considered to be transferable asset. Ld. Sr. Counsel took the Bench through sequence of events and documents reflecting various litigations and transactions of settlement to submit that Ld. Tax Authorities below have fallen in error in considering the amount received under settlement to be capital gains. He referred to the judgment of Hon’ble Delhi High Court in CIT vs. J. Dalhu 1985 20 taxman 86 Delhi to submit that mere right to sue may or may not be property but it certainly cannot be ‘transferred’ within the meaning of section 45 r.w.s. 2(47) of the Act. He also relied following judgments to submit that the pre-emption being ‘Right in Personam’ could not have been transferred:-
5.2 Ld. Sr. Counsel relied judgment of Hon’ble Supreme Court of India in Bishan Singh & Others vs. Khazan Singh & Another 1958 AIR 838 and of Hon’ble Allahabad High Court in Jhagru Rai vs. Basdeo Rai and Anr. 1924 Allahabad 400, to stress that the contract for a right of pre-emption or re-purchase does not give rise to any interest in the immovable property.
6. On the other hand, Ld. DR submitted that there is no error in the findings of Ld. Tax authorities below. The submissions made by Ld. DR are that the Revenue in this case is heavily relying on the orders of Ld. Tax authorities below who have both held that the appellant has received an amount of Rs. 20.4 cr. for relinquishing the two rights, i) The right of preemptive purchase and ii) The right to perpetual lease. He has referred to the observations of the Ld. CIT(A) in para 5.5.31(b), 5.5.31 (c) and 5.5.31 (d) of his order on page 82 are as under:-
(b) Be that as it may, the contention of the AO that such a high compensation was for pre-emptive right to purchase also is not plausible. It could be for a host of factors and the entirety of facts are close to the chest of the appellant which is kept under cover. The fact remains that the right of lease in perpetuity was relinquished and the consideration also attributable to it. Further, the transfer of tenancy, right is exigible to capital gain tax, without doubt.
(c) In any case, the appellant has not submitted the basis of consideration of Rs. 20.4 cr. Received by it. The onus to prove that it is capital receipt not liable to be taxed has also not been discharged. Even otherwise, such contentions are bound to fail in view of the discussion made above.
(d) The upshot of the entire discussion is that the appellant has transferred valuable rights (capital asset) of pre-emptive right to purchase and also right to lease in perpetuity. It is liable to be exigible to capital gain for the entire amount of Rs. 20.40 cr. The same is held penalty proceedings u/s 271(1)(c) is to be initiated for furnishing of inaccurate particulars leading to concealment of taxable income.
6.1 He has submitted that the Ld. Counsel of the appellant has taken a contrary position to the earlier position taken by the appellant, that the appellant did not had a pre-emptive right rather the appellant had the right to sue for breach of clause 13 of the lease deed dated 19.04.2004. Ld. DR has distinguished the judgements relied by Ld. Sr. Counsel by submitting that the question for examination, before the Hon’ble Supreme Court in the case of Bishan Singh and Ors. Vs. Khazan Singh and Ors.[Civil Appeal no. 255 of 1954] dated 20.05.1958 (supra) was to decide that out of many claimant of the Right to preemption on certain property under Punjab Pre-emption Act, who has the superior right or all have equal right. The other question before the Hon’ble Court was to decide whether this right is modified or otherwise enlarged by the provision of the Act. So, the subject matter before the Hon’ble Apex Court was not to examine the nature and definition of right of pre-emption to property.
6.2 Further, referring to the Judgment of Hon’ble Allahabad High Court dated 28.01.1924 in the case of Jhagru Rai vs. Basdeo Rai and Ors.[AIR 1924 ALL400] the Ld. DR submitted that is also not an authoritative law on the issue of right of pre-emption to property.
6.3 Ld. DR has relied the judgement of the Hon’ble Supreme Court in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others 1954 AIR 417 to submit that same is an authoritative law on this subject where the Hon’ble Apex Court has scrutinized the nature and character of the right of pre-emptive purchase in this case. He submitted that while adjudicating the issue on this subject, the Hon’ble Apex Court in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others has stated as under:
“That the law of pre-emption imposes a limitation or disability upon the ownership of a property to the extent that it restricts the owner’s unfettered right of sale and compels him to sell the property to his co-sharer or neighbor as the case may be. The person who is a co-sharer in the land or owns land in the vicinity consequently gets an advantage or benefit corresponding to the burden with which the owner of the property sold. The crux of the whole thing is that the benefits as well as the burden of the right of pre-emption run with the land and can be enforced by or against the owner of the land for the time being although the right of pre-emptor does not amount to an interest in the land itself. It may be stated here that if the right of preemption had been only a personal right of sale in a certain manner, a bona-fide purchaser without notice would certainly obtain an absolute title to the property, unhampered by any right of the pre-emptor and in such circumstances there could be no justification for enforcing the right of pre-emption against the purchaser on grounds of justice, equity and good conscience on which ground alone the right could not be enforced at the present day. In our opinion the law of pre-emption creates right which attaches to the property and on that footing only it can be enforced against the purchaser.”
6.4 Ld. DR contended that the Hon’ble Supreme Court in this case has conclusively held that the benefit as well as burden of the right of pre-emption runs with the land and can be enforced by or against the owner of the land for the time being which is contrary to the argument of the Ld. Counsel that the right for pre-emption is right in personam i.e. right against the person.
6.5 Referring to Hon’ble Patna High Court judgement in the case of Sheo Kumar Dubey vs. Smt. Sudama Devi and Anr. AIR 1962 Pat 125 he submitted that in this judgement both the judgment of Hon’ble Supreme Court i.e. in the case of Bishan Singh and Ors. Vs. Khazan Singh and Ors. and in the case of Shri Audh Behari Singh vs. Gajadhar Jaipuria and Others has been discussed. Ld. DR pointed out that the Hon’ble High Court in para 11 of the judgment has stated as under:
“The decision of the Privy Council in Sheo-baran Singh v. Kulsumunnissa, AIR 1927 PC 113, though not directly in point, lends considerable support to the view that the customary right of pre-emption is a right annexed to the land and not a mere personal right. The entire controversy now has been set at rest by their Lordships of the Supreme Court in AIR 1954 SC 417, wherein the view taken by the Allahabad High Court that it was not a mere personal right but an incident annexed to the land has been accepted as correct. In order to appreciate the precise nature of the law of pre-emption, It will be necessary to reproduce here the observations of their Lordships of the Supreme Court. They have observed as follows:
“In our opinion it would not be correct to say that the right of pre-emption under Muhammaden law is a personal right on the part of the pre-emptor to get a re-transfer of the property from the vendee who has already become owner of the same It is true that the right becomes enforceable only when there is a sale but the right exists antecedently to the sale, the foundation of the right being the avoidance of the inconvenience and disturbances which would arise from the introduction of a stranger into the land. We agree with Mr. Justice Mahmood that the sale is a condition precedent not to the existence of the right but to its enforceability The correct legal position seems to be that the law of pre-emption imposes a limitation or disability upon the ownership of a property to the extent that it restricts the owner’s unfettered right of sale and compels him to sell the property to his co-sharer or neighbour as the case may be. The person who is a co-sharer in the land or owns lands in the vicinity consequently gets an advantage or benefit corresponding to the burden with which the owner of the property is saddled, even though it does not amount to an actual interest in the property sold. The crux of the whole thing is that the benefit as well as the burden of the right of pre-emption run with the land and can be enforced by or against the owner of the land for the time being although the right of the pre-emptor does not amount to an interest in the land itself. It may be stated here that if the right of pre-emption had been only a personal right enforceable against the vendee and there was no infirmity in the title of of the owner restricting his right of sale in a certain manner, a ‘bona fide’ purchaser without notice would certainly obtain an absolute title to the property, unhampered by any right of the pre-emptor and in such circumstances there could be no justification for enforcing the right of pre-emption against the purchaser on grounds of justice, equity and good conscience on which grounds alone the right could be enforced at the present day. In our opinion the law of pre-emption creates a right which attaches to the property and on that footing only it can be enforced against the purchaser.”
6.6 Ld DR submitted that further, there are numerous judgments of Hon’ble Supreme Court and various High Courts wherein it has been held that the transfer of lease hold rights and lease in perpetuity constitute a transfer and liable to tax on capital gains. Some of the Judgments have been examined by Ld.CIT(A) in para 5.26 of his order on page 75.
7. Now after giving thoughtful consideration to the matter and the submissions, at the outset it is necessary to mention as to what Hon’ble Supreme Court of India in Audh Bihari Singh v. Gajadhar, AIR 1954 SC 417 pointed out about the sources of right of pre-emption. Hon’ble Supreme Court has classified the sources to; 1stRule of common law; 2ndcustom; 3rd personal law; 4th statute and 5th contract. It will be relevant to reproduce what Hon’ble Constitutional Bench observed in regard to the aforesaid classification;
“The Privy Council has said in more cases than one, that the law of pre-emption was introduced in this country by the Muhammadans. There is no indication of any such conception in the Hindu Law and the subject has not been noticed or discussed either in the writings of the Smriti writers or in those of later commentators. Sir William Macnaghten in his Principles and Precedents of Mahomedan Law has referred to a passage in the Makanirvana Tantra which, according to the learned author, implies that pre-emption was recognised as a legal provision according to the notions of the Hindus. But the treatise itself is one on mythology, not on law and is admittedly a recent production. No value can be attached to a stray passage of this character the authenticity of which is not beyond doubt. During the period of the Mughal emperors the law of pre- emption was administered as a rule of common law of the land in those parts of the country which came under the domination of the Muhammadan rulers, and it was applied alike to Muhammadans and Zimmees (within which Christians and Hindus were included), no distinction being made in this respect between persons of different races and creeds. In course of time the Hindus came to adopt pre-emption as a custom for reasons of convenience and the custom is largely to be found in provinces like Bihar and Gujarat which had once been integral parts of the Muhammadan empire. Opinions differ as to whether the custom of preemption amongst village communities in Punjab and other parts of India was borrowed from the Muhammadans or arose independently of the Muhammadan Law, having its origin in the doctrine of “limited right” which has always been the characteristic feature of village communities. Possibly much could be said in support of either view, and there is reason to think that even where the Muhammadan Law was borrowed it was not always borrowed in its entirety. It would be useful to refer in this connection to the following observations of the Judicial Committee in Digambar v. Ahmad (1):
” In some cases the sharers in a village adopted or followed the rules of the Mahomedan Law of pre-emption, and in such cases the custom of the village follows the rules of the Mahomedan Law of pre-emption. In other cases, where a custom of pre-emption exists, each village community has a custom of pre-emption which varies from the Mahomedan Law of pre-emption and is peculiar to the village in its provisions and its incidents. A custom of preemption was doubtless in all cases the result of agreement amongst the shareholders of the particular village, and may have been adopted in modern times and in villages which were first constituted in modern times.”
It is not necessary for our present purpose to pursue this discussion any further.
Since the establishment of British rule in India the Muhammadan Law ceased to be the general law of the land and as pre-emption is not one of the matters respecting which Muhammadan Law is expressly declared to be the rule of decision where the parties to a suit are Muhammadans, the Courts in British India administered the Muhammadan Law of pre-emption as between Muhammadans entirely on grounds of justice, equity and good conscience’ Here again there was no uniformity of views expressed by the different High Courts in India and the High Court of Madras definitely held that the law of pre-emption, by reason of its placing restrictions upon the liberty of transfer of property, could not be regarded to be in consonance with the principles of justice, equity and good conscience(2). Hence the right of pre-emption is not recognised in the Madras Presidency at all even amongst Muhammadans except on the footing of a custom. Rights of preemption have in some provinces like Punjab, Agra and Oudh been embodied in statutes passed by the Indian Legislature and where the law has been thus codified it undoubtedly becomes the territorial law of the place and is applicable to persons other than Muhammadans by reason of their property being situated therein. In other parts of India its operation depends upon custom and when the law is customary the right is enforceable irrespective of the religious persuasion of the parties concerned. Where the law is neither territorial nor customary, it is applicable only between Muhammadans as part of their personal law provided the judiciary of the place where the property is; situated does not consider such law to be opposed to the principles of justice, equity and good conscience. Apart from these a right of pre-emption can be created by contract and as has been observed by the Judicial Committee in the case referred to above, such contracts are usually found amongst sharers in a village. It is against this background that we propose to examine the contentions that have been raised in the present case.”
8. Further the Hon’ble Supreme Court in Bishan Singh v Khazan Singh, AIR 1958 SC 838, while dealing with the provisions of the Punjab Pre-Emption Act 1913, summarized the law on pre-emption as follows:
“ (1) The right of pre-emption is not a right to the thing sold but a right to the offer of a thing about to be sold. This right is called the primary or inherent right.
(2) The pre-emptor has a secondary right or a remedial right to follow the thing sold.
(3) It is a right of substitution but not of re-purchase i.e., the pre-emptor takes the entire bargain and steps into the shoes of the original vendee.
(4) It is a right to acquire the whole of the property sold and not a share of the property sold.
(5) Preference being the essence of the right, the plaintiff must have a superior right to that of the vendee or the person substituted in his place.
(6) The right being a very weak right, it can be defeated by all legitimate methods, such as the vendee allowing the claimant of a superior or equal right being substituted in his place.” (Emphasis supplied)
9. In a Constitution Bench decision of Hon’ble Supreme Court in Radhakisan Laxminarayan Toshniwal v Shridhar Ramchandra Alshi 1960 AIR 1368, it dealt with the question whether a suit for pre-emption could be filed prior to execution of the sale deed and held thus:
13. …The right to pre-empt the sale is not exercisable till a pre-emptible transfer has been effected and the right of preemption is not one which is looked upon with great favour by the courts presumably for the reason that it is in derogation of the right of the owner to alienate his property. It is neither illegal nor fraudulent for parties to a transfer to avoid and defeat a claim for pre-emption by all legitimate means…” (Emphasis supplied)
15 The right of pre-emption is a preferential right to acquire the property by substituting the original vendee. The transfer or sale of an immovable property is a condition precedent to the enforceability of the right. The right of pre-emption is attached to the property and only on that footing can it be enforced against the vendee. Though the right is recognised by law, yet it can be rendered imperfect by the vendor when he transfers the property to another person who also has a superior right to the plaintiff pre-emptor”
10. Also relevant is to keep in mind is that practice of Pre-Emption is held to be inconsistent with Constitutional Scheme and modern idea and reliance can be placed on the judgment in Smt. Vijayalakshmi Vs. B. Himantharaja Chetty, AIR 1996 SC 2146, where Hon’ble Supreme Court was pleased to observe as under:
“The concept of substitution from that long and even before has been the foundation of the law of pre-emption and has been noticed, followed and employed, time and again, in a catena of decisions. The fact that this Court in Atam Prakesh vs. State of Haryana [1986(2) SCC 249] has struck down the right of pre-emption based on consanguinity as a relic of the feudal past, inconsistent with the constitutional scheme and modern ideas, has not altered the situation that the right of pre-emption, wherever founded, whether in custom, statute or contract, is still a right of being substituted in place of the vendee, in a bargain of sale of immovable property. We therefore need not burden this judgment with other attributes of the concept as attempted by both Hon’ble Judges of the High Court.”
11. As also it is important to keep in mind that the right of Pre-emption once waived, cannot be raised on subsequent sales. In Raghunath v. Radha Mohan, AIR 2020 SC 502, iterating that pre-emption is a weak right. It was held that once a plaintiff-pre-emptor chooses to waive his right of Pre-emption, he loses that right for ever, and could not raise the right in perpetuity every time there is a subsequent transaction or sale. It is only exercisable for the first time when the cause of such a right arises.
12. Now in the case in hand, appreciating the contentions of Ld. Sr. Counsel and Ld. DR, the Bench is of considered opinion that both of them have drawn reference to the characteristic of rights under law of pre-emption on the basis of judgments, where right of pre-emption was either part of customs or the personal law. The first question for decision is whether a right of pre- emption had accrued to assessee at all in the light of aforesaid classification of right of preemption. Though in the Suit filed by assessee an issue was framed by Hon’ble High Court but no adjudication came from the Hon’ble High Court as there was settlement. Ld. AO has erroneously concluded at page no. 12 of the order that Hon’ble High Court of Delhi has recognized the Assessee’s right of preemption. While infact mere framing of issue during the hearing of suit cannot be considered to be recognition of the right of assessee.
13. When the aforesaid classification of right of pre-emption is considered very apparently right of pre-emption said to be held by assessee firm does not fall under any of the aforesaid classifications. Specially referring to right of pre-emption arising out of contract amongst sharers in a village, it is not to be confused with the contract arising out of a promise and acceptance followed by due consideration in terms of The Indian Contract Act, 1872, which regulates the lease deed contract between the assessee firm as lessee and the owner of premises, the lessor. Judgement which Ld. Sr. Counsel has referred of Hon’ble Allahabad High Court in Jhagru Rai vs. Basdeo Rai and Ors. AIR 1924 Allahabad 400 was in regard to contract arising out of Wajib-ul-arz. The same is a contract amongst the co-sharers of the village land and not regulated by principles of Indian Contract Act. So we need to consider the various facts arising from the record to analyze if there was a legal right of preemption at all.
14. To understand the nature of right of the assessee under the lease deed clause 13 of the lease deed dated 19/4/2004 ( Page 10 of PB) is relevant and worthy to be reproduced here as follows;
“13. That in case the LESSOR intends to sell the premises, first priority of purchase of the premises shall be given to LESSEE and if LESSEE does not avail the offer and in the event of transfer of demised premises by “LESSOR” to a third party, the “LESSOR” shall be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements present and such purchaser shall be bound by all the terms and conditions concerning this arrangement including the return of security amount paid by LESSEE after deducting arrears and dues or otherwise in same manner as the “LESSOR” was and as if no transfer had taken place. In case the purchaser further sells to any other purchaser or purchasers, the present arrangements will also be binding on the.”
15. The Ld. AO construed this clause 13, by observing at page no. 10 of the assessment order as follows :-
“The aforementioned clause bestows the “Right of preemption’’ upon the assessee and it further safeguards the assesse’s “Tenancy Rights” as the clause states that in case the LESSEE (which is the assessee) does not avail the offer of sale and in the event of transfer of the premises to a third party, the LESSOR “shall” be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements and the purchaser “shall” be bound by all the terms & conditions concerning this arrangement. Further, if the purchaser further sells to any other purchaser, the present arrangements will also be binding on them.
The point to be noted above is that the continuity of the arrangement is mentioned with the assessee’s first right of purchase/ right of preemption. This implies that even if the assessee did not avail the offer of purchase and the property was sold to a third party, the assessee would not only retain its “tenancy rights” but also retain its “right of preemption”. The assessee’s rights would continue even if the property was further sold.
As a corollary, the assessee’s “Right of Preemption” does not cease to exist with the sale of the property. The assessee retains the right to avail the first offer of purchase even if he has refused it earlier.”
16. What this Bench construes from this clause 13 is that the lessee merely had a right to offer of the purchase of the premises. The Clause 13, nowhere indicates the intention that on sale of the premises, the lessee will have right to follow the purchaser and get himself to be substituted in place of purchaser, as otherwise is the remedy in case of right of pre-emption. At page no. 21 of the paper book there is a letter dated 19.09.2005 which shows that the lesser being aggrieved by the default in the payment of rent intended to sell the property and therefore, in terms of clause 13 offered the assessee to purchase the property by giving consent in 15 days. Assessee seems to have not accepted the offer.
17. At the same time, Clause 13 makes it apparent that in the event of transfer of the premises by the lessor to a third party, the lesser was under obligation to ensure that the purchaser continues to recognize the obligations, encumbrances and liabilities created under the lease deed in favour of the lessee, including the return of security amount paid by the lessee. It signifies that parties merely intended that in case the offer of purchase is not accepted by the lessee in that case also certain rights of assessee under the lease deed will be protected and recognized by the purchaser. However, once right to offer was not exercised against the lessor, the assessee firm as lessee could not have enforced the same against the purchaser. Only rights protected were right of tenure, rent, security etc. and not right to have preferential offer to purchase from subsequent purchaser also. It appears that the reason for having this covenant of preferential right to purchase was to protect the right of lessee to have continuous possession during period of lease, which though as per clause 1 of the lease deed (Page 4 of PB) was fixed initially for Three years, was renewable exclusively at the behest of lessee for ‘as number of years as lessee may desire, at the option of lessee and the lessor shall have no objection of the same.”
18. Next in the aforesaid context, when the settlement agreement dated 29.05.2012, available at page no. 48 to 51, is considered it is established that assessee had agreed that upon receipt of Rs. 20,40,00,000/- from the purchaser, the assessee shall be deemed to have given up all its right to sue and assessee shall withdraw its suit being Civil suit CS (OS) No. 1863/2006 on 31.05.2012 and shall be left with no claim/ right/ title /interest / any parting damage etc. of any nature whatsoever with respect to the said property. What is relevant is that the purchaser, M/s. Kandhari Infrastructures Pvt. Ltd. had based its cause of action in the Civil suit no. 101/2007, for rejection, damages, recovery of arrears of rent and mandatory injunction on the basis of default in payment of rent by the assessee and that the lessor vide notice dated 29.11.2005 had terminated the tenancy of the lessee. The purchaser has also pleaded that the assessee was put to notice that the tenancy with respect to said premises would stand attorned to the purchaser company with effect from 01.06.2006.
19. This settlement agreement was entered in the suit filed by the assessee being CS (OS) No. 1863/2006 and by order dated 31.05.2012, Hon’ble Delhi High Court had disposed of the suit as not pressed, as apparent from the copy of order available at page no. 52-53 of the paper book.
20. What is important is that under this settlement agreement dated 29.05.2012 assessee had also agreed to remove all its asset/goods in terms of order dated 06.08.2007 passed in Civil suit no. 101/2007, filed by the purchaser seeking possession. It can be observed that by order dated 06.08.2007, Hon’ble Delhi High Court had directed assessee to surrender physical and vacant possession. There is the report of Advocate cum Local Commissioner appointed in Civil suit no. 101/2007, available at page no. 41-42 of the paper book, which shows that the assessee has handed over the possession of the premises to the representative of the purchaser.
21. AO has also failed to appreciate these facts and has erroneously concluded page no. 14 that :
“As is evident from the above extract of the Settlement Agreement, the assessee only handed over vacant possession of the property as part of the Settlement Agreement and had retained possession till then by way of the assets/ goods kept there.
Further, it is by way of the Settlement Agreement entered into 22.05.2012 that the assessee ceased to have any claim/right/interst in the property.”
22. The Bench is of considered view that in any circumstances once the possession is parted away by the assessee no right of pre-emption actually survived in terms of principles of law of pre-emption enunciated above. Hon’ble Supreme Court of India in Rikhi Ram & Ors. Vs. Ram Kumar and Ors AIR 1975 (SC) 1869 while dealing with the preemptory right of a tenant has held that preemptor who claims the right to preempt the sale, on the date of sale must continue to possess that right till the date of the decree. If he loses that right before the passing of the decree, decree of preemption cannot be granted even though he may have such right on the date of the suit. In the case in hand there is no dispute to the fact that after the orders of Hon’ble High Court, the assessee has handed over the possession to the purchaser. Thus, having lost the possession to the purchaser, on the date of settlement he actually did not have any right of preemption left to be transferred or relinquished under the settlement. So the amount was not for transfer by way of relinquishment of right of preemption, as held by Ld. Tax authorities below.
23. Thus Bench is of considered opinion that the ‘right of first priority of purchase of premises’ given to the assessee under clause 13, as a lessee is not strictly speaking a right of pre-emption. It was merely an enforceable covenant, not attached to land but one attached to the right of assessee as a lessee. Ld. Tax authorities have erred in holding it to be a right attached to the land by virtue of right of preemption.
24. The covenant of preferential right to purchase in favour of assessee merely created an enforceable contract for sale based, contingent on the sale of the premises by the lessor to third party, during the lease period. As under Sec. 54 of the Transfer of Property Act, a contract for sale does not of itself create any interest in or charge on immoveable property consequently the covenant of preferential right to purchase, in the instant case created no alienable or transferable interest in favour of the lessee, except enforcement of covenant of preferential right to purchase by way of suit for specific performance of contract. The same is fortified from the fact that the suit which was filed by the assessee, for the enforcement of preferential right to purchase was not a suit simpliciter for enforcing pre-emption right under the aforesaid classification and characteristics of the right of pre-emption but it was out of his preferential right of purchase under Clause 13, as a lessee and therefore, assessee had sought a decree of specific performance of contract.
25. In this context, it can be appreciated that the title of Civil suit CS (OS) No. 1863/2006 by assessee was “suit for pre-emption and/or for specific performance of agreement to sell and injunction”. There in the suit, Assessee had sought following reliefs in para no. 11, available at page no. 17-18 of the paper book :-
“11.“That the Plaintiff prays that this Honble court may be pleased to pass decree in favour of the Plaintiff and against the defendants.
i) for pre-emption and / or specific performance of the agreement of sale of property No. 73, Ring Road, Lajpat Nagar – III, New Delhi for a sale consideration of Rs.6 Crores, by directing and commanding the defendants to execute and register Sale Conveyance Deed of property No. 73, Ring Road, Lajpat Nagar – 111, New Delhi in favour of the Plaintiff;
ii) for permanent injunction, restraining the Defendants from, in any manner, dealing with, alienating, selling or encumbrancing the property’ no. 73, Ring Road, Lajpat Nagar – III, New Delhi and
iii) award costs of the suit to the plaintiff and against the Defendants;
iv) Grant such other or further relief as may be deemed fit and proper in the facts and circumstances of the case.”
26. The relief sought in the suit makes it clear that there was no relief of substitution in the sale deed executed in favour of the purchaser ( M/s. Kandhari Infrastructures Pvt. Ltd.), as should ordinarily be sought in a suit for pre-emption, but what was sought is a direction to the defendant to execute and register sale conveyance deed of the property which is a relief sought in case of breach of contract to sell immovable property.
27. Therefore the bench is of considered opinion that the right of assessee to have the offer for purchase cannot be considered to be a Capital asset for the purpose of Section 2(14) of the Act. This right arising out of covenant in the lease deed has no semblance of a ‘property’ as its alienation, transfer or relinquishment was not possible independently at the will of assessee. It was incidental to prospective sale by the lessor. It was merely contingent right. Ld. AO has fallen in error in concluding that when assessee entered into the settlement with the purchaser there was a relinquishment of the asset. Relinquishment under law does not merely mean “withdraw from, desert, abandon, to cease to hold, adhere to”, as assumed by Ld. AO. The judgment he has relied to understand the term relinquishment in CIT vs. Rasiklal Maniklal (HUF)  177 ITR 198 was in regard to the question where the assessee in the case had received certain shares of the company upon amalgamation. While we are dealing with rights in regard to the transactions concerning immovable properties.
28. Relinquishment in case of immovable property is a way of enlargement of the share or shares of the co-owners of the same rights. Reliance can be placed on the judgment of Hon’ble Delhi High Court in Hari Kapoor vs. S.D.M.C, W.P.(C) 3370/2018 decided on 15.11.2019, wherein Hon’ble High Court has held;
“12. It would follow that a deed of release is an instrument by which one co-owner releases his interest in a specified property as a result of which there would be enlargement of the share of the other co-owners. The releasee should also have a legal right in the property and the release deed would operate to enlarge that right. The share cannot be released in favour of one who has no rights in the property as co-owner.” In regard to right of relinquishment in immovable property Hon’ble Supreme Court of India in Kuppuswamy Chettiar vs A.S. P. A. Arumugam Chettiar, 1967 AIR 1395, has recognized the aforesaid by approving Judgement of Bombay High Court in Hutchi Gowder v. Bheema Gowder (1959 (2) M.L.J. 324;) where in it was held that “A release deed can only feed title but cannot transfer title” and another observation in S. P. Chinnathambiar v. V. R. P. Chinnathambiar (1953 2 M.L.J. 387, 391), “Renunciation must be in favour of a person, who had already title to the estate, the effect of which is only to enlarge the right. Renunciation does not vest in a person a title where it did not exist.”
29. Despite the definition of expression ‘capital asset’ in the widest possible terms in section 2(14), right to a capital asset must fall within the expression “property of any kind” in the context of transferability. Relinquishment of the asset or the extinguishment of any rights therein of a right in regard immovable property, to fall under definition of Transfer u/s clauses (i) or (ii) of Section 2(47) of the Act, should be of a right or an interest which is alienable and otherwise which can be monetized. Based on the aforesaid observations the Bench is of considered opinion that the Ld. AO has fallen to conclude at page 27 of the assessment order as follows :-
“In the instant case of the assessee,
a) The right being considered a ‘capital asset’ is the “Right of Preemption” and not the “Right to sue for damages”.
b) The civil suit instituted by the assessee was for specific performance and not for damages.
c) What the assessee received was a consideration in return for the ‘Relinquishment’ of its “Right of Preemption” and not damages for breach of contract.”
30. In any case such a right for specific performance of the covenant to have priority of purchase is a mere right to sue. It is not a property and it cannot be transferred. Section 6(e) of the Transfer of Property Act specifically makes it a exception to types of transfer. Hon’ble Supreme Court in Swami Motor Transports ( P..) Ltd. v. Sri Sankaraswamigal Mutt AIR 1963 SC 864, has observed that the right of the assessee under the contract for sale of immovable property was not in the nature of property in that the assessee was having no interest in or right of property. The Supreme Court was concerned with the question of right to purchase property by a tenant under the Madras City Tenants Protection Act, 1922, with reference to article 19(1)(/) of the Constitution of India. The same is the nature of right bestowed on the present assessee firm under the lease deed. Hon’ble Supreme Court held in this case;
” . . The law of India does not recognise equitable estates. No authority has been cited in support of the contention that a Statutory right to purchase land is, or confers, an interest or a right in property. The fact that the right is created not by contract but by a statute cannot make a difference in the content or the incidents of the right: that depends upon the nature and the scope of the right conferred. The right conferred is a right to purchase land. If such a right conferred under a contract is not a right of property, the fact that such a right stems from a statute cannot obviously expand its content or make it any the less a non-proprietary right. In our view, a statutory right to apply for the purchase of land is not a right of property. It is settled law that a contract to purchase a property does not create an interest in immovable property’. . ..” (p. 874)
31. That being the state of affairs, the questions framed by ld. AO with regard to nature of right of assessee in the premises by way of right of pre-emption are not of any consequence. Ld. Tax authorities have fallen in error in construing the clause 13 to be a right of preemption and then going ahead to make addition on basis of transfer of this right of preemption by assuming it to be right relinquished under the settlement. Assessee may have also fallen in error in claiming it as a right to preemption but settlement terms and conditions establish that the reference to ‘right to sue’ in the settlement is not established to be right to sue for a particular remedy of enforcement of preemption right which was already lost after vacating the premises. Ld. AO has erred to concluded that consequent to the payment of Rs. 20,40,00,000/-, M/s. Kandhari Infrastructures Pvt. Ltd. was free from the suit instituted by the assessee for the enforcement of assessee’s right of preemption. M/s. Kandhari Infrastructures Pvt. Ltd. also became the sole and absolute owner of the property which was now free from all encumbrances. The injunction of this company restraining it from transferring, alienating or computing encumbrances of the property no longer stood. It now had the right of either use the property or sale, alienate transfer it according to its ledger.
32. The Bench is of opinion that there was no determination of nature of rights of assessee by the Civil Courts so no opinion for that end against the assessee can be made. There was no encumbrance on the premises in favour of assessee after vacation of the premises in furtherance of orders of Hon’ble Delhi High Court. It seems the Ld. Tax authorities were intrigued to tax heavy receipt by assessee but failed to examine the reasons for receipt beyond the right of preemption and suit filed by assessee. As a matter fact what is reflected in the preface to the settlement arrived in mediation is that the amount received by the assessee under the settlement was to make the premises free of litigation and avoid costs of protracted civil litigation. Once the assessee had already parted with the possession of premises in favour of purchaser, in furtherance of the orders of Hon’ble High Court, in the suit filed by the purchaser then any cloud over the title and rights of purchaser due to pending two suits made the property loose its prospective value. Aforesaid consideration in the mind of purchaser to buy peace and make the property clean on cost to pay Rs. 20,40,00,000/- may have any other incidence of taxability, but certainly not a Capital Gains.
33. Lastly, to burden assessee with capital gain arising out of transfer of immovable property or an interest in it, the cost of acquisition is necessarily to be established. Mumbai Bench of Tribunal in the case of DCIT vs. Star Chemicals (Bom.) P. Ltd. 110 TTJ 753 (Mum) has held that for want of acquisition cost capital gain tax would not arise. It is settled proposition of law that the charging section and the computation provisions u/s 48 must go together. Reliance can be placed on the judgment of Hon’ble Supreme Court of India in CIT vs. B.C. Srinivas Shetty, 128 ITR 294 (SC). In the present case, Ld. AO himself has considered the cost of acquisition of the so called right of preemption to be Nil. Thus, the computation provisions fail, therefore, capital gains could not have been calculated. This too establish that a mere right to sue in regard to immovable property cannot be subject to Income Tax under the head ‘Capital Gains’ as restricted by Section 6(e) of the Transfer of Property Act 1882, laying that a mere right to sue cannot be transferred.
34. Thus the grounds raised deserve to be sustained in favor of the appellant. The appeal of assessee is allowed and the impugned orders of Ld. Tax Authorities below are quashed.
Order pronounced in the open court on 10th May, 2023.