AKBER A. DEHGAMWALLA VS COMNUSSIONER OF WEALTH TAX, 1992 PTD-BOMBAY-HIGH-COURT-INDIA 1420 (1991)

(a) Wealth Tax------

----Asset---Value of right to receive compensation---Difference between right to receive compensation under statute and damages for breach of contract-- Suit filed on breach of contract and order directing Commissioner to take accounts in September, 1961---Objections to report of Commissioner-- Consent decree in June, 1969---Right to receive damages and interest accrued in June, 1969---Value of right not assessable to Wealth Tax in assessment years 1963-64 to 1969-70.

There is a marked distinction between the right to receive compensation under the Land Acquisition Act or Estate Abolition Act or some other such Act and the right to receive damages for breach of contract. In the case of right to receive compensation for acquisition of land etc., the right to receive compensation is the creation of the statute itself. It is only the amount of compensation that is to be determined later on after taking into account various relevant aspects. In the case of damages for breach of contract, there is no vested right as such. Breach of contract gives merely a right to sue which right is certainly not an "asset" within the meaning of section 2(e) of the Act. The right to receive damages materialises into an "asset" only after it is established that the concerned person has suffered loss as a result of breach of contract by the other party. What remains thereafter is only, the quantification of damages, which are then awarded for breach of contract. Only at that stage, i.e. at the stage when breach of contract is established and the concerned person has established that he has suffered loss as a result of breach of contract by the other party and only quantification of damages remains, can the right to receive damages for breach of contract be said to accrue to the assessee and not before.

The Government of India called for sealed offers for purchase of 999 years lease of a plot of land in 1943 and, in 1945, the assessee submitted his offer, which was accepted by the Government subject to certain conditions. The assessee deposited Rs. 40,000 as required and wanted the Central Government to execute, the lease and hand over possession. There was prolonged correspondence between the assessee and the Government. Ultimately, the assessee was forced to file a suit for specific performance of the contract. In the alternative, he claimed damages for breach of contract. The assessee's prayer for grant of specific performance was refused. As regards the alternative claim for damages for breach of contract, however, the matter was referred to the Commissioner appointed for the purpose of determining the amount of compensation, if any. The assessee and the Government objected to the amount of damages determined by the Commissioner. Eventually, there was a compromise between the parties and by a consent decree passed on June 11, 1969, the damages and the interest thereon were determined. The Wealth Tax Officer included the damages and interest as an asset for the assessment years 1963-fi4 to 1969-70 but the Tribunal held that no part of that amount was includible in the wealth of the assessee for any of the years. On a reference.

Held, that the actual settlement of the damages and the right to recover damages in this case came into existence on the same day, i.e. the day the consent decree was passed on June 11, 1969. On the valuation dates relevant for the assessment years 1963-64 to 1969-70, the right to receive damages had not accrued to the assessee. The assessee was not liable to wealth-tax for those years.

CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524 (SC) applied.

CWT v. Pachigolla Narasimha Rao- (1982) 134 ITR 640 (AP); CWT v. Shivjibhai Jairam (HUF) (.1983) 143 ITR 759 (MP); CWT v. Vysyaraju Badreenarayana Moorthy Raju (1985) 152 ITR 4.54 (SC); Nayak (U.S.) v. CWT (1968) 68 ITR 171 (Kar.); Pandit Lakshmi Kant Jha v. CWT (1973) 90 ITR 97 (SC) and Vadrevu Venkappa Rao v. CWT (1968)69 ITR 552 (AP) ref.

(b) Wealth tax---

----Deductions---Debt owed---Tax liability on amount disclosed voluntarily-- Deductible.

The proportionate tax liability on account of disclosure made under section 68 of the Indian Finance Act, 1965, is a debt owed in terms of section 2(m) of the Indian Wealth-tax Act, 1957, and is deductible in computing the net wealth of an assessee.

Ahmad Ibrahim Sahigra Dhoraji v. CWT (1981) 129 ITR 314 (SC) fol.

S.E. Dastur with N.A. Dalvi and Y.B. Pandya instructed by M/s. Pandya and Co. for the Assesse (in both the references).

G.S. Jetley, Senior Advocate with P.S. Jetley and K.C. Sidhwa for the Commissioner, in both the References.

JUDGMENT.

T.D. SUGLA, J.---Wealth-tax Reference No.5 is at the instance of the Department. Wealth-tax Reference No.12 involves cross-references, i.e. both at the instance of the assessee as well as the Department. The assessee's reference relates to the assessement years 1963-64 and 1964-65 only whereas the references at the instance of the Department relate to the assessment years 1963-64 to 1969-70 (both inclusive).

So far as the assessee's reference is concerned, the Tribunal has referred to this Court only one question of law for opinion under section 27(1) of the Wealth-tax Act, 1957. The question reads thus:

W.T.R. No.12 of 1977:

"Whether the proportionate tax liability of Rs.78,000 on account of disclosure made under section 68 of the Finance Act, 1965, was a debt owed in terms of section 2(m) of the Wealth-tax Act, 1957, and therefore, deductible in computing the net wealth of the assessee for each of the assessment years 1963-64 and 1964-65?"

Counsel are agreed that, in view of the Supreme Court decision in the case of Ahmed Ibrahim Sahigra Dhoraji v. CWT (1981) 129 ITR 314, the question requires to be answered in the affirmative and in favour of the assessee. The question is so answered.

In the references at the instance of the Department, questions of law referred to this Court by the Tribunal are:

For the assessment years 1963-64 to 1966-67 (W T R No 12 of 1977):

"Whether, on the facts and in the circumstances of the case and having regard to the consent decree, dated June 11, 1969, the Appellate Tribunal was right in holding that the right of the assessee to receive compensation from the Central Government and the interest thereon will not amount to the assessee having aquired any right in the immovable property V as to be treated as wealth and, consequently, directing the Wealth-tax Officer to delete the amounts of Rs. 62,963, Rs. 78,083, Rs. 93,203, Rs. 1,08,323 for the assessment years 1963-64, 1964-65, 1965-66 and 1966-67 respectively from the net wealth of the assessee?"

For the assessment years 1967-68 to 1969-70 (W T R No -5 of 1977:

"Whether, on the facts and in the circumstances of the case and having regard to the terms of the consent decree, dated June 11, 1969, the amounts of Rs. 3,75,443, Rs.3,90,563 and Rs. 4,05,683 representing the assessee's right to receive compensation and interest will be liable to wealth tax in his hands for the respective assessment years 1967-68, 1968-69 and 1969-70?"

The assessee is an individual. The Government of India, on March. 11, 1943, called for sealed offers for the purchase of 999 years lease of plots Nos. 5 and 7 to 11 admeasuring about 4,200 sq. yards situated at Paltan Road Estate, Bombay. On April 6, 1945, the assessee submitted his offer to purchase the land on lease at the rate of Rs. 90 per sq. yard. The offer was accepted by the Accountant-General of Bombay on May 1, 1945, subject to certain conditions. The assessee deposited Rs. 40,000 as required and wanted the Central Government to execute the lease and hand over possession. There was prolonged correspondence between the assessee and the Government. Ultimately, the assessee was forced to file Suit No.37 of 1959 in our Court for specific performance of the contract. In the alternative, he claimed damages for breach of the contract. The suit was decreed by the learned Single Judge on September 20, 1961, whereby the assessee's prayer for grant of specific performance was refused. As regards the alternative claim for damages for breach of the contract, however, the matter was referred to the Commissioner for taking accounts for the purpose of determining the amount of compenstion, if any, to which the plaintiff might be entitled for breach of the contract committed by the Government.

The assessee accepted the learned Single Judge's aforesaid order. But, the Union of India challenged it in appeal, inter alia, on the grounds that the assessee's suit for specific performance was barred by limitation, that the contract was not binding on the Union of India in view of the mandatory provisions of section 175 of the Government of India Act, 1935, that there was no binding contract between the parties as alleged, that the alleged agreement was provisional, that the' terms of the contract were to come into force on the execution by the Governor-General-in-Council of the agreement of lease in the assessee's favour and that as no formal agreement of lease was executed between the parties, no subsisting contract had come into existence. The appeal was, however, dismissed by the Division Bench by judgment, dated July 16,1965.

On June 29, 1968, the Commissioner appointed for determining the amount of compensation, if any, submitted a report in terms of which the amount of compensation/damages was determined at Rs.10,92,000. The assessee filed objections to the report on July 16, 1968. The Union of India also filed objections on July 19,1968. Eventually, however, there was a compromise between the parties and, by a consent decree, the amount of damages was determined at Rs.2,52,000. The Union of India was directed to pay to the assessee Rs.2,52,000 plus Rs. 1,56,030 being interest thereon at the rate of 6% per annum from January 30, 1959, up to the date of the consent decree and to pay interest at the rate of 4% per annum from the date of the consent decree till payment. The assessee did not disclose any part of the amount received as damages and interest thereon in his wealth tax returns for the assessment years 1963-64 to 1969-70. However, the Wealth-tax Officer took the view that the amount received as damages as well as interest accruing thereon represented an "asset" in his hands on each of the valuation dates relevant for the assessment years involved. Accordingly, he included in the computation of the assessee's wealth the amounts of Rs.62,963, Rs.78,083, Rs. 93,203, Rs. 1,08,323, Rs. 3,75,343, Rs. 3;70,563 and Rs. 4,05,083 for the respective years. The Appellate Assistant Commissioner allowed the assessee's appeals partly. However, the Tribunal accepted the assessee's submission that, on the relevant valuation dates, the assessee did not own any "asset" in respect of damages and/or interest accruing there on within the meaning of section 2(e) of the Wealth-tax Act, 1957. Accordingly it held that no part of that amount was includible in the wealth of the assessee for any of the years under reference.

Shri Jetley, learned counsel for the Revenue, placed reliance on the Supreme Court decision in the case of Pandit Lakshmi Kant Jha v. CWT (1973) 90 ITR 97, for the proposition that, if an amount was due to the assessee in the form of compensation, it would represent an asset in the hands of the assessee irrespective of the fact that the amount of compensation is determined or is paid to the assessee at some later date. He also relied on two Andhra Pradesh High Court decisions in the cases of Vadravu Venkappa Rao v. CWT (1968) 69 ITR 552 and CWT v. Pachigolla Narasimha Rao (1982) 134 ITR 640, where certain amounts had accrued but the assessee had not shown them in his wealth-tax returns on the ground that he was following the cash method of accountancy. The Andhra Pradesh High Court is stated to have held that, irrespective of the method of accountancy followed by the assessee, the amounts having accrued to the assessce, they were includible in his wealth for the relevant years. Shri Jetley pointed out that the aforesaid Andhra Pradesh High Court decisions have been approved by the Supreme Court in the case of CWT v. Vysyaraju Badrecnarayana Moorthy Raju (1985) 152 ITR 454. Reliance was also placed on a Madhya Pradesh High Court decision in the case of CWT v. Shivjibhai Jairam (HUF) (1983) 143 ITR 759. The suit in that case was for recovery of mesne profits in respect of a property of which the defendant was in possession. There was no dispute that mesne profits were receivable by the assessee at the rate of Rs. 1,600 per month for the period the defendant was in possession. The claim of the assessee was that mesne profits should be paid at the rate of Rs. 4,000 per month. The District Judge decreed the suit awarding mesne profits at the rate of Rs.4,000 per month. The matter went up to the Supreme Court. The Supreme Court stayed the decree and yet the Madhya Pradesh High Court held that the right to receive or recover mesnce profits existed as an asset belonging to the assessee on the relevant valuation dates even before the passing of the decree by the District Judge quantifying the amount of mesne profits. The contention of Shri Jetley, thus, was that, in the present case, when the, learned Single Judge of our Court decreed the suit on September 20, 1961, directing the Commissioner to take accounts for fixing the amount of damages, there accrued an asset belonging to the assessee in the form of a right to receive damages and the time when the amount of damages was actually quantified was irrelvant. On the relevant valuation dates, such a right, i.e. the "asset" is required to be evaluated and included in the wealth of the assessee.

Shri Dastur, learned counsel for the assessee, strongly relied on the Supreme Court decision in the case of CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524. He stated that, unless the assessee could be said to have an absolute and indefeasible right to receive damages on the relevant valuation dates, it would not be an "asset" belonging to the assessee. He invited our attention to the fact that the decree passed by the learned Single Judge was challenged by the Government in appeal on grounds which went to the root of the matter. Therefore, until the Division Bench of our Court dismissed the appeal, it could not be held that any "asset" in Terms of section 2(c) of the. Wealth-tax Act belonging to the assessee came into existence. According to Shri Dasiur, even after the judgment of the Division Bench in 1965, it was not possible to say that the assessee had any asset in the form of a right to receive damages as in the original decree passed by the learned Single Judge, there was no mandate to pay damages as such. The decree was merely a direction to the Commissioner to take accounts for the purpose of determining the damages, if any, payable to the assessee for breach of the contract. All that the decree held was that there was a breach of contract. Damages are, he stated, not payable for every breach of contract. The assessee had to establish that he had suffered loss due to breach of the contract and it would be then only that any damages would be determined as payable to him. All that was yet to be examined by the Commissioner. As to the question that, in that case, at (cast after the submission of the report by the Commissioner in 1908, why the right to receive damages be not treated as an "asset", Shri Dastur stated that the judgment and the report of the Commissioner also were not final until decreed by the Court or accepted by the parties. In this case, both the parties had raised objections to. the report. Unless the objections taken by the parties were heard and adjudicated upon by the Court, no right to receive damages could be said to have come into existence. If there was no compromise and consequently a consent decree as was the case herein, there would have perhaps been prolonged litigation. In short, Shri Dastur's argument was that the asset in the form of a right to receive damages which can be said to accrue to the assessee came into existence in this case on the date the consent decree was passed.

In reply, Shri Jetley referred to a Karnataka High Court decision in the case of U.S. Nayak v. CWT (1(X)3) 68 ITR 171. In that case, despite serious disputes about the validity of sale and the fact that even the possession of the property was not given to the assessee, it was held that, as on the relevant valuation date, the assessee owned the property, the property was required to be valued as a "property" at its fair market value. The assessee's claim that, in such a case, only the amount paid by. it as sale price of the property be treated as an asset being advance paid towards the purchase of the property was rejected. Referring again to the Andhra Pradesh High Court decision in CWT v. Pachigolla Narasimha Rao (1982) 134 ITR 640, Shri Jetley pointed out that the analogy of the Income-tax Act cannot be extended to the Wealth-tax Act because, by means of section 2(m) read with section 2(e), the Wealth Tax Act defines what constitutes "net wealth" and "an asset". Shri Jetley made an attempt to distinguish the Supreme Court decision in CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524, strongly relied upon by Shri Dastur by referring to the fact that, in that case, the assessee was permitted to withdraw the decretal amount only on furnishing a security bond for refunding the amount in the event of the appeal being allowed.

In order to appreciate the rival contentions properly, it is desirable to mention that there is a marked distinction between the right to receive compensation under the Land Acquisition Act or Estate Abolition Act or some such other Act and the right to receive damages for breach of the contract. In the case of the right to receive compensation for acquisition of land, etc., the right to receive compensation is the creation of the statute itself. It is only the amount of compensation that is to be determined later on after taking into account various relevant aspects. In the case of damages for breach of contract, there is no vested right as such. Breach of contract gives merely a right to sue which right is certainly not an "asset" within the meaning of section 2(e) of the Act. The right to receive damages materialises into an "asset" only after it is established that the concerned person has suffered loss as a result of a breach of contract by the other party. What remains thereafter is only the quantification of damages, which are then awarded for breach of the contract. Only at that stage, i.e., at the stage when breach of contract is established and* the concerned person has established that he has suffered loss as a result of breach of contract by the other party and only the quantification of damages remains, can the right to receive damages for breach of contract be said to accrue to the assessee and not before.

The decisions relied upon by Shri Jetley have to be considered in this background. The Supreme Court decision in Pandit Lakshmi Kant Jha v. CWT (1973) 90 ITR 97 is a decision in which the assessee had become entitled to receive compensation under the Bihar Land Reforms Act, 1950. It proceeded on the basis that, as soon as the estate or tenure of a proprietor or tenure holder vests in the State, the person concerned becomes entitled to receive compensation. The Andhra Pradesh High Court decision in Vadrevu Venkappa Rao v. CWT (1968) fig ITR 552 is also a case in which the amount of compensation was payable under section 54A of the Estates Abolition Act. There again, the compensation was receivable under the statute and only the amount of compensation was to be quantified subsequently. The question involved was merely whether, when the assessee was maintaining accounts on the cash basis, an "asset" that accrued but was yet to be received could be treated as an asset for wealth tax purposes. In that case which was subsequently confirmed by the Supreme Court in CWT v. Vysyaraju Badrenarayana Moorthy Raju (1985) 152 ITR 454 it was held that so far as the Wealth-tax Act is concerned, the method of accounting was not a relevant consideration. What is relevant was whether an asset belonged to the assessee in terms of section 2(e) of the Act on the relevant valuation date. The facts in the Andhra Pradesh High Court decision in CWT v. Pachigolla Narasimha Rao (1982) 134 ITR 640, are not much different. There again, the dispute was not about the accrual of interest. The dispute was only that' because the assessee was maintaining his accounts on cash basis, the mere fact that the interest had accrued whether it could not be included in his wealth. No doubt the Madhya Pradesh High Court decision in CWT v. Shivjibhai Jairam (HUF) (1983) 143 ITR 759, is a case which apparently supports the Department. However, in that case, also the question involved was about the right to recover mesne profits. No doubt the Court held that the right to recover or sue for mesne profits was a claim for unliquidated damages and was not a debt nor, an actionable claim as defined in section 3 of the Transfer of Property Act, 1882. The Court, however, also held that, after the passing of the decree for possession in November, 1962, in favour of the assessee, such a right had clearly crystallised, and all that remained to be done in the suit was the quantification of the mesne profits. It could not be disputed that the assessee was entitled to recover mesne profits for the period from the date of expiry of the lease up to the date of delivery of possession.

On the other hand, the Supreme Court decision in CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524, relied upon by Shri Dastur neatly settles the issue in favour of the assessee. It is true that that was also a case of compensation for acquisition of land. However, the Land Acquisition Officer had awarded a compensation of Rs.24.97 lakhs. The arbitrator increased it to Rs. 30.11 lakhs and awarded interest at the, rate of 5% on the increase in the amount. The dispute was taken to the Supreme Court. But in the meantime, the Government had deposited the amount of Rs.5.14 lakh and interest thereon in the Court. The assessee was permitted to withdraw the amount deposited by the Government in the Court on furnishing a security bond for refunding the amount in the event of the appeal being decided against the assessee. Observing that the dispute was regarded as real and substantial by the Court in view of permitting the assessee to withdraw the amount in the manner stated above, the Supreme Court held that the right to the increased amount had not become absolute till the decision in appeal. Accordingly, it was not possible to say that the disputed amount accrued to the assessee as income.

Moreover, in the present case, the suit for specific performance and, in the alternative, for damages for breach of the contract was filed in this Court on January 30, 1959. The suit was decreed by the learned Single Judge on September 20, 1961, by which the assessee's claim for specific performance was rejected Apart from the well-settled legal position that damages for breach of the contract accrue only when the amount of damages is decreed or admitted and not when a mere claim is made or entertained, our Court merely directed the Commissioner by its decree to take accounts for the purpose of determining damages, if any, payable to the assessee for breach of the contract. As the decree stands, it is not possible to say that any right to receive damages as such in reality accrued to the assessee as a result of the decree. Besides, the judgment of the learned Single Judge was not accepted by the Union of India. An appeal was filed, inter alia, on the grounds already mentioned earlier. It is evident from the grounds taken that the very existence of the contract was disputed in appeal. It is true that the Division Bench, by its judgment dated July 16, 1965, dismissed the appeal filed by the Union of India. The effect of the dismissal of the appeal merely brought back the situation as it was on the date when the decree was passed by the learned Single Judge. The dismissal of the appeal, thus, did not improve upon the assessee's right to receive damages as such. Coming then to the judgment and report of the Commissioner dated June 29, 1908, by which he recommended awarding of damages of Rs.10,92,000, here again, it is seen that both the assessee and the Union of India filed objections. If the matter had not been settled out of Court by means of a consent decree, the learned Single Judge would have adjudicated the matter and the aggrieved party, whether it was the assessee or the Union of India, would have gone in appeal there against. Thus, actual settlement of the damages and the right to recover damages in this case came into existence on the same day, i.e. the day the consent decree was passed on June 11, 1969.

Having regard to the above facts of the case and keeping in view the -ratio of the Supreme Court decision in CIT v. Hindustan Housing and Land Development Trust Ltd. (1980) 161 ITR 524, we are in agreement with Shri Dastur that the right to receive damages and the interest thereon accrued to the assessee on the date of the consent decree, i.e., on June 11, 1969. That being so, we have ho hesitation in holding that, on the relevant valuation dates, there had not accrued any right to receive damages to the assessee. Accordingly, we answer the questions in the negative and in. favour of the assessee.

No order as to costs.

Before concluding, we would like to refer to the Karnataka High Court, decision in the case of U.S. Nayak v. CWT (1908) 68 ITR 171, very strongly relied upon by, Shit Jetley. In that case, the assessee had purchased a property in 1955 for Rs. 25,0(X). The validity of the sale was questioned. Possession of the property was not given to the assessee. The assessee's claim was that the amount of Rs.25,000 paid by him as consideration should alone be included in his wealth whereas the case of the Department was that the property belonged to the assessee and that its fair market value as on the relevant valuation date should be included in the wealth. The Karnataka High Court held that the assessee did own the property despite the disputes and it was the value of the property that is required to be included in the net wealth of the assessee. However, it is pertinent to mention that the admitted position in that case was that the assessee had claimed that he owned the house and there was no dispute about it. Under the circumstances, we do not see how this case is relevant in the facts of the present case.

M.B.A./1628/TOrder accordingly.