JUDGMENT :

A.M. Ahmadi, J.

The facts of this case lie in a narrow compass. The assessee, an incorporated company, was at all material times, engaged in the manufacture and sale of sugar and certain chemicals. Some time in February, 1970, Messrs K.C.P. Limited, Madras, contracted to sell a second hand GHH Mill from out of its Vuyyuru Sugar Factory to the assessee company for an agreed price. Subsequently, the vendor committed breach of the contract by defaulting to sell the machinery, etc., to the assessee company. There is no dispute regarding the validity of the contract or the factum of its breach. The breach of the contract entitled the assessee to the remedies arising ex contractu, e.g., specific performance of the contract or damages; in the present case, the first was ruled out because the subject-matter bad been sold by the vendor to a third party. The assessee was, therefore, entitled to seek compensation for the breach of the contract from Messrs K.C.P. Limited. In about April, 1971, that is, during the previous year relevant to the assessment year 1972-73, the assessee and Messrs K.C.P. Limited settled the claim for a sum of Rs. 1,40,000 and the latter paid the said amount to the former in full and final settlement of all claims arising ex contractu on account of the breach of the contract.

2. The assessee, relying on the decision of the Supreme Court in CIT v. Vazir Sultan and Sons (1959) 36 ITR 175 and Divecha (P.H.) v. CIT (1963) 48 ITR 222, claimed that the receipt was a non-recurring capital receipt and being casual, was not liable to tax. The Income-tax Officer, while agreeing that it was in the nature of a capital receipt, held that the payment resulted in extinguishment of the assessee's right to acquire the subject-matter, an intangible asset, and was, therefore, covered by section 2(47) read with section 45 of the Income-tax Act, 1961 (for short "the Act"), and was liable to tax as short-term capital gain. In appeal, the Appellate Assistant Commissioner held that the agreement did not bring into existence any capital asset or any right in the capital asset which could have been transferred. The creation of an obligation for specific performance, he held, did not create any property and, therefore, there was no question of "transfer" of a capital asset or any right therein. In his view, the payment, therefore, represented a capital receipt only which was not liable to tax as capital gains. He, therefore, reversed the order of the Income-tax Officer. The Revenue carried the matter in appeal to the Tribunal. The Tribunal held that the right which the assessee had acquired was a capital asset within the meaning of section 2(14) of the Act and on the settlement of the claim, there was extinguishment of the said right amounting to "transfer" under section 2(47) of the Act. Quoting profusely from the decision of this court in CIT v. Amin (1971) 82 ITR 194, the Tribunal concluded that there was a "transfer" of a capital asset and hence the receipt of Rs. 1,40,000 was liable to capital gains tax. Feeling aggrieved, the assessee sought a reference under section 256(1) of the Act. The following question has been referred to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount received by the assessee company by way of damages for breach of contract of sale of movable property was chargeable to tax under the head 'Capital gains'?"

3. Section 2(14) of the Act defines the term "capital asset" to mean property of any kind held by an assessee, whether or not connected with his business or profession. Certain properties enumerated in clauses (i) to (v) have, however, been excluded from the definition of "capital asset" and since the subject-matter of the contract in question does not attract any of these clauses, it is not necessary to set them out. Section 2(47) defines the term "transfer", in relation to a capital asset, to include (i