1. This is a reference under section 256(1) of the Income-tax Act, 1961. The assessment year with which we are concerned is the assessment year 1966-67, the relevant previous year being the one ended on March 31, 1966.
2. On April 28, 1963, the assessee paid a sum of Rs. 20,000as 'earnest money' to S. N. Desai Topiwala for the purchase of land admeasuring about 2,454 square yards in Goregaon (referred to hereinafter as 'the said plot'). On May 25, 1963, an agreement was entered into under which the said Topiwala as the vendor agreed to sell and the assessee as the purchaser agreed to purchase the said plot for Rs. 29,448. The said agreement referred to the said Topiwala having received Rs. 20,000 as part of the purchase price and recorded that the balance of the purchase price would be payable on or before the execution of the conveyance. The assessee was gen possession of the said plot and under the agreement to purchase the said plot, it was the duty of the assessee to guard the same against trespassers and squatters. On September 24, 1964, the assessee paid the balance amount of Rs. 9,448 under the said agreement and the said plot of land was conveyed to the assessee under a document dated September 25, 1964. The said document of conveyance was duly registered on September 29, 1964. On April 3, 1965, the assessee sold 1,114 square yards out of the said plot to a co-operative society at the rate of Rs. 80 per square yard. The Income-tax Officer took the view that the assessee was bound to pay tax on the footing of having made a short-term capital gain of Rs. 71,670 on the said transaction in respect of 1,114 square yards out of the said plot sold by the assessee as aforesaid, as the assessee had sold the said portion of the said plot within 12 months of having acquired the same. On an appeal by the assessee, the Appellate Assistant Commissioner took the view that the capital gain made by the assessee on the aforesaid transaction was a long-term capital gain. The Revenue preferred an appeal against the said decision of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal. The Tribunal took the view that as the assessee had obtained possession of the said plot more than 12 months prior to the aforesaid transaction of sale of the said portion of the said plot by the assessee, the transaction must be regarded as of the sale of a long term capital asset and the Tribunal upheld the decision of the Appellate Assistant Commissioner. From this decision of the Tribunal, the following question has been referred to us for our determination :
'Whether, on the facts and in the circumstances of the case, and on a proper interpretation of section 2(42A) of the Income-tax Act, 1961, read with section 2(14) of the said Act, the sum of Rs. 71,670 was properly treated as long-term capital gains ?'
3. Before setting out or considering submissions made by the counsel, it would be proper to take note of the relevant provisions of law. Clause (14) of section 2 of the Income-tax Act, 1961, defines the term 'capital asset'. The relevant portion of the said definition run thus :
''Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include..'
4. Admittedly, the said plot was not property of the type excluded from the purview of the said definition. Clause (42A) of section 2 of the said Act defines the term 'short-term capital asset'. The relevant portion of the said clause, as it stood at the relevant time, ran thus :
''short-term capital asset' means a capital asset held by an assessee for not more than twelve months immediately preceding the date of its transfer.'
5. There is an Explanation to this clause, but it is not relevant for our purpose. It is unnecessary to consider in any detail the provisions of the Income-tax Act levying tax on short-term capital gains and long-term capital gains, because it is common ground that if a gain is made by the transfer of a short-term capital asset, it is a short-term capital gain and liable to tax at a higher rate than a gain made by the transfer of a capital asset other than a short-term capital asset.
6. The submission of Mr. Dhanuka, learned counsel for the Commissioner, is that in the present case, the assessee acquired the title to the said plot only on the execution of the conveyance dated September 25, 1964, which was executed on that very day; and the sale of the aforesaid portion of the said plot was effected on April 3, 1965, within twelve months of her acquisition of the said plot. In view of this, the portion of the said plot sold must be regarded as a short-term capital asset and the assessee must be held liable to pay tax on that footing. The submission of Mrs. Jagtiani, learned counsel for the assessee, is that the assessee entered into the agreement to purchase the said plot on May 25, 1963, and pursuant to that agreement was put in possession of the said plot. In view of this, it was submitted by her that the assessee must be regarded as having held the said plot from the date of the agreement to purchase the same and, hence, the assessee had held the said Plot for more than twelve months prior to selling the same. It is not possible to accept the submission of Mrs. Jagtiani. On entering into the agreement to purchase the said plot, all that the assessee acquired was an equity to obtain specific performance of the said agreement, if she was able to establish that she was and had always been ready and willing to carry out her part of the agreement. It is well-settled in law that a mere agreement to purchase a land does not convey any title to the said land or create any interest in the said land. All that the intended purchaser acquires under such an agreement is an equity to obtain specific performance. The fact that she was put in possession of the said plot does not in any way confer on the assessee a title to the land in question. At best, such possession might give the assessee a right to claim the benefit of part performance, but it is clear that the fact of being put in possession in part performance of the agreement cannot confer any title on the assessee to the land in question. It was only on the execution of the conveyance that the assessee acquired title to the said plot and it was only from the date of conveyance that it can be said that the assessee held the said plot as the owner thereof. Thus it is clear that the assessee has disposed of or 'sold the aforesaid portion of the said plot within twelve months of acquiring title to the same and holding the same as the owner thereof, and the said portion must be regarded as a short-term capital asset in the hands of the assessee.
7. We may mention that in support of her submission, Mrs. Jagtiani relied on the decision of a Division Bench of this court in CIT v. Tata Services Ltd. : 122ITR594(Bom) . In that case, on July 31,1961, under an agreement of sale of that date executed by the owner of a residential plot of land, the assessee had agreed to purchase 5,000 square yards out of a larger residential plot of land at Rs. 75 per square yard. The purchase was to be completed within six months. The assessee paid Rs. 90,000 as earnest money. Later, the vendor wanted to cancel the agreement on the ground that the sub-division of the plot had not been granted by the Municipal Corporation but this was not accepted by the assessee. Ultimately, under a tripartite agreement, the assessee transferred and assigned in favour of a third party, its right, title and interest under the aforesaid agreement to purchase the said portion of the said plot and received a sum of Rs. 5,90,000 from the said third party. It was held by the Division Bench which decided the aforesaid case that under the tripartite agreement, the assessee was to transfer and assign in favour of the third party, the right, title and interest which the assessee had under the aforestated agreement entered into with the vendor or the owner of the said land. Once the parties had decided that the rights under the agreement of sale were to be assigned in favour of the third party, the excess sum of Rs. 5,00,000 received by the assessee from the third party could not be claimed to have been received by way of compensation or damages for breach of the agreement of sale. The rights which had been assigned in favour of the third party, clearly fell within the definition of 'capital asset' in clause (14) of section 2 of the Income-tax Act, 1961. It was held that the entire amount of Rs. 5,00,000, being the difference between the amount of Rs. 5,90,000 received by the assessee an(l Rs. g0,000 originally paid by the assessee as earnest money, would be capital gains in the hands of the assessee, subject to deduction on account of legal and other expenses. In our view, this case is of no assistance whatsoever to the assessee. In the case before the aforesaid Division Bench, what the assessee had was the right under an agreement to purchase a part of the plot of land and what was assigned by the assessee was the right, title and interest of the assessee under that agreement. It was not at all a case like the one before us where, pursuant to the agreement of purchase, the title to the land was acquired and thereafter it was the title to the land which was sold.
8. Mrs. Jagtiani next relied on the decision of a Division Bench of the Calcutta High Court in CIT v. All India Tea and Trading Co. Ltd. : 117ITR525(Cal) . This decision, we are afraid, is not at all relevant to the question before us. In that case, the question was whether the gain made by the assessee on transfer of a large area of land in Assam was capital gain and taxable under the Income-tax Act as such. What was held was that the land in question was agricultural land and it never became a capital 'asset' in the hands of the assessee. Hence, the gain made by the transfer of the same was exempt from capital gains tax.
9. It was further submitted by Mrs. Jagtiani that even if the transaction entered into by the assessee is to be regarded as of the sale of a short-term capital asset, the cost of acquisition of the portion of the said plot which wa5 sold by the assessee as aforesaid should be taken to be its market value as on the date of the conveyance executed in favour of the assessee, namely. September 25, 1964, and not the amount mentioned as the purchase price under the agreement to purchase entered into by the assessee as aforesaid. In our view, there is no substance whatever in this submission. The conveyance itself clearly mentions the price at which the land in question was sold to the assessee and that price is the same as that set out in the agreement of purchase referred to earlier. In view of this, there is no question of the market value of the said portion of the land having to be ascertained as on the date of the conveyance. It is clear that the cost of acquisition was at the rate mentioned in the conveyance.
10. In the result, the question referred to us must be answered in the negative and in favour of the Revenue. The assessee to pay the costs of the reference.