1. At the instance of the assessee, the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, has referred under the section 256(1) of the Income-tax Act (hereinafter referred to as 'the Act'), the following question of law for the opinion of this court :
'1. On the facts and in the circumstances of the assessee's case, whether the Tribunal was justified in law in holding that the receipt of Rs. 20,000 represented the assessee's long-term capital gain liable to tax ?'
2. The following facts are disclosed in the statement of the case submitted by the Tribunal. The assessee was declared as the purchaser of certain immovable property for Rs. 125 at a court auction held in 1962. The judgment-debtors filed an application under rule 90 of order 21 of the Code of Civil Procedure, to get the sale set aside. The application was dismissed any the executing court. Against the order of the executing court, the judgment-debtors filed an appeal under Order 43, rule 1(j), of the Code of Civil Procedure, in R.A. No. 47/1967 on the file of the 1st Additional Civil Judge, Civil Station, Bangalore. During the pendency of that appeal, the dispute between the parties was compromised. Under the compromise the assessee agreed to the sale being set aside on payment of rs 20,000 by the person in whose favour the judgment-debtors had agreed to execute a sale deed conveying the property in question. The compromise was recorded by the learned civil judge and the sale was set aside by him. During the assessment year 1968-69, the question of taxability of the sum of Rs. 20,000 received by the assessee arose for consideration before the Income-tax Officer. The Income-tax Officer held that the entire sum of Rs. 20,000 represented long-term capital gain and was liable to be taxed under the Act. Aggrieved by the order of the Income-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner of income-tax and that appeal was dismissed. On further appeal to the Income-tax Appellate Tribunal, it was again held that the sum of Rs. 20,000 was an item of capital gain which attracted tax. At the instance of the assessee, the Tribunal has made this reference.
3. The contention of the assessee before the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal was that since she had not acquired any title to the property in question, it could not be said that she had interest in it and that she had transferred the same for a consideration of Rs. 20,000. The contention of the department has been that because the assessee could receive the sum of Rs. 20,000 only in lieu of an interest she had in the property in question, which became crystallised by the confirmation of sale by the executing court, the receipt in question should be treated as consideration for relinquishment of her interest in a capital asset.
4. In order to appreciate the merits of the rival contentions, it is necessary to set out briefly some of the provisions of the Code of Civil Procedure which have bearing on the question; rule 84 of Order 21 of the Civil Procedure Code provides that on every sale of immovable property the person declared to be the purchaser shall pay immediately after such declaration a deposit of twenty-five per cent. of the amount of his purchase money to the officer or other person conducting the sale, and in default of such deposit, the property shall forthwith the re-sold. Under rule 85, the full amount of purchase money payable shall be paid by the purchaser into the court before the court closes on the fifteenth day from the sale of the property. Under rule 90 where any immovable property has been sold in execution of a decree, the decree-holder, or the purchase, or any other person entitled to share in a ratable distribution of assets, or whose interests are affected by the sale, may apply to the court to set aside the sale on the ground of a material irregularity or fraud in publishing or conducting it. If the court allows the application the sale held will be set aside. If no such application is made or if an application is made or if an application is made and disallowed the court has to make an order confirming the sale under rule 92 of order 21, Civil Procedure code, and thereupon the sale would become absolute. Thereafter, under rule 94 a sale certificate would be issued to the purchaser. Section 65 of the Code of Civil Procedure provides that where immovable property is sold in execution of a decree and such sale has become absolute, the property shall be deemed to have vested in the purchaser from the time to time. When the property is sold and not from the time the sale becomes absolute. A close reading of the above provisions would show that until the sale becomes absolute on its confirmation it cannot be said that the auction purchaser has become the owner of the property. But when once the sale is confirmed the auction purchaser would acquire a right to the property with effect from the date of sale, subject to any order to be made in an appeal which the law provides. If an appeal is filed the appellate court is entitled to go into the validity of the sale and to pass appropriate orders. In that appeal, it is open to the appellate court to set aside the order passed by the executing court and to set aside the sale. If the sale is set aside on appeal which is a mere continuation of the application under rule 90 of Order 21, Civil Procedure Code, the fact that it had been confirmed by the executing court earlier would not make any material difference at all. The attempt of the auction purchaser to purchase the property at the auction sale should become abortive and be of no effect as it also relates back to the date of sale. There cannot be any difference between the appellate court setting aside a sale after hearing the arguments of the parties or as a consequence of a compromise between the parties or as a consequence of compromise between the parties or as a consequence of a compromise between the parties. The ultimate result in both the cases is that the auction between the parties. The ultimate result in both the cases is that the auction purchaser would not have acquired any interest in the property at any time. It follows that there cannot be any transfer of interest in a capital asset by auction purchaser when the sale itself is set aside in appeal.
5. It was, however, argued by Shri S. R. Rajashekhara Murthy, learned counsel for the revenue, that the sum of Rs. 20,000 received by the assessee in this case, in substance, was a consideration for relinquishment of an interest which the assessee had acquired by reason of confirmation of sale by executing court and that only because the parties had recourse to compromise before the appellate court and got the sale set aside on the basis of such compromise it could not be said that there was no transfer of capital asset by way of relinquishment by the assessee. We are of the opinion that though the arguments urged on behalf of the revenue is attractive, it lacks substance. It is well settled that it is the duty of a court while administering any tax law to give importance both to the form and substance of a transaction. It is quite possible that when a transaction is entered into in one form known to law the amount receive under that transaction may attract liability under the Act and importance both to the form and substance of transaction. It is quite possible that when a transaction is entered into in one form known to law the amount received under that transaction may attract liability under the Act and if it is entered into in another form which is equally lawful it may not attract such liability. But when the assessee has adopted the latter one it would not be open to the court to hold him liable for tax on the ground that in substance the transaction is one which resulted in gain subject to tax. In matters of this kind the court cannot ignore the form altogether as also the legal effect of the proceedings in court. The department cannot be permitted to treat the transaction in question as a transfer of capital asset by the assessee even though she had not acquired any interest in the property and had not done though she had not done any act which would either directly or indirectly amount to a transfer.
6. The following extract from the speech of Lord Tomlin in Duke of Westminister v. Commissioner of Inland revenue  19 TC 490, 520 (HL) supports our view :
'Apart, however, from the question of contract, with which I have dealt, it is said that in revenue cases there is a doctrine that the court may ignore the legal position and regard what is called the 'substance of the matter' and that here the substance of the matter is...... This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support upon misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled and the supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting 'the uncertain and crooked cord of discretion 'for' the golden and straight mete wand of the law.'
7. In Commissioner of Income-tax v. Keshavlal Lallubhai Patel : 55ITR637(SC) the facts were these :
'... the assessee was assessed till the assessment year 1952-53 (accounting year ending March 31, 1952) as an individual. On April 18, 1951, he swore an affidavit before the Deputy Nazir, District Court, Ahmedabad, throwing all his self-acquired properties, mentioned in the affidavit, into the common hotchpot of the Hindu undivided family, consisting of himself and his two sons. The assessee had a wife and two sons, one a major and the other a minor. However, no entries in the books were passed. On July 12, 1951, an oral partition was effected between the several members of the Hindu undivided family, and consistent with this partition, entries in the books were made. A joint declaration was made by the assessee, his wife and the major son on June 26, 1951, before the District court. Later, a joint statement was made on December 5, 1951, before the Revenue Court. Properties were transferred thereafter in accordance with this arrangement to the names of the several members of the family.'
8. It was argued before the Supreme Court on behalf of the revenue that the transactions were really acts of transfer of properties to the wife and minor son of the assessee and the joint Hindu family had been utilised only as a conduit pipe by the assessee to transfer properties to the wife and the minor son. The Supreme Court rejected the plea even though in fact the wife and son had become owners of the properties in question. While doing so the Supreme Court quoted with approval the following observations of Lord Normand in Pott's Executors v. Commissioner of Inland Revenue  32 TC 211, 230 (HL) :
'The court is not entitled to say that for the purposes of taxation the actual transaction is to be disregarded as 'machinery' and that the substance or equivalent financial results are the relevant consideration. It may indeed be said that if these loose principles of construction had been liberally applied, they would in many instances have been adequate to deal with tax evasion and there would have been less frequent cause for the intervention of Parliament.'
9. On the facts, and in the circumstances of the case, we are of the opinion, that since the court sale itself was set aside ultimately by the appellate court the assessee never acquired any sort of interest in the property in question and that it never became a capital asset and a transfer by the assessee resulting in a capital gain could not, therefore, take place at all. The Tribunal was, therefore, in error in holding that the sum of Rs. 20,000 which was received by the assessee under the compromise represented long-term capital gain liable to tax.
10. We, therefore, answer the question in the negative and in favour of the assessee.
11. The assessee is entitled to costs. Advocate's fee Rs. 250.