CHANDRA REDDY C.J. - The following two questions have been referred by the Income-tax Appellate Tribunal, Hyderabad Bench, for the opinion of this court under section 66(1) of the Indian Income-tax Act, namely :
'1. Whether on the facts and circumstances of the case the leasehold rights, which formed the subject-matter of sale, are capital assets as contemplated under section 2(4A) and section 12B of the Indian Income-tax Act ?
2. If the answer to the first question is in the affirmative, whether the sale of the said leasehold rights took place only on May 5, 1947, when the sale deed was executed ?'
These question arise under the following circumstances. The assessee, Messrs. Rajendra Mining Syndicate, Guntur, is a registered firm having three mining leases and one prospecting licence for varying terms for certain plots in the Kondapalli Reserve Forest area. On January 29, 1946, the assessee entered into an agreement to transfer to one B. D. V. Ramaswami Naidu, the mining rights, concessions, licences and leases in those mines possessed by the assessee together with stocks, equipments etc., the consideration for the transfer being Rs. 3,00,000. On February 4, 1946, a sum of Rs. 75,000 was paid by the vendee to the vendor by way of advance. The title of the vendor to the properties in question was approved of by the vendee on February 20, 1946. On March 9, 1946, the assessee put in an application to the District Collector for permission to sell the leases and the prospecting licence and the Government of Madras sanctioned the transfer of the three mining leases but refused sanction for the transfer of the prospecting licence on March 20, 1947. The sale deed was actually executed and registered on May 5, 1947, and the balance of the sale proceeds was paid in the presence of the Sub-Registrar at the time of registration of the sale deed.
As the sale was effected for a price higher than the original cost, the proper Income-tax Officer thought that the profits derived by the assessee brought them within the scope of section 12B of the Indian Income-tax Act and consequently brought the excess to tax.
The assessment of the Income-tax Officer was affirmed on appeal by the appellate Assistant Commissioner and on further appeal by the Appellate Tribunal.
On the request of the assessee, the two questions mentioned above have been referred to this court.
Before we take up for consideration the two questions referred to, it is useful to extract section 12B of the Income-tax Act in so far as it is of immediate relevance. It reads :
'The tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the March 31, 1946, and before the April 1, 1948, and such profit and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place.'
The first point that falls to be considered is whether the leasehold rights of the assessee were a capital asset within the terms of section 12B.
It is urged on behalf of the assessee that a leasehold right in a mine is only movable property and as such does not attract section 12B. This argument lacks substance. That a leasehold right such as the present one is a capital asset within the preview of section 12B does not admit of much doubt. The term 'capital asset' is defined in section 2(4a) of the Act as :
'Property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include -
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation;
(ii) personal effects that is to say movable property (including wearing apparel, jewelry and furniture) held for personal use by the assessee or any member of his family dependent on him;
(iii) any land from which the income derived is agricultural income;.....................'
There can be little doubt that the rights which the assessee possessed in the mines would fall within the sweep of 'capital asset' as contained in section 2(4A). They do not come under any of the exclusions contemplated by that definition. We find it difficult to subscribe to the proposition advanced on behalf of the assessee that the leasehold right which the assessee had is movable property such as would attract clause (1) or (2) of that sub-section. Further the rights which the assessee had in the mines were connected with his business.
This view of ours gains support from decided cases. In Traders and Miner Ltd. v. Commissioner of Income-tax it was decided that the lease relating to the surface rights together with the mine located in that are was a capital asset within the mischief of section 12B Provident Investment Co. Ltd. v. Commissioner of Income-tax 2 contains the principle that the managing agency of a concern was a capital asset within the meaning of section 12B.
There can be little doubt that the leasehold rights which the assessee had and which he transferred constituted a capital asset for the purpose of section 12B. The first question has, therefore, to be answered in favour of the department and against the assessee.
The only question that survives whether the capital gains tax could come into play in regard to the transaction in question. This depends upon whether the transfer was effected after March 31, 1946. It is urged by Sri Venkataramaiah, counsel for the assessee, that the transfer took place before March 31, 1946, when section 12B came into force by reason of the agreement of sale having been entered into on January 29, 1946, and possession having been given to the vendee pursuant to it. To substantiate this proposition he invites our attention to the terms of the agreement which is marked as annexure 'A'. The following conditions of the agreement are set of thereunder :
'1. The party of the second part shall pay Rs. 3,00,000 (Rs. three lakhs only) as consideration for the above transfer, out of which the sum of Rs. 30,000 (Rs. Thirty Thousand only) shall represent the value of stocks, equipment, tools etc., in list No. 2 and the balance of Rs. 2,70,000 (rupees two lakhs and seventy thousand only) as consideration towards the transfer of mining rights and concessions.
2. The stamp duty and other incidental expenses pertaining to the transfer or assignment as the case may be shall be entirely borne by the party of the second part.
3. This agreement to purchase on the part of the party of the second part shall be subject to the approval of his legal advisers regarding the title of the party of the first part, for which purpose all the relevant papers and documents relating to the licences, leases etc., mentioned in list No. 1 have been handed over to the party of the second part.
4. The party of the first part shall not claim the deposits made by him to the Government towards licences and leases and the same shall enure to the benefit of the party of the second part.
5. After the date of transfer the party of the second part shall pay all the royalties, surface and deed rents, survey fees, the tree values and all such other incidental charges payable to the revenue, forest and other departments of the Government.
6. Title : To be approved of or otherwise by Messrs. King and partridge by the twenty first day of February, 1946.
7. Completion to be seven days after Governments sanction for transfer of all leases and licences where such sanction is necessary.
8. Transfer to be made in favour of Mr. B. D. V. Ramaswami or his nominee or assigns.
9. Advance of Rs. 75,000 (Rupees seventy five thousand only) to be paid on or before the second day of February, 1946. This sum shall be returnable only in case the title is not approved by Messrs. King and Partridge or the Government refuse to permit the transfer of the respective leases and licences to the party of the second part.
10. The party of the first part shall either get item No. 4 in the List No. 1 transferred to his name and them assign or transfer it to the party of the second part or cause the transfer to be made directly to the party of the second part by G. Seshiah.
11. Regarding item No. 5 in the list No. 1, the party of the first part shall transfer the licence to the party of the second part immediately on the Government granting his application for licence; but the delay in the grant of licence or the refusal to grant it by the Government shall not be a ground for the party of the second part to alter or modify withhold or defer payment in full or part, change the agreement or refuse to implement this agreement to purchases....'
The point presented by Shri Venkataramaiah is that the execution of the sale deed is a mere formality and that the sale in reality was made on the date when the agreement of sale was entered into. We do not think that this contention is entitled to any weight. For one thing the very stipulations of the agreement of sale give a clear indication that the agreement proprio vigore could not create interest in the property in question. Condition No. 3 definitely states that the agreement itself was subject to the approval of the legal advisers of the vendee regarding the title to the proper of the vendor. The obligations of the vendee under condition No. 5 to pay the relevant rents, charges, etc., would arise only after the transfer. Further, clause 8 of the agreement specifically states that the transfer has to be made in favour of the vendee or his nominee or assigns. A reference to clause 10 also reinforces the conclusion that the agreement cannot operate as a transfer. The vendor has to assign or transfer the rights in favour of the vendee. It has also to be bound in mind that no transfer of the leasehold rights could be effected without the sanction of the Government.
It is, therefore, futile to contend that the agreement to sell by itself operated to convey the rights of the vendor to the vendee. Moreover, the expression used in section 12B is 'sale effected'. It cannot be contended that the sale was effected without the execution of the document. Sri Venkataramaiah argues that there is no definition of 'sale' in the Indian Income-tax Act and, therefore, the sale must be held to have been effected when the agreement to sell was made and the property was put in the possession of the vendee, which together amount to the doctrine of 'part performance' of the contract governed by section 53A of the Transfer of Property Act.
It is needless for us to say that section 53A does not render any assistance to the assessee. That section does not play any part in the determination of the question as to when the sale was effected. That only gives protection to the person who has performed his part of the contract and is put in possession of the property but has not acquired any right to it under a properly executed sale deed. In fact, that doctrine itself emphasises that without a proper sale deed, the title of the person in possession is not perfected. It is because of lack of title that recourse is had to this doctrine. There can be little doubt that without a sale deed the vendee does not obtain any title to the property. The very sale deed relied on by Sri Venkataramaiah, counsel for the assessee, clearly says that all the right, title and interest of the vendor was assigned to the vendee only under that document. It is, therefore, difficult to uphold the plea of the assessee that the moment the agreement of sale was executed or possession was given to the vendee the sale was affected.
Provident Investment Co. Ltd. v. Commissioner of Income-tax, called in aid by Sri Venkataramaiah, does not lend any countenance to the theory propounded by him. That decision did not deal with the question as to the date on which the sale could be said to have been effected. The controversy there was whether there was a transfer of managing agency within the range of section 12B and the question was answered in the negative for the reason that the assessee merely resigned the managing agency and did not sell it or transfer it to any one.
On the other hand, there are cases which clearly establish that the date of agreement of sale does not determine the date of the actual sale. In Commissioner of Income-tax v. Elder it was laid down that there could be no transfer of share till the sale deed was executed. In re Kunjamal & Sons illustrates the principle that till a regular instrument of transfer is written and registered, there could not be said to be any transfer or sale of the property and that section 53A of the Transfer of Property Act does not invest the transferee with any title to the property. It was observed that title to the property became complete only on the execution of the sale. It is unnecessary to multiply citations on this topic. Suffice it to say that it is only when a proper instrument is executed and registered that the sale can be said to have taken place. When once it is registered the making of the sale deed dated back to the date when it was actually executed. In this case that does not makes much difference because both the execution and the registration of the document occurred on the same date.
For these reasons, we answer the second question also against the assessee.
The assessee will pay the department the costs of this reference Advocates fee Rs. 250.
Reference answered accordingly.