1. In compliance with directions of this court in W.T.C. No. 1-D/65, the Income-tax Appellate Tribunal (for short called 'the Tribunal') drew up a statement of case and referred for the decision of this court the following question of law :
'Whether, on the facts and in the circumstances of the case, the assets of the Crown Flour Mills belong to the assessed-company and their value is liable to be included in the new wealth in the assessment of the assessed-company for wealth-tax purposes ?'
2. The reference arises out of the assessment to wealth-tax of M/s. Meattles Pvt. Ltd. of Delhi for the assessment year 1957-58. The relevant valuation date is March 31, 1957. While completing the assessment of M/s. Meattles Pvt. Ltd. for the assessment year 1957-58 to wealth-tax, the WTO included in the net wealth of the assessed the value of certain assets compendiously described as the Crown Flour Mills (for short called 'the Mills'). According to the assessed, the Mills had been sold by it to its subsidiary company known as M/s. Hindustan Cold Storage and Refrigeration Pvt. Ltd. (for short called 'the company') for a sum of Rs. 75,000, on February 1, 1957. The WTO did not agree that there had been a sale of the Mills on February 1, 1957, as contended by the assessed. The reasons for this conclusion are discussed at great length in the order of assessment to income-tax made on the assessed for the assessment year 1957-58. In that assessment, the assessed had claimed that as a result of the sale, it had incurred a loss of Rs. 3,58,783 and the loss was claimed as allowable under the provisions of s. 10(2)(vii) of the Indian I. T. Act, 1922 (for short called 'the 1922 Act'). The ITO took the view that there had been no sale. He, thereforee, disallowed the assessed's claim for the said loss. On the other hand, he included in the assessment of the assessed the income of Rs. 94,023 derived from the Mills in the months of February and March, 1957. This matter arising out of the income-tax assessment eventually came to this court for its consideration in I.T.R. No. 22 of 1965 (CIT v. Meattles Pvt. Ltd. : 84ITR37(Delhi) . The facts relevant for the transaction out of which the present reference arises are all identical with those that have been considered by this court in the above-noted income-tax reference, and hence the statement of case as well as the decision of this court in I.T.R. No. 22 of 1965 are treated as part and parcel of the statement of case in this wealth-tax reference.
3. The WTO noticed that on February 1, 1957, the assessed entered into a sale agreement with the company whereby the assessed's property known as the mills was agreed to be sold to the company for a sum of Rs. 8,75,000, that the possession of the Mills was handed over on February 1, 1957, but the sale deed was not registered as required under s. 54 of the Transfer of Property Act, 1882 (for short called 'T.P.A.'), and that in the absence of a registered sale deed regarding the sale of the Mills, it was not legally transferred. The assets of the Mills were, thereforee, included in the computation of net wealth in the assessment. The AAC upheld the inclusion in the total wealth of the assessed.
4. The assessed went up in second appeal before the Tribunal. The Tribunal referred to the facts of the case as stated in detail in income-tax appeals and the findings recorded in income-tax appeals. It was pointed out that though the company had not acquired a perfect legal title to the Mills, the assessed was not in a position to claim possession thereof from the subsidiary company in view of the provisions of s. 53A of the T. P. Act, that the subsidiary company was virtually the owner of the property and the vesting of full-fledged title is only a question of time, that the legal title which remained vested in the assessed in the present case was incapable of enabling the assessed to exploit and enjoy any benefit, much more full benefits of the title to the property, and that thus the value of the legal title to the Mills vested in the assessed was nil and, thereforee, no amount remained to be included in the net wealth of the assessed. The Tribunal pointed out that under s. 3 of the W. T. Act, 1957 (hereinafter called 'the Act'), read with s. 2(m), 'net wealth' means all the assets 'belonging to the assessed on the valuation date'. In the opinion of the Tribunal, the expression belonging has to be understood in its ordinary and popular sense and not in a technical sense as possessing title and though the legal title to the Mills in the present case remained vested, in the assessed, the Mills could not be said to belong to the assessed. The Tribunal further pointed out that the wealth-tax assessment of the assessed included not merely the value of the properties in question but also the price realised by the assessed for selling the same and this is also an additional reason for deleting the value of the Mills from the assessment under appeal.
5. The main facts which would be necessary for the determination of the question posed for our opinion and relied on in the statement of case are those given in I.T.R. No 22 of 1965. The assessed had been carrying two distinct businesses, namely, (1) the business of speculation in shares and other commodities, and (2) business of flour milling in its factory known as the Mills. Since for a number of years, the losses in its speculation business were wiping out the profits earned in its milling business, the assessed, decided to transfer the Mills to its subsidiary company. A resolution was passed by the assessed on February 1, 1957, approving two draft agreements relating to the sale of the Mills and its stock-in-trade to the subsidiary company in consideration of Rs. 8,75,000 and Rs. 3,75,063-12-10 respectively. The consideration for the sale of the Mills was resolved to be accepted in equity shares of the subsidiary company of the face value of R. 8,75,000 and Rs. 3,75,063-12-10, being the consideration for the sale of stock-in-trade and other assets and liabilities, was to be treated as a loan to the subsidiary company repayable with interest at the rate of 5% per annum.
6. The subsidiary company on its part had passed a resolution dated December 29, 1956, for the purposes of starting negotiations for acquiring the Mills. A resolution was passed by the subsidiary company on February 1, 1957, approving the aforesaid draft agreements for the purchase of the Mills and its stock-in-trade and other assets and liabilities. On February 1, 1957, two separate agreements were executed between the assessed and the subsidiary company in pursuance of the above resolutions. The first agreement related to the sale of the Mills for Rs. 8,75,000 on the terms and conditions set out therein. The relevant facts found are these :
(1) The agreement provided for immediate delivery and possession of Mills to the subsidiary company, allotment of fully paid-up equity shares of the subsidiary company of the value of Rs. 8,75,000 to the assessed within three months from the date of the agreement and execution of a proper sale deed by the assessed within three months from the date of the receipt of fully paid-up shares.
(2) The subsidiary company was made liable to pay all taxes and outgoings relating to the Mills with effect from the date of the agreement.
(3) The subsidiary company actually took possession of the Mills as also stock-in-trade and other articles transferred to it under the agreements on February 1, 1957.
(4) The subsidiary company started running the Mills with effect from February 1, 1957.
(5) Necessary intimation regarding the change of proprietorship of the Mills was given to the authorities concerned and the Government Departments.
(6) On April 3, 1957, the subsidiary company allotted equity shares of the fact value of Rs. 8,75,000 to the assessed as consideration for the transfer of the Mills and necessary intimation of the allotment of the shares was given to the Registrar of Companies on the same date.
7. The sale deed, however, was not executed.
8. After the statement of case was read, we called upon Shri C. S. Aggarwal, counsel for the assessed, to support the view taken by the Tribunal. In addition to reiterating the arguments which found favor with the Tribunal, the counsel urges that the Mills having vested in the company for exercise of all the powers of an owner, the subsidiary company is the legal owner of the Mills even though the formal sale deed has not been executed. A half-hearted attempt was made to contend that the provisions of the T. P. Act were extended to the Union Territory of Delhi with the effect from December 1, 1962, and before that there was no requirement of a written sale deed and, consequently, no question of registration would arise. Suffice it to say that in the Punjab and Delhi where the T.P. Act was not extended for some time, its provisions as to matters of principle were followed as rules of justice, equity and goods conscience. Even though power is conferred to exempt the sections of the T.P. Act dealing with the transactions to be effected by registered instruments, none of the States has excluded its territories from the operation of these provisions. The reason is that those provisions are based on good conscience. Apart from it, this question was not raised before the authorities under the Act.
9. The counsel for the assessed relied upon Addl. CIT v. Sahay Properties and Investment Co. (P.) Ltd. : 144ITR357(Patna) , wherein the Patna High Court found (p. 361) :
'This being the vital background, namely, that the entire consideration money was received by the Sahay family from the assessed-company, the assessed-company was put in actual physical possession of the entire properties contracted to be sold; the assessed was empowered by the vendor-transferor to use the properties in whatsoever manner the assessed liked and to receive and enjoy the entire usufructs thereof, with the only reservation that a formal deed of conveyance with registration in conformity with the Indian Registration Act shall follow at the request of the assessed and once that request was made, it was incumbent upon the transferor to execute such a deed of conveyance to get it registered without any murmur.'
10. On these facts, it was found that the assessed there, must be deemed to be the owner of the property within the meaning of s. 22 of the Act. Reliance is also placed on Kala Rani v. CIT , wherein it was held that before a person can be assessed under s. 22 it is not necessary that he must be the owner of the property by virtue of a sale deed in his favor. Reliance is next placed on Jodha Mal Kuthiala v. CIT : 82ITR570(SC) , where it was observed (p. 578) :
'But the real question is, can that right be considered as ownership within the meaning of section 9 of the Act. As mentioned earlier, that section seeks to bring to tax income of the property in the hands of the owner. Hence, the focus of that section is on the receipt of the income. The word 'owner' has different meanings in different contexts. Under certain circumstances, a lessee may be considered as the owner of the property leased to him. In Stroud's Judicial Dictionary, 3rd edition, various meanings of the word 'owner' are given. It is not necessary for our present purpose to examine what the word 'owner' means in different contexts. The meaning that we give to the word 'owner' in section 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act.'
11. In our view, these cases do not help the assessed in its case. What was in issue in Jodha Mal's case : 82ITR570(SC) , was whether the persons displaced from the area now forming part of Pakistan continued to be the owners of the properties left behind by them in Pakistan within the meaning of s. 9 of the 1922 Act. The Supreme Court held, in view of the provisions of the Pakistan (Administration of Evacuee Property) Ordinance, 1949, that the property vested in the Custodian. It was a case of statutory vesting in the Custodian who got the legal little to the property. All these cases relied upon by the counsel for the assessed are on s. 22 of the Act of 1961. What is being taxed under s. 22 is the income from house property or the annual value of the property of which the assessed is the owner. The focus of the section is on the receipt of the income from house property. In the cases under W.T. Act, the net wealth is that belonging to the assessed. Liability to wealth-tax arise out of ownership of the asset and not otherwise. The property of the Mills cannot be held to be belonging to the subsidiary company with the transfer of the title by a valid sale deed. The proprietary right in the Mills does not get extinguished by the mere acts attributed to the assessed.
12. In the Income-tax reference CIT v. Meattles Ltd. : 84ITR37(Delhi) , the question before this court was whether, on the facts and in the circumstances of the case, the assessed company was entitled to the deduction of the loss of Rs. 3,58,783 under s. 10(1)(vii) of the 1922 Act. The sale of the Mills by the assessed was at Rs. 3,58,783 below its written down value. Allowance in respect of this loss was claimed to the extent of the said amount under s. 10(2)(vii) of the 1922 Act. The question was to be answered on the consideration of the fact whether the property in the Mills and the stock-in-trade and other articles did or did not pass to the subsidiary company for want of a registered sale deed. This court held that there was no sale of the Mills during the accounting period relevant to the assessment year 1957-58, since the conveyance of the Mills being immovable property of value exceeding Rs. 100 could be made only by a registered instrument. The word 'sale' had become a word of well-recognised legal import at the time when it was introduced in the 1922 Act, and in that sense a sale could be made only by a registered instrument in the case of immovable property of the value of Rs. 100 and upwards. Although the agreement of sale was executed and possession was handed over to the subsidiary company, there was no sale since the registered sale deed had not been executed during the relevant period. The assessed was, thereforee, held not entitled to the balancing allowance under s. 10(2)(vii) for the assessment year 1957-58.
13. At this stage, we may also notice that the subsidiary company in its return income for the assessment year 1958-59 while showing its income from the business of the Mills claimed depreciation amounting to Rs. 56,265 on the building, plant and machinery employed in the Mills. The ITO, in that case, disallowed the claim on the ground that the subsidiary company was not the owner of the Mills inasmuch as no sale deed had been executed by M/s. Meattles Pvt. Ltd. in favor of the company. The disallowance of the claim for depreciation by the ITO was upheld by the AAC. The Tribunal, however, held that the building, plant and machinery of the Mills was the property of the subsidiary company within the meaning of s. 10(2)(vi) of the 1922 Act and, as such, the claim for depreciation should be allowed. A reference was made to this court and the question posed was whether, on the facts and in the circumstances of the case, the company was entitled to claim depreciation under s. 10(2)(vi) of the 1922 Act in respect of building, machinery and plant of the Mills. This court in CIT v. Hindustan Cold Storage & Refrigeration Pvt. Ltd. : 103ITR455(Delhi) , held that the words 'being the property of the assessed' appearing in the s. 10(2)(vi) of the 1922 Act had the same meaning as the words 'owned by the assessed' appearing in s. 32(1) of the of the 1961 Act and these words merely clarified the position that already existed under s. 10(2)(vi) of the 1922 Act. The interest which a person had in a property by virtue of s. 53A of the T.P. Act did not amount to ownership of the property. The Mills constituted immovable property of more than Rs. 100 in value and the title thereto would not pass to a party in the absence of a registered sale deed. As, admittedly, no sale deed was executed in favor of the subsidiary company during the previous year relevant to the assessment year 1958-59, the title to the Mills did not pass. The Mills was not the property of the subsidiary company during the assessment year and, thereforee, one of the conditions prescribed under s. 10(2)(vi) of the 1922 Act was not satisfied. It was held that the company was not entitled to depreciation in respect thereto. A contra view is taken by the Allahabad High Court in Addl. CIT v. U.P. State Agro Industrial Corporation : 127ITR97(All) , replied upon by Shri Aggarwal. We would prefer to follow the view taken by this court which in our opinion, lays down the correct law.
14. In CIT v. Hans Raj Gupta : 137ITR195(Delhi) , another Division Bench of this court stated that it is well-settled that in the case of immovable property of the value of Rs. 100 and above, its transfer can be effected only be means of an instrument in writing, duly stamped and registered. This principle has been consistently applied in a number of decisions in the context of the question of capital gains or balancing charge which arise on a transfer or sale.
15. For the above reasons, we answer the reference in favor of the Department and against the assessed with no order as to costs.