G. K. MITTER J. - The main question for determination in this reference is whether there was a sale by the assessee of its immoveable properties to Hall and Anderson Ltd., a public company, on December 1, 1946, within the meaning of section 12B(1) of the Indian Income-tax Act, 1922.
The assessee bearing the name, Hall and Anderson Limited, is a private company incorporated under the Indian Companies Act, 1913. It used to carry on business as general drapers, outfitters, furnishers and warehouse owners in Calcutta. On November 29, 1946, it entered into an agreement for sale of all its properties and assets in Calcutta and Darjeeling to a new public company also bearing that name. The document executed in this connection shows that the vendors agreed to sell and the new company agreed to purchase with effect from December 1, 1946, all the freehold land lying at 31, Chowringhee Road, and 1, Russell Street, Calcutta, together with all buildings, fixtures, furniture and other moveable property and the monthly tenancy of the premises at Commercial Road, Darjeeling, and all cash, bank and other balances, stock-in-trade, books debts, etc., belonging to the vendors including the benefit of any excess profits tax refund and the advantages of all contracts with assistants and other and generally the whole of the undertaking and assets of the vendors including its goodwill and the right to use the name 'Hall and Anderson'. The price was fixed at Rs. 80,00,000 apportioned in the manner following, namely, Rs. 20,00,000 for the freehold land, Rs. 30,00,000 for the buildings and other immoveable properties and Rs. 30,00,000 for the moveable properties. Possession was to be given to the new company on the execution of the agreement for sale or at any rate within two weeks thereof. The vendors undertook to execute a conveyance and any other documents which might thereafter be considered necessary in respect of the portions of the premises agreed to be sold but which did not pass by delivery of possession. The new company agreed to accept such title as the vendors had, as also all existing liabilities and debts of the vendors. The new company further agreed to retain the services of any member of the vendors staff who wished to remain on the same terms as before.
It will be noticed from the above that the intention of the parties was that the public company would step into the shoes of the assessee as soon as possible and within a fortnight from November 29, 1946. As a matter of fact possession of the entire properties was delivered to the new company on December 1, 1946. There can be no doubt again that the parties intended that whatever properties or assets the assessee had would be put into possession of the new company immediately and the assessee would execute a sale deed or any other document which might be required by the new company to perfect its title. For some reason or other, there being no suggestion that it was with the intention of avoiding payment of any tax, the sale deed in respect of the immoveable properties was not executed until February 26, 1949. The deed of sale recites that the vendors, on being called upon to execute a conveyance 'for the purpose of formally transferring the lands, hereditaments and premises' mentioned in the agreement for sale, were granting, selling and conveying unto the new company free from incumbrances all the immoveable properties mentioned in the agreement for sale. The question is whether the sale for the purpose of section 12B(1) of the Indian Income-tax Act was effected on December 1, 1946, as claimed by the revenue or on February 26, 1949, as claimed by the assessee. If the sale be held to have been effected in December, 1946, the assessee will have to pay tax on the capital gains but will be exempt therefrom, if the date of sale be in February, 1949.
This reference turns on the interpretation of section 12B(1) and section 12B(2) of the Indian Income-tax Act as they stood until repealed by the Indian Finance Act, 1949. The portions of the sections with which we are concerned in this case are as follows :
'12B. Capital gains. - (1) 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 31st day of March, 1946, and before the 1st day of April, 1948, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place...
Provided further that the tax shall not be payable by an assessee in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset, being property the income of which is chargeable under section 9 and which has been possessed by the assessee or a parent of his for not less than seven years before the date on which the sale, exchange or transfer took place; and the amount of such profits or gains shall not be included in his total income....
(2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made namely :...
Provided further that where the capital asset became the property of the assessee... before the 1st day of January, 1939, he may, on proof of the fair market value thereof on the said date to the satisfaction of the Income-tax Officer, substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset, and which shall be reduced by the amount of depreciation, if any, allowed to the assessee after the said date and increased or diminished, as the case may be, by any adjustment made under clause (vii) of sub-section (2) of section 10.'
The questions which have been referred to this court are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the sale by the assessee of its immoveable properties to Hall and Anderson Ltd., a public company, was a sale effected on December 1, 1946, within the meaning of Section 12B(1) of the Indian Income-tax Act ?
(2) If the answer to the aforesaid question be in the affirmative whether by virtue of the second proviso to sub-section (1) of section 12B, the entire sum of capital gains was exempt from charge and not merely 1/6th portion thereof being the value of 1/6th portion of the premises let out to tenants ?
(3) In arriving at the actual cost of the premises as on January 1, 1939, is the assessee entitled to claim under the third proviso to sub-section (2) of section 12B to deduct the whole of the depreciation allowed in the assessments since January 1, 1939, i.e., Rs. 1,44,642, from out of the fair market value, before allocating the actual cost between the 5/6th portion of the premises occupied and 1/6th portion let ?'
The Indian Income-tax Act does not purport to define a sale or exchange or transfer of property. So far as immoveable property is concerned these expressions have been defined in various sections of the Transfer of Property Act. In this case we are only concerned with 'sale' which has been defined by section 54 of the Transfer of Property Act to mean a transfer of ownership in exchange for price paid or promised or part paid and part promised. Such transfer in the case of tangible immoveable property of the value of one hundred rupees and upwards can be made only by a registered instrument. The said section further shows that a contract for the sale of immoveable property does not of itself create any interest in or charge on such property. Ownership in moveable property may pass by mere delivery of possession but in the case of immoveable property a buyer who is put in possession thereof in furtherance of the contract of sale on payment of the entire purchase price does not acquire title to the property so long as an instrument of transfer is not executed and registered by the vendor. It is true that a transferor or any person claiming under him may be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken possession and has done some act in furtherance of the contract and is willing to perform his part of it. In this case the public company had paid the full price agreed upon and had gone into possession of the property on December 1, 1946. It was not, therefore, open to the assessee to enforce any right in respect of the property against the public company. It may therefore be said that, in substance, though not in law, the public company had become the owner of the property on December 1, 1946. On behalf of the revenue it was contended that the substance of the transaction has got to be considered for income-tax purposes and that the only thing remaining outstanding on December 1, 1946, being the execution and registration of a formal document to record the transfer, the sale should be treated as having been effected on the said date for income-tax purposes. In support of this, our attention was drawn to the recital in the agreement for sale that the public company was being incorporated for the purpose of acquiring and taking over the whole of the undertaking and assets of the assessee immediately, that the agreement for sale was a composite document executed for the purpose of giving effect to the said intention, that the public company was not even entitled to investigate into the title of the assessee, but had to accept such title as the assessee had, that the public company was to take over all existing liabilities and to continue employment of members of the assessees staff who wished to serve the new company and in short to replace the assessee with regard to the whole of its undertaking and assets as from the date of the agreement or at least from a period within two weeks thereafter. Reference was also made to the recital in the conveyance executed on February 26, 1949, that the sale deed was executed merely for 'formally transferring the lands, hereditaments and premises mentioned in the agreement for sale. Reliance was also placed on the facts that the balance-sheet of the assessee as on March 31, 1947, disclosed that all the assets of the assessee had been sold away, that the assessee had not claimed any depreciation on the assets from December 1, 1946, and that the public had shown the same assets as purchase from the assessee in his balance-sheet and as owned by it from December 1, 1946, claiming depreciation thereon.
In my opinion, all the above circumstances do not entitle the revenue to come to the conclusion that the sale had been effected on December 1, 1946. As already pointed out the word 'sale' has not been defined in the Indian Income-tax Act and in order therefore to find out the legal implication of a 'sale' we must resort to the Transfer of Property Act in the case of immoveable property and to the Sale of goods Act for moveable property. In so far as fixtures are concerned the position is covered by section 8 of the Transfer of Property Act. Even thought the assessee had parted with the immoveable property to all intents and purpose as from December 1, 1946, in law the ownership continued in the case of commissioner of Income-tax v. Bhurangya Coal Co. There, the respondent, a firm, the owner of a colliery at a place called Bhurangya coal Company Ltd. for Rs. 6,10,000 on March 16, 1946. The schedule attached to the deed of agreement set out in detail the properties covered by it. It consisted of two parts, the first part include the lands, building and structures; the second part consisted if moveable with machinery, trucks, pipes, motor cars, etc. The value of the properties set out in the first part was fixed at Rs. 2,00,600 and that of all properties described in the second part at Rs. 4,09,400. The company itself was incorporated on March 18, 1946, the agreement having been signed on its behalf by the promoters. After its incorporation the directors of the company adopted the transaction by a resolution passed on March 29, 1946, and the company was put in possession of the properties moveable and immoveable on March 30, 1946. A deed of sale was executed by the firm and registered in favour of the company on May 17, 1946. The question in that case was what were the properties sold to the properties mentioned in the first part of the schedule or did they include fixtures mentioned in the second part as well. The Supreme Court observed that 'title to the movables passed when they were delivered to the transferees and that was on March 30, 1946, and their sale falls outside the section [12B]. Therefore, on the terms of the agreement dated March 16, 1946, and the sale deed dated May 17, 1946, the position is that while the respondent will be liable for tax in respect of profits made with reference to immoveable covered by the sale deed dated May 17, 1946, it will not be liable to tax in respect of profits attributable to the sale of moveables of which delivery was given to them on March 30, 1946.' With regard to the fixtures the Supreme Court held that it was clear that by the sale deed of May 17, 1947, the parties only transferred the properties mentioned in the first part of the schedule to the agreement for sale and no portion of those set out in the second part.
On behalf of the revenue reliance was placed on section 47 of the Registration Act which provides that 'a registered document shall operate from the time from which it would have commenced to operate if on registration thereof had been required or made, and not from the time of its registration'. Relying in this it was argued that the sale deed clearly shows that the transaction was to have effect from December 1, 1946, and consequently, the sale should be treated as having taken place on that date. According to the sale deed even on February 26, 1949, 'the vendors are the owners of the lands, hereditaments and premises' specified in the schedule to the deed.
In my view section 47 of the Registration Act does not help the revenue. In this case the registered document itself did not come into distance before February 26, 1949, and under section 47 could operate only from that date. Under section 47, a document may be operative from a date anterior to the date of registration. The parties to a document sometimes intend that title should not pass until consideration is paid or until the happening of some other event. In such a case the document, if it so provides, can only operate from the date of the happening of the event or the payment, as the case may be.
In my opinion therefore question No. 1 must be answered in favour of the assessee and against the revenue.
With regard to question No. 2 it should be noted that it was found by the income-tax authorities that 1/6th of the property was tenanted, the rest being used by the assessee in its business. Under section 9 of the Indian Income-tax Act 'an assessee has to pay tax under the head income from property in respect of the bona fide annual value of the property consisting of any building or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him, the profits of which are assessable to tax, subject to allowances mentioned.' Five-sixths of the property which was used by the assessee for its business was not property, the income whereof was chargeable under section 9. Clearly therefore 1/6th portion of the property would be exempt from charge under section 12B. The same view was taken by the Madras High Court in Sri Kannan Rice Mills Ltd. v. Commissioner of Income-tax.
Question No. 3 : In this case the income-tax authorities did not accept the valuation of the capital asset of the property made by the assessee but estimated the fair market value thereof as on January 1, 1939, at Rs. 25,00,000. It was argued by the assessee that the depreciation of Rs. 1,44,642 allowed to it ought to have been spread over the entire property including the portions let out and out of the balance the value of 5/6th portion used for the assessees business should be computed. The Tribunal pointed out that in applying the third proviso to section 12B(2) mentioned above no differentiations was made between the portions let out to tenants and the portion which was in the occupation of the assessee for the purpose of his business and that depreciation was allowable only on the portion which was used for the business purpose. This depreciation could clearly not be allowed in respect of the tenanted portion because section 9 of the Act does not contain any provision for allowances on depreciation. The third question must be answered against the assessee.
In view of the fact that the determination of the first question in favour of the assessee makes the answers to question Nos. 2 and 3 redundant the assessee must have the cost of this reference.
RAY J. - I agree.