Even temporary transfer attracts capital gain

Even temporary transfer attracts capital gain

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Even temporary transfer attracts capital gain

RAJENDRA MINING SYNDICATE vs. COMMISSIONER OF INCOME TAX

HIGH COURT OF ANDHRA PRADESH

  1. Chandra Reddy, C.J. & Ramachandra Rao, J.

Case Refd. No. 46 of 1959

24th January, 1961

(1961) 29 CCH 0029 APHC

(1961) 43 ITR 0460

Legislation Referred to

Sections 2(14), 45, 45(1)

Case pertains to

Asst. Year –

Decision in favour of:

Revenue

Capital gains—Capital assets—Lease hold rights in the mines—Mining rights, concessions, licences and leases in mines connected with his business constituted capital asset for the purpose of s. 12B—Capital gains is chargeable on transfer of such rights

Held :

It is 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 cl. (i) or (ii) of that sub-section. Further the rights which the assessee had in the mines were connected with the business. 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 s. 12B.—Traders & Miners Ltd. vs. CIT (1955) 27 ITR 341 (Pat) : TC20R.128#1 and Provident Investment Co. Ltd. vs. CIT (1953) 24 ITR 33 (Bom) : TC20R.247 relied on.

(Para 8)

Conclusion :

Leasehold rights, which formed the subject-matter of sale, are capital assets as contemplated under s. 2(4A) and s. 12B of 1922 Act.

Capital gains—Time of Accrual—Sale of leasehold rights—No transfer of the leasehold rights could be effected without the sanction of the Government—Sec. 53A does not render any assistance as that section does not play any part in the determination of the question as to when the sale was effected—Sale deed clearly says that all the right, title and interest of the vendor was assigned to the vendee only under that document and therefore, the plea that the moment the agreement of sale was executed or possession was given to the vendee the sale was effected cannot be accepted—It is only when a proper instrument was executed and registered, the sale could be said to have taken place—Sale of the leasehold rights therefore, took place only on the date when the sale deed was executed

Held :

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 property 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, cl. 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 cl. 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 borne in mind that no transfer of the leasehold rights could be effected without the sanction of the Government. It is needless to say that s. 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, 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 effected. 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 s. 12B is “sale effected”. It cannot be contended that the sale was effected without the execution of the document. 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 dates back to the date when it was actually executed. In this case, that does not make much difference because both the execution and the registration of the document occurred on the same date. Therefore, sale of the leasehold rights took place only on the date when the sale deed was executed.—CIT vs. A.J. Elder & Anr. (1954) 25 ITR 150 (Cal) : TC20R.428 and In re Kunjamal & Sons (1941) 9 ITR 358 (All) relied on; Provident Investment Co. Ltd. vs. CIT (1953) 24 ITR 33 (Bom) : TC20R.247 distinguished.

(Paras 10 to 12)

Conclusion :

Sale of leasehold rights took place only on the date when the sale deed was executed.

Counsel appeared:

  1. Venkatramaiah, for the Assessee : C. Kondaiah, for the Revenue

CHANDRA REDDY, C.J.

The following two questions have been referred by the Tribunal, Hyderabad Bench, for the opinion of this Court under s. 66(1) of the Indian IT 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 s. 2(4A) and s. 12B of the Indian IT Act ?

  1. If the answer to the first question is in the affirmative, whether the sale of the said leasehold rights took place only on 5th May, 1947, when the sale deed was executed ?”
  2. These questions arise under the following circumstances. The assessee, M/s 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 29th Jan., 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 4th Feb., 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 20th Feb., 1946. On 9th March, 1946, the assessee put in an application to the District Collector for permission to sell the lease and the prospecting licence and the Government of Madras sanctioned the transfer of the three mining leases but refused sanction for the prospecting licence on 20th March, 1947. The sale deed was actually executed and registered on 5th May, 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.
  3. As the sale was effected for a price higher than the original cost, the proper ITO thought that the profits derived by the assessee brought them within the scope of s. 12B of the Indian IT Act and consequently brought the excess to tax.
  4. The assessment of the ITO was affirmed on appeal by the AAC and on further appeal by the Tribunal.
  5. On the request of the assessee, the two questions mentioned above have been referred to this Court.
  6. Before we take up for consideration the two questions referred to, it is, useful to extract s. 12B of the IT Act in so far as it is of immediate relevancy. 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 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.”

  1. The first point that falls to be considered is whether the leasehold rights of the assessee were a capital asset within the terms of s. 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 s. 12B. This argument lacks substance. That a leasehold right such as the present one is a capital asset within the purview of s. 12B, does not admit of much doubt. The term “capital asset” is defined in s. 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 purpose of his business, profession or vocation;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery 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;………”

  1. 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 s. 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 cl. (i) or (ii) of that sub-section. Further the rights which the assessee had in the mines were connected with the business.

This view of ours gains support from decided cases. In Traders & Miners Ltd. vs. CIT (1955) 27 ITR 341 (Pat) : TC20R.128 it was decided that the lease relating to the surface rights together with the mine located in that area was a capital asset within the mischief of s. 12B. Provident Investment Co. Ltd. vs. CIT (1953) 24 ITR 33 (Bom) : TC20R.247 contains the principle that the managing agency of a concern was a capital asset within the meaning of s. 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 s. 12B. The first question has, therefore, to be answered in favour of the Department and against the assessee.

  1. The only question that survives is 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 31st March, 1946. It is urged by Sri Venkataramaiah, counsel for the assessee, that the transfer took place before 31st March, 1946, when s. 12B came into force, by reason of the agreement of sale having been entered into on 29th Jan., 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 out 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.

  1. 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.
  2. 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.
  3. 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.
  4. After the date of transfer the party of the second part shall pay all the royalties, surface and dead rents, survey fees, the tree values and all such other incidental charges payable to the revenue, forest and other departments of the Government.
  5. Title : to be approved of or otherwise by M/s King & Partridge by the twenty first day of February, 1946.
  6. Completion to be seven days after Government’s sanction for transfer of all leases and licences where such sanction is necessary.
  7. Transfer to be made in favour of Mr. B.D.V. Ramaswami or his nominee or assigns.
  8. 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 M/s King & Partridge or the Government refuse to permit the transfer of the respective leases and licences to the party of the second part.
  9. The party of the first part shall either get item No. 4 in the List No. 1 transferred to his name and then 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.
  10. 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 purchase…….”
  11. The point presented by Shri Venkatramaiah 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 gives 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 property 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, cl. 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 cl. 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 borne 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 s. 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 IT 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 s. 53A of the Transfer of Property Act.

  1. It is needless for us to say that s. 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.
  2. Provident Investment Co. Ltd. vs. CIT (supra), called in aid by Sri Venkatramaiah, 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 s. 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 CIT vs. A.J. Elder & Anr. (1954) 25 ITR 150 (Cal) : TC20R.428 it was laid down that there could be no transfer of shares till the sale deed was executed. In re, Kunjamal & Sons (1941) 9 ITR 358 (All) 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 s. 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 dates back to the date when it was actually executed. In this case, that does not make much difference because both the execution and the registration of the document occurred on the same date.

  1. For these reasons, we answer the second question also against the assessee.

The assessee will pay the Department the costs of this reference. Advocate’s fee Rs. 250.

 

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