Commissioner of Income Tax West Bengal vs Provincial Farmers (P) Ltd.

Deb, J.—The following questions are involved in this reference u/s 256(1) of income tax Act, 1061 :

"(1) Whether, on the facts and circumstances of the case, there was any sale or transfer of capital asset by the assessee attracting the provisions of section 12B of the income tax Act, 1922 ?

(2) If the answer to question (1) is in the affirmative, whether, on the facts and circumstances of the case and having regard to the fact that the assessee returned the sum of Rs. 50, 785/- to the vendor company, any capital gains accrued to the assessee ?"

The assessment year is 1963-64. The previous year ended on June 3C, 1962. The assessee is a private limited company. It derives income from property and "other sources".

Messrs. Sur Estates (P) Ltd., hereinafter stated as the "Company" was the owner of the house property involved in this reference. The Company agreed to sell this property for Rs. 1, 30,000/- to one Mr. Gostho Behari Sircar. On February 2, 1946, Mr. Sircar filed a suit, being Suit No. 266 of 1946, on the original Side of this Court against the Company for specific performance of the said agreement due to the failure of the Company to convey this property to him. The said suit was dismissed on November, 21, 1957.

On November 29, 1957, the Company sold this property to the assessee for Rs. 75,000/- The assesses also paid registration charges and incurred other expenses. The total cost thus incurred by the assessee came to Rs. 79,204/-.

On April 17, 1958, Mr. Sircar preferred an appeal, being Appeal No. 65 of 1958, from the said decree dated November 21, 1957. On October 3, 1961, the said appeal was allowed the decree of the Trial Court was set aside and a decree for specific performance of the said agreement was passed in favour of Mr. Sircar directing the Company to transfer this property to Mr. Sircar or to his nominee. The Company was also directed by the said decree to execute a conveyance in favour of Mr. Sircar or to his nominee. By an order dated December 12, 1961 made in that appeal the assessee was directed by the Court to join as a confirming party to said sale. In terms of the said decree, a nominee of Mr. Sircar paid Rs. 1,30,000/- to the company, who transferred this property on February 8, 1962 to the said nominee by executing the conveyance to which the assessee joined as a confirming party in terms of the said order dated December 12, 1961.

It has been stated by the Tribunal that the assessee has made up its account by crediting itself with Rs. 1,30,000/- though this amount was not received by the assessee but was received by the Company, from the said purchaser. The assessee has also debited Rs. 79,204/- being the price it paid to the Company for purchasing this property. It has further debited Rs. 25,750.50 p. as the expenses for the said litigation financed by it to the Company as agreed between them. The account kept by the ass(sic) thus showed a profit of Rs. 25,045.50 p on the sale of this property. It has also been found by the Tribunal that Rs. 50,795/, being the surplus of the sale proceeds of Rs. 1,30,000/- over the cost of Rs. 79,204.50p, was returned by the assessee to the Company and that the assessee "had spent Rs. 79,204/- and got back only that amount and nothing more" from the Company.

The income tax Officer has brought Rs. 50, 795/- to tax, u/s 12B of the income tax Act, 1922 as capital gains accruing to the assessee by reason of the said sale and the Appellate Commissioner has sustained it. The Tribunal has, however, allowed the second appeal filed by the assessee by holding that no capital gains has accrued to the assessee inasmuch as this property was purchased by the assessee during the pendency of said litigation and accordingly the assessee acquired no right, title, interest in the said property in view of the ultimate result of the said suit.

It has been contended before us by Mr. B. L. Pal, the learned counsel for the Revenue, that in view of the aforesaid findings of the Tribunal regarding the book entries of the assessee it should be held that a capital gains has accrued to the assessee in this transaction, but we are not impressed by it.

It is an admitted fact that the said property was purchased by the assessee during the pendency of the said litigation. It is beyond dispute that an appeal is the continuation of a suit for the purposes of section 52 of the Transfer of Property Act. This section, inter alia, provides that during the pendency of any suit or proceeding in which any right to immovable property is directly and specifically in question, the property cannot be transferred or otherwise dealt with by any party to the suit or proceeding so as to affect the right of any other party thereto under any decree or order which may be made therein.

It is not the case of the department that the suit filed by Mr. Sircar was a collusive suit. It is a settled law that a bona fide suit for specific performance of a contract to sell an immovable property falls squarely within the scope and ambit of section 52 of the Transfer of Property Act: Vide, Gouri Dutt Maharaj v. Sheikh Sukur Mohammed and ors., 75 I.A. 165. It has also been held by the Judicial Committee of the Privy Council in the case of Faiyaz Hossain Khan v. Munshi Prag Narain & ors., reported in 34 I.A. 102 at p. 105 of the report, that during the pendency of a litigation concerning an immovable property "neither party to it can alienate the property in dispute so as to affect his opponent."

In other words, transfer pendente lite, though not void as between the transferor and the transferee and that it "operates to vest the title of the transferor in the transferee", it cannot affect the rights of the decree holder : vide, Nagubhai Ammal & ors. v. Shama Rao & ors. AIR 1956 S.C. 598. Accordingly, though the title in this property had passed from the Company to the assessee since its title was subject to the result of the said litigation, it did not and could not affect the rights of Mr. Sircar in any manner whatsoever.

Mr. Sircar became entitled to get this property by virtue of the said decree and in terms thereof this property was transferred and conveyed to Mr. Sircar''s nominee by the Company at the direction of the assessee who was enjoined by the order dated December 12, 1961 to release and transfer its right, title and interest including claims and demands as a confirming party to the said conveyance and this mandate of the Court has been carried out by the assessee.

Further, the proper form of the decree for specific performance of the agreement in this class of cases has been prescribed by the Supreme Court in the case of Lala Durga Prasad and Another Vs. Lala Deep Chand and Others, , and in terms thereof both the transferor and the subsequent transferee are bound to execute the conveyance in favour of the plaintiff who is normally directed to pay the purchase price to the defendant-vendor and not to the subsequent transferee. And the same thing has exactly happened in the instant case before us in view of the said decree of the Appeal Court read with its order dated December 12, 1961.

It is also elementary that the entries in the books of account cannot alter or affect the nature, quality and character of any transaction and that for the purposes of taxation the substance of the transaction in question has to be looked at. The substance of the matter, in the instant case before us, must be viewed in the light of the said litigation including the decree and the said order passed therein. Further, the conveyance in this case should also be read and understood in the context of the said decree and the order including the facts and the circumstances of the case as found by the Tribunal.

The charge is not on the entries on the books of any assessee but on the capital gains, if any, accrued to him u/s 12B of the Act. The assessee keeps his accounts for his own purposes, and though his method of accounting is vital, it is not decisive for the purposes of taxation because the substance of the matter cannot be altered by a mere method of accounting as laid down by the Supreme Court in the case of Keshav Mills Ltd. Vs. Commissioner of Income Tax, Bombay, .

The assessee in the instant case before us was not entitled to receive a single paise from the purchaser in view of the said order dated December 12, 1961, and has not received any money from the said purchaser who has paid Rs. 1,30,000/- to the Company in terms of the said decree as found by the Tribunal and this finding was not questioned by the Revenue in this reference.

Subject to enquities if any between the assessee and the Company, the assessee was entitled only to get back Rs. 79,204/- from the Company because the assessee was the transferee pendente lite and the result of the said suit went against both the Company and the assessee. As against this amount, the Company was entitled to get from the assessee Rs. 50,794/- being the difference between Rs. 1,30,000/- and Rs. 79,204/- arising out of the accounting of the assessee and this difference was returned by the assessee to the Company as found by the Tribunal, Moreover, the finding of the Tribunal that the assessee "had spent Rs. 79,204/-and got back only that amount and nothing more" in this transaction has not been questioned in this reference by the Revenue and therefore it must be held that in the instant case the assessee has suffered a loss of Rs. 25,750/-being the amount spent by the assessee on the said litigation relating to this transaction.

That apart, the rights of the assessee in relation to the property were subject to the result of the said litigation and that the assessee was bound by the said decree for specific performance passed in the said suit against the Company including the said order dated December 12, 1961 passed against the assessee. As already stated, the substance of the transaction has to be looked at in the light of the said litigation. The decree directed the Company to sell this property for Rs. 1,30,000/- to Mr. Sircar or to his nominee and the said order directed the assessee to release or transfer its rights in the said property as a confirming party to the said conveyance. This order did not entitle the assessee to claim any money either from Mr. Sircar or to his nominee. In other words, the assessee was not entitled to receive any money from the said purchaser for releasing or conveying its right title and interest in this property to the said purchaser.

In the premises, though the assessee has released and sold its right, title and interest in this property, it must be held that no capital gains has accrued to the assessee in the facts and circumstances of the case and therefore we return our answer to Question No. 1 in the negative and in favour of the assessee, and accordingly Question No. 2 does not call for any answer.

No one has appeared for the assessee and therefore w" do not propose to make any order as to cost.

Dipak Kumar Sen, J.

I agree with the conclusions arrived at by my learned Brother in his judgment delivered just now and the reasons for such conclusions. I would like to add that it has been found as a fact by the Tribunal that (a) the assessee got no right, title and interest, (b) the assessee did not acquire any interest in the capital asset, and (c) the assessee only got back from prices received by the vendee what it had actually invested originally.

These facts have not been challenged in the questions mooted before us.

The indenture of sale pursuant to the decree specifically records that the said sum of Rs. 1,30,000/- has been paid by the purchaser, that is Sur Estate to the vendor, that is Sircar Estate. In view of this finding of facts it appears to me that the matter is otherwise concluded. The indenture recording the transfer is principally by Sur Estates the vendor and the assessee is only a confirming party. In any event it cannot be said that if any capital gain has resulted from this transaction how the same can be taxed entirely in the hands of the confirming party ignoring the vendor altogether.