The Judgment of the Court was delivered by
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 lease hold rights which formed the subject matter of sale are capital assets as contemplated under section 2(4-A) and section 12-B of the Indian Income-tax Act?
(2) If the answer to the first question is in the affirmative whether the sale of the said lease hold rights took place only on 5th May, 1947 when the sale was executed?
2. These questions 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 Kondapalli Reserve Forest area. On 29th January, 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 February, 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 by the vendee on 20th February, 1946. On 9th March, 1946, the assesse 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 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 Income-tax Officer thought that the profits derived by the assessee brought them within the scope of section 12-B of the Indian Income-tax Act and consequently brought the excess to tax.
4. The assessment of the Income-tax Officer was affirmed on appeal, by the Appellate Assistant Commissioner and on further appeal by the Appellate 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 section 12-B of the Income-tax 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 Ist 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:
7. The first point that falls to be considered is whether the lease-hold rights of the assessee is a capital asset within the terms of section 12-B.
8. It is urged on behalf of the assessee that a lease-hold right in a mine is only movable property and as such does not attract section 12-B. This argument lacks substance. That a lease-hold right such as the present one is a capital asset within the purview of section 12-B does not admit of much doubt. ‘Capital asset’ is defined in section 2(4-A) 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 properly (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.”
9. 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(4-A). 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 lease-hold right which the assessee had is movable property such as would attract clause (i) or (ii) of that sub-section. Further the rights which the assessee had in the mines were connected with his business.
10. This view of ours gains support from decided cases. In Traders and Miners, Ltd. v. Commissioner of Income-tax, Bihar and Orissa . 1955-27 I.T.R 341., 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 section 12-B. Provident Investment Co., Ltd. v. Commissioner of Income-tax, Bambay City . 1953-24 I.T.R 33. contains the principle that the managing agency of a concern was a capital asset within the meaning of section 12-B.
11. There can be little doubt that the lease-hold rights which the assessee had and which he transferred constituted a capital asset for the purpose of section 12-B. The first question has, therefore, to be answered in favour of the department and against the assessee.
12. 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 Venkataramiah counsel for the assessee, that the transfer took place before 31st March, 1946 when section 12-B came into force, by reason of the agreement of sale having been entered into on 29th January, 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 (Rupees Three lakhs only) as consideration for the above transfer, out of which the sum of Rs. 30,000 (Rupees thirty thousand only) shall represent the value of stocks, equipment, tools, etc., in list 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 I 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 & Patridge by the twenty-first day of February, 1946.
(7) Completion to be seven days after Government's 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 & Patridge or the Government refuse to permit the transfer of the respective leases and licences to the party of the second pare.
(10) 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.
(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 purchase.
13. The point presented by Sri Venkataramiah is that the execution of 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 ??? yigore could not create interest in the property in question. Condition 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 relevent 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 borne in mind that no transfer of the lease-hold rights could be effected without the sanction of the Government.
14. 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 12-B is ‘sale effected’. It cannot be contended that the sale was effected without the execution of the document. Sri Venkataramiah 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 possession of the vendee, which together amount to the doctrine of part ‘performance’ of the contract, governed by section 53-A of the Transfer of Property Act.
15. It is needless for us to say that section 53-A 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 property 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 Venkataramiah, 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 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.
16. Provident Investment Co., Ltd. v. Commissioner of Income-tax, Bombay City called in aid by Sri Venkataramiah, does not lend any countenance to the theory pro-pounded 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 12-B 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.
17. 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, West Bengal v. Elder, it was laid down that there could be no transfer of shares till the sale deed was executed. Kurjamal & Sons, In re3, illustrates the principle that till a regular instrument of transfer is written and registered there could not be said to be any transfer of a sale of the property and that section 53-A 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.
18. For these reasons, we answer the second question also against the assessee.
19. The assessee will pay the department the costs of this reference. Advocate's fee Rs. 250.
Answered against assessee.