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  • S.C Deb
  • Dipak Kumar Sen, JJ.
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Smart Summary

Structured Summary of the Opinion (Deb, J. and Dipak Kumar Sen, J.)

Factual and Procedural Background

The reference arises under section 256(1) of the Income-tax Act, 1961, concerning assessment year 1963-64 (previous year ending 30 June 1962). The assessee is a private limited company deriving income from property and other sources.

Messrs. Sur Estates (P.) Ltd. ("the company") agreed to sell a house property for Rs. 1,30,000 to Mr. Gostho Behari Sircar. Mr. Sircar filed Suit No. 266 of 1946 for specific performance on 2 February 1946; the suit was dismissed on 21 November 1957. On 29 November 1957 the company sold the property to the assessee for Rs. 75,000; the assessee incurred total acquisition cost of Rs. 79,204.

Mr. Sircar appealed (Appeal No. 65 of 1958); on 3 October 1961 the appellate court allowed the appeal, set aside the trial decree, and decreed specific performance in Mr. Sircar's favour for transfer of the property for Rs. 1,30,000. By order dated 12 December 1961 the court directed the assessee to join as confirming party to the sale. In consequence, a nominee of Mr. Sircar paid Rs. 1,30,000 to the company, and the company executed conveyance to the nominee on 8 February 1962, with the assessee joining as a confirming party.

The Tribunal found that, in the assessee's accounts, the assessee credited itself with Rs. 1,30,000 (although it did not receive that sum), debited Rs. 79,204 (its purchase cost), and debited Rs. 25,750.50 (litigation expenses it financed for the company). The Tribunal found that Rs. 50,795 (the surplus of Rs. 1,30,000 over Rs. 79,204.50) 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."

The Income-tax Officer assessed Rs. 50,795 as capital gains under section 12B (Indian Income-tax Act, 1922); the Appellate Assistant Commissioner sustained that assessment. The Tribunal allowed the assessee's second appeal, holding that no capital gains accrued because the property was purchased pendente lite and the assessee ultimately acquired no right, title or interest in the property in view of the litigation's outcome.

Legal Issues Presented

  1. Whether, on the facts and circumstances of the case, there was any sale or transfer of a capital asset by the assessee attracting the provisions of section 12B of the Indian Income-tax Act, 1922?
  2. If the answer to question No. (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?

Arguments of the Parties

Revenue's Arguments

  • The learned counsel for the revenue (Mr. B. L. Pal) contended that, given the Tribunal's findings regarding the assessee's book entries (crediting itself with Rs. 1,30,000 and debiting costs), capital gains should be held to have accrued to the assessee on the transaction.

Assessee's Position

  • The opinion states that no one appeared for the assessee before the court and therefore there was no oral argument by or on behalf of the assessee at this stage. The Tribunal's factual findings about the assessee's accounts and conduct of the transaction (including return of surplus and litigation expenses borne) were not challenged in the reference.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Gouri Dutt Maharaj v. Sheikh Sukur Mohammed, AIR 1948 PC 147 That a bona fide suit for specific performance of sale of immovable property falls within the scope of section 52 of the Transfer of Property Act (i.e., the property cannot be dealt with so as to affect the rights of parties during pendency). The court relied on this authority to support the proposition that a suit for specific performance prevents transfers which would affect the decree-holder's rights while litigation continues; thus the assessee's purchase during pendency did not affect Mr. Sircar's eventual rights.
Faiyaz Hussain Khan v. Pragnarain, [1907] LR 34 IA 102; [1907] ILR 29 All 339 (PC) During pendency of litigation concerning immovable property, neither party can alienate the property so as to affect the opponent's rights under any future decree. Quoted as authority for the same principle that a pendente lite transfer cannot affect the rights of the decree-holder; used to conclude that the assessee's acquisition could not affect Mr. Sircar's rights.
Nagubai Ammal & Others v. B. Shama Rao & Others, AIR 1956 SC 593 Transfer pendente lite operates to vest the title of the transferor in the transferee as between them but does not affect the rights of the decree-holder. Applied to explain that although legal title passed to the assessee, that title was subject to the litigation's outcome and therefore could not affect Mr. Sircar's rights under the decree.
Durga Prasad v. Deep Chand, AIR 1954 SC 75 Prescribed the proper form of decree for specific performance in such cases: normally the plaintiff is directed to pay the purchase price to the defendant-vendor and not to a subsequent transferee; both transferor and subsequent transferee may be bound to execute conveyance in favour of the plaintiff. Used to show that the appellate decree and order (including direction to the assessee to join as confirming party) were in accordance with the Supreme Court's guidance, and that payment was to be made to the vendor (company), not to the subsequent transferee (assessee).
Keshav Mills Ltd. v. Commissioner of Income-tax, [1953] 23 ITR 230 (SC) The form of accounting entries cannot alter the true nature, quality and character of a transaction; substance must prevail over form for taxation purposes. Applied to reject reliance on the assessee's book entries as decisive; the court looked to the substance of the transaction in the context of the litigation and decree.

Court's Reasoning and Analysis

The court proceeded step-by-step, grounded in the facts found by the Tribunal and established legal principles:

  1. Timing and nature of acquisition: The court observed as an admitted fact that the assessee purchased the property while the litigation (suit and appeal) was pending. The court treated the appeal as continuation of the suit for purposes of section 52 of the Transfer of Property Act (as stated in the opinion).
  2. Effect of transfer pendente lite: The court relied on established authorities to explain that a transfer during pendency (transfer pendente lite) is effective between transferor and transferee but cannot affect the rights of a decree-holder who ultimately obtains specific performance. Consequently, although legal title passed to the assessee, that title remained subject to the pending litigation and could not prejudice Mr. Sircar's rights once his appeal succeeded.
  3. Content and effect of the decree and order: The appellate decree directed transfer to Mr. Sircar (or nominee) and the order of 12 December 1961 required the assessee to join as confirming party and to release its rights. The decree envisaged payment to the vendor (company), not to a subsequent transferee; in the present case the purchaser paid Rs. 1,30,000 to the company, not to the assessee.
  4. Accounting entries vs. substance: The court emphasized that book entries cannot alter the substantive character of a transaction for taxation. Citing Keshav Mills, the court held that the charge under section 12B is on capital gains actually accrued, not on internal accounting credits. Thus the Tribunal's factual findings about receipts and payments governed the tax question.
  5. Tribunal's unchallenged findings: The Tribunal found that the assessee did not receive any amount from the purchaser (the purchaser paid the vendor), that the assessee had returned the surplus (Rs. 50,795) to the company, and that the assessee only recovered its cost (Rs. 79,204) and had expended Rs. 25,750 on litigation. These findings were not contested by the revenue in the reference.
  6. Conclusion from facts and law: Given that (a) the transfer was pendente lite, (b) the decree affirmed purchaser's rights and directed payment to vendor, (c) the assessee did not receive proceeds and returned the surplus, and (d) the assessee in substance suffered a net loss (litigation expense), the court concluded that no capital gains accrued to the assessee under section 12B.

Holding and Implications

Holding: The court answered Question No. 1 in the negative and in favour of the assessee. Accordingly, Question No. 2 did not require an answer. Put succinctly:

No capital gains accrued to the assessee on this transaction.

Implications:

  • Direct effect on the parties: The assessment of Rs. 50,795 (or the surplus identified by the Income-tax Officer) as capital gains under section 12B is not sustained in the hands of the assessee because, in substance, the assessee did not receive the sale proceeds and the transfer was subject to the pending litigation resulting in specific performance in favour of Mr. Sircar. The assessee returned the surplus to the vendor and only recovered the amount it had invested; it also bore litigation expenses.
  • Precedential effect: The court applied existing authority on transfer pendente lite, the effect of accounting entries, and the form of decrees for specific performance. The opinion does not purport to establish a new legal principle beyond applying settled law to the facts; no broader new precedent was announced by the court in this decision.
  • Costs: No order as to costs was made because no one appeared for the assessee.

This summary is strictly confined to the content and findings expressly recorded in the provided opinion. No facts or conclusions have been inferred beyond those stated by the court in the opinion.

Show full summary ...

    Commissioner Of Income-Tax, West Bengal-Iii v. Provincial Farmers (Pvt.) Ltd.

    Deb, J.:— The following questions are involved in this reference under section 256(1) of Income-tax Act, 1961:

    “(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 Indian Income-tax Act, 1922?

    (2) If the answer to question No. (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?”

    2. The assessment year is 1963-64. The previous year ended on June 30, 1962. The assessee is a private limited company. It derives income from property and “other sources”.

    3. 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.

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

    5. 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 the 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.

    6. 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 as the expenses for the said litigation financed by it to the company as agreed between them. The account kept by the assessee thus showed a profit of Rs. 25,045.50 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. 79,204.50, 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.

    7. The Income-tax Officer has brought Rs. 50,795 to tax, under section 12B of the Indian Income-tax Act, 1922, as capital gains accruing to the assessee by reason of the said sale and the Appellate Assistant 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 the said litigation and accordingly the assessee acquired no right, title or interest in the said property in view of the ultimate result of the said suit.

    8. 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 capital gains has accrued to the assessee in this transaction, but we are not impressed by it.

    9. 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.

    10. It is not the case of the department that the suit filed by Mr. Sircar was a collusive suit. It is 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 AIR 1948 PC 147). It has also been held by the Judicial Committee of the Privy Council in the case of Faiyaz Hussain Khan v. Pragnarain [1907] LR 34 IA 102, 105 : [1907] ILR 29 All 339 (PC) 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”.

    11. In other words, transfer pendente lite, though not void as between the transferor and the transferee and it “operates to vest the title of the transferor in the transferee”, it cannot affect the rights of the decree-holder: vide Nagubai Ammal & Others v. B. Shama Rao & Others AIR 1956 SC 593. 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.

    12. 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.

    13. 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 Durga Prasad v. Deep Chand AIR 1954 SC 75, 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.

    14. 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.

    15. The charge is not on the entries in the books of any assessee but on the capital gains, if any, accrued to him under section 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. v. Commissioner of Income-tax [1953] 23 ITR 230 (SC).

    16. The assessee in the instant case before us was not entitled to receive a single paisa 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.

    17. Subject to equities, 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.

    18. That apart, the rights of the assessee in relation to the property were subject to the result of the said litigation and 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 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.

    19. 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.

    20. No one has appeared for the assessee and, therefore, we do not propose to make any order as to costs.

    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 the price received by the vendee what it had actually invested originally.

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

    23. 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 Estates, to the vendor, that is, Sircar Estate.

    24. In view of this finding of fact 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 the same can be taxed entirely in the hands of the confirming party ignoring the vendor altogether.

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    Comments

    Commissioner Of Income-Tax, West Bengal-Iii v. Provincial Farmers (Pvt.) Ltd.
    (Feb 4, 1976)