I handed over possession of my factory and the buyer credited me with the price, but the sale deed came much later. In which year did I make the capital gain?
In the year the conveyance was executed and registered, not the year possession changed hands. The Supreme Court held that title to the machinery, electrical fittings, buildings and site could not pass to the company until a conveyance was executed and registered, and none was before 1 April 1948. Transfer in the capital gains provision means an effective conveyance of the asset; delivery of possession of immovable property is not by itself equivalent to a conveyance. Entries in the books of the assessee and the company were irrelevant to fixing the date. Only the furniture, title to which passes by delivery, was transferred in time.
Decided by the Supreme Court (Supreme Court of India - P.B. Gajendragadkar, CJ, J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J)) on 1965-03-29, reported as 1966 AIR 115; 1965 SCR (3) 567; (1965) 57 ITR 185. It bears on section 12B of the Indian Income-tax Act, 1922, section 2(47), section 45 of the Income Tax Act 1961, in Capital Gains matters.
This is the authority for the proposition that for immovable property the capital gains charge follows the conveyance, not the handing over of possession or the accounting entries. Three of its holdings are used constantly. Transfer, though a wider word than sale, still requires an effective conveyance of the asset. Book entries do not fix the date of transfer, whichever way they run - here they were against the assessee and were still disregarded. And an asset-by-asset analysis is legitimate: the Court separated machinery and buildings from furniture, which passes by delivery, from stock, which was outside the definition of capital asset, from goodwill, which is intangible and ordinarily passes with the whole business. Note that the 1961 Act's definition of transfer has since been widened, so check it before applying the result to a possession-based arrangement.
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The assessee was the proprietor of Mohan Tile Works at Tenali, owning the factory buildings, plant and machinery. Mohan Industries Ltd was incorporated on 5 July 1947 and the assessee was appointed its managing agent on 15 July 1947. By an agreement of 17 March 1948 he agreed to sell the goodwill, immovable property, plant, machinery, furniture and stocks to the company for Rs 2,00,000. Clause 6 fixed 17 March 1948 for completion, when possession was to be given so far as practicable; clauses 8 and 9 contemplated adoption of the agreement by the company, until which the promoter remained liable and either party could determine it. Possession of the land, buildings and machinery was given on 17 March 1948. On 20 March 1948 the company credited the assessee with Rs 2,00,000 and debited the asset accounts - plant and machinery Rs 15,989, furniture Rs 18,805, electric goods Rs 1,289-10-0, site and construction Rs 1,26,470, stock Rs 30,050 and goodwill Rs 7,396-6-0 - and the assessee made corresponding entries. A sale deed for the land was executed and registered on 22 November 1948; the company mortgaged the property to the State of Madras on 9 December 1948; the board approved the agreement in March 1949 and the general body on 10 April 1949, payment being made in instalments from 1949. The assessee had himself returned the gain, and the Income-tax Officer assessed Rs 79,494 as capital gains for 1948-49. The Tribunal first deleted the addition, then rectified its order and restored it. The Andhra Pradesh High Court answered the reference against the assessee, holding that possession effected the transfer and that the accounting method showed the income had arisen in the year of account.
The appeal was allowed, the assessee having succeeded substantially, with costs in both courts. The referred question was answered by holding that Rs 79,494 was not assessable as capital gains in 1948-49, save such part of it, if any, as was attributable to the transfer of furniture valued at Rs 18,805. The charge as it then stood applied to profits arising from a sale, exchange or transfer effected after 31 March 1946 and before 1 April 1948, deemed to be income of the previous year in which it took place. The agreement of 17 March 1948 was a conditional agreement to sell which had to be adopted by the company before it ripened into a contract, and clauses 8 and 9 could not be discarded as inapplicable merely because they read like clauses meant for a pre-incorporation agreement. Title to the machinery valued at Rs 15,989, the electrical fittings valued at Rs 1,289-10-0 and the buildings and site valued at Rs 1,26,470 could not pass until a conveyance was executed and registered, following Bhurangya Coal Co, and none was executed before 1 April 1948. Stocks of Rs 30,050 were expressly outside the definition of capital asset. Furniture, title to which passes by delivery, was transferred on 17 March 1948, delivery in the circumstances having been made with the intention of passing title. Goodwill, being intangible, ordinarily passes with the transference of the whole business and was not transferred before 1 April 1948.
The Court's central move was to give content to the word 'transfer'. The Revenue argued that transfer is a wide word deliberately used in addition to sale, that possession had passed on 17 March 1948, and that by reason of section 53A of the Transfer of Property Act the assessee could never recover it. The Court accepted that transfer is wider than sale but held that in the context it must mean an effective conveyance of the capital asset to the transferee, and that delivery of possession of immovable property cannot by itself be treated as equivalent to a conveyance. The charge is on gains arising from a transfer, and it presupposes that the asset has actually passed. On the High Court's reliance on the accounts, the Court held that the date of sale or transfer is the date on which the sale or transfer takes place, so entries in the account books are irrelevant to determining it - the same answer whichever party the entries favour. It rejected the argument that the assessee should not be allowed at that stage to distinguish movable from immovable assets, because the agreed statement of the case itself set out the values of the buildings and site, the machinery and electrical fittings embedded in the earth, the stocks and the goodwill separately. It also declined to rewrite the agreement by ignoring the adoption clauses, holding them appropriate to an agreement made by an agent subject to confirmation by a principal.
Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.
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Handle my notice → Ask a CA on WhatsAppIn the year the conveyance was executed and registered, not the year possession changed hands. The Supreme Court held that title to the machinery, electrical fittings, buildings and site could not pass to the company until a conveyance was executed and registered, and none was before 1 April 1948. Transfer in the capital gains provision means an effective conveyance of the asset; delivery of possession of immovable property is not by itself equivalent to a conveyance. Entries in the books of the assessee and the company were irrelevant to fixing the date. Only the furniture, title to which passes by delivery, was transferred in time. This was decided by the Supreme Court (Supreme Court of India - P.B. Gajendragadkar, CJ, J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J)) and bears on section 12B of the Indian Income-tax Act, 1922, section 2(47), section 45 of the Income Tax Act 1961. It is reported as 1966 AIR 115; 1965 SCR (3) 567; (1965) 57 ITR 185. This is the authority for the proposition that for immovable property the capital gains charge follows the conveyance, not the handing over of possession or the accounting entries. Three of its holdings are used constantly. Transfer, though a wider word than sale, still requires an effective conveyance of the asset. Book entries do not fix the date of transfer, whichever way they run - here they were against the assessee and were still disregarded. And an asset-by-asset analysis is legitimate: the Court separated machinery and buildings from furniture, which passes by delivery, from stock, which was outside the definition of capital asset, from goodwill, which is intangible and ordinarily passes with the whole business. Note that the 1961 Act's definition of transfer has since been widened, so check it before applying the result to a possession-based arrangement. If it applies to you, the first step is this: Fix the year by the conveyance for immovable property, and be able to produce the registered deed and its date.
The assessee was the proprietor of Mohan Tile Works at Tenali, owning the factory buildings, plant and machinery. Mohan Industries Ltd was incorporated on 5 July 1947 and the assessee was appointed its managing agent on 15 July 1947. By an agreement of 17 March 1948 he agreed to sell the goodwill, immovable property, plant, machinery, furniture and stocks to the company for Rs 2,00,000. Clause 6 fixed 17 March 1948 for completion, when possession was to be given so far as practicable; clauses 8 and 9 contemplated adoption of the agreement by the company, until which the promoter remained liable and either party could determine it. Possession of the land, buildings and machinery was given on 17 March 1948. On 20 March 1948 the company credited the assessee with Rs 2,00,000 and debited the asset accounts - plant and machinery Rs 15,989, furniture Rs 18,805, electric goods Rs 1,289-10-0, site and construction Rs 1,26,470, stock Rs 30,050 and goodwill Rs 7,396-6-0 - and the assessee made corresponding entries. A sale deed for the land was executed and registered on 22 November 1948; the company mortgaged the property to the State of Madras on 9 December 1948; the board approved the agreement in March 1949 and the general body on 10 April 1949, payment being made in instalments from 1949. The assessee had himself returned the gain, and the Income-tax Officer assessed Rs 79,494 as capital gains for 1948-49. The Tribunal first deleted the addition, then rectified its order and restored it. The Andhra Pradesh High Court answered the reference against the assessee, holding that possession effected the transfer and that the accounting method showed the income had arisen in the year of account. The matter was decided on 1965-03-29 by the Supreme Court (Supreme Court of India - P.B. Gajendragadkar, CJ, J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J)). On those facts the Supreme Court held as follows. The appeal was allowed, the assessee having succeeded substantially, with costs in both courts. The referred question was answered by holding that Rs 79,494 was not assessable as capital gains in 1948-49, save such part of it, if any, as was attributable to the transfer of furniture valued at Rs 18,805. The charge as it then stood applied to profits arising from a sale, exchange or transfer effected after 31 March 1946 and before 1 April 1948, deemed to be income of the previous year in which it took place. The agreement of 17 March 1948 was a conditional agreement to sell which had to be adopted by the company before it ripened into a contract, and clauses 8 and 9 could not be discarded as inapplicable merely because they read like clauses meant for a pre-incorporation agreement. Title to the machinery valued at Rs 15,989, the electrical fittings valued at Rs 1,289-10-0 and the buildings and site valued at Rs 1,26,470 could not pass until a conveyance was executed and registered, following Bhurangya Coal Co, and none was executed before 1 April 1948. Stocks of Rs 30,050 were expressly outside the definition of capital asset. Furniture, title to which passes by delivery, was transferred on 17 March 1948, delivery in the circumstances having been made with the intention of passing title. Goodwill, being intangible, ordinarily passes with the transference of the whole business and was not transferred before 1 April 1948.
The Court's central move was to give content to the word 'transfer'. The Revenue argued that transfer is a wide word deliberately used in addition to sale, that possession had passed on 17 March 1948, and that by reason of section 53A of the Transfer of Property Act the assessee could never recover it. The Court accepted that transfer is wider than sale but held that in the context it must mean an effective conveyance of the capital asset to the transferee, and that delivery of possession of immovable property cannot by itself be treated as equivalent to a conveyance. The charge is on gains arising from a transfer, and it presupposes that the asset has actually passed. On the High Court's reliance on the accounts, the Court held that the date of sale or transfer is the date on which the sale or transfer takes place, so entries in the account books are irrelevant to determining it - the same answer whichever party the entries favour. It rejected the argument that the assessee should not be allowed at that stage to distinguish movable from immovable assets, because the agreed statement of the case itself set out the values of the buildings and site, the machinery and electrical fittings embedded in the earth, the stocks and the goodwill separately. It also declined to rewrite the agreement by ignoring the adoption clauses, holding them appropriate to an agreement made by an agent subject to confirmation by a principal. In the words reproduced by the source cited on this page: "Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property."
It was decided by the Supreme Court on 1965-03-29 and is reported as 1966 AIR 115; 1965 SCR (3) 567; (1965) 57 ITR 185. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 12B of the Indian Income-tax Act, 1922, section 2(47), section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed, the assessee having succeeded substantially, with costs in both courts. The referred question was answered by holding that Rs 79,494 was not assessable as capital gains in 1948-49, save such part of it, if any, as was attributable to the transfer of furniture valued at Rs 18,805. The charge as it then stood applied to profits arising from a sale, exchange or transfer effected after 31 March 1946 and before 1 April 1948, deemed to be income of the previous year in which it took place. The agreement of 17 March 1948 was a conditional agreement to sell which had to be adopted by the company before it ripened into a contract, and clauses 8 and 9 could not be discarded as inapplicable merely because they read like clauses meant for a pre-incorporation agreement. Title to the machinery valued at Rs 15,989, the electrical fittings valued at Rs 1,289-10-0 and the buildings and site valued at Rs 1,26,470 could not pass until a conveyance was executed and registered, following Bhurangya Coal Co, and none was executed before 1 April 1948. Stocks of Rs 30,050 were expressly outside the definition of capital asset. Furniture, title to which passes by delivery, was transferred on 17 March 1948, delivery in the circumstances having been made with the intention of passing title. Goodwill, being intangible, ordinarily passes with the transference of the whole business and was not transferred before 1 April 1948. It arises in Capital Gains matters, on section 12B of the Indian Income-tax Act, 1922, section 2(47), section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India - P.B. Gajendragadkar, CJ, J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Break the consideration down asset by asset; different assets pass in different ways and some may not be capital assets at all. Do not let book entries or a credit of the price decide the year, in either direction - the Court held them irrelevant to the date of transfer. Check the current definition of transfer before relying on this case where possession has been given under an agreement, because that definition has been widened since.
Validity check could not be completed. Only this judgment was read. It construes section 12B of the 1922 Act, and the definition of transfer in the 1961 Act has since been expanded, including to cover transactions in which possession of immovable property is allowed to be taken or retained in part performance of a contract; that definition was not read as part of this exercise, nor were the later decisions on it. The reasoning on book entries and on the asset-by-asset analysis is unaffected, but the result on possession-based arrangements must be checked against the current provision. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under section 12B of the Indian Income-tax Act, 1922 as it then stood, which charged transfers effected between 31 March 1946 and 1 April 1948; the batch line's sections 2(47) and 45 of the 1961 Act are the corresponding provisions but were not construed. The Court did not decide how much, if any, of the Rs 79,494 was attributable to the furniture, leaving that open. It also did not decide the effect of section 53A of the Transfer of Property Act beyond holding that possession is not a conveyance, and recorded that the point had not been considered in any of the cases cited. The judgment gives the date of the board's approval of the agreement both as 16 March 1949, in its narrative, and as 26 March 1949, in the agreed statement of the case; the discrepancy is in the source. The harvested page carries a reporter's headnote before the judgment; it has been ignored. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed, the assessee having succeeded substantially, with costs in both courts. The referred question was answered by holding that Rs 79,494 was not assessable as capital gains in 1948-49, save such part of it, if any, as was attributable to the transfer of furniture valued at Rs 18,805. The charge as it then stood applied to profits arising from a sale, exchange or transfer effected after 31 March 1946 and before 1 April 1948, deemed to be income of the previous year in which it took place. The agreement of 17 March 1948 was a conditional agreement to sell which had to be adopted by the company before it ripened into a contract, and clauses 8 and 9 could not be discarded as inapplicable merely because they read like clauses meant for a pre-incorporation agreement. Title to the machinery valued at Rs 15,989, the electrical fittings valued at Rs 1,289-10-0 and the buildings and site valued at Rs 1,26,470 could not pass until a conveyance was executed and registered, following Bhurangya Coal Co, and none was executed before 1 April 1948. Stocks of Rs 30,050 were expressly outside the definition of capital asset. Furniture, title to which passes by delivery, was transferred on 17 March 1948, delivery in the circumstances having been made with the intention of passing title. Goodwill, being intangible, ordinarily passes with the transference of the whole business and was not transferred before 1 April 1948.
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