Meccane Industries Ltd. vs Commissioner of Income Tax

R. Jayasimha Babu, J.—The extent to which the assessee should be held liable for the capital gain alleged to have been secured by it in the

assessment year 1968-69 is the matter which the Tribunal considered. The correctness of the consideration so made having been called into

question, at the instance of the assessee four questions have been referred to us. In substance those questions are as to whether an agreement to

sell accompanied by delivery of possession can amount to transfer ; as to whether when an agricultural land is sold for use as house sites, it can be

regarded as non-agricultural, and as to whether the cost of acquisition should be the cost of acquiring the agricultural lands or the market value as

on the date the agricultural land is converted for use as land meant for use as house sites.

The assessee had purchased 6.76 acres of land together with a factory and godown buildings, that factory and godown building being located in

an area of about less than an acre, the remaining extent being open area on which some agricultural operations were continued to be carried on.

The purchase was on February 11, 1959. Seven years later, the lands were sold after demarcating the open area from the area in which the

factory and godown buildings were located. An agreement to sell was entered into on August 19, 1966, on which date the assessee received an

advance of Rs. 50,000 and also delivered possession to the other party. The agreement, inter alia, required the assessee to execute conveyance

deeds in favour of the nominees of the other party to the agreement and to receive the balance of the amount agreed to be paid for the land in

instalments one of which was payable on December 31, 1966, and the other two instalments on March 31, 1967, and June 30, 1967.

In the books of account of the assessee, the assessee recorded the receipt of a sum of Rs. 2,28,902. The assessee accepted the liability for

capital gains in respect of what it regarded as the industrial portion of the land, but not for the gains from the sale of the area 6.22 acres which the

assessee claimed to be agricultural lands. That claim of the assessee was rejected and the Assessing Officer held that the sum of Rs. 2,50,000

which the assessee had received in that assessment year under the agreement for sale represented the value of the capital assets sold by the

assessee, by treating the lands sold as non-agricultural land, having regard to the purpose for which it was to be used after the sale. From that sum,

he deducted the original cost of acquisition and treated the balance of Rs. 2,28,902 as capital gain arising from the sale of the capital asset. That

order having been upheld by the Commissioner, the assessee went up in appeal to the Tribunal.

The Members of the Bench of the Tribunal which heard the appeal having disagreed about the manner in which the appeal should be disposed

of, the matter was referred to a Third Member. In the course of the order made by the two members who had disagreed, it had been observed

that, since the charge to capital gain arises only on the execution of a registered deed of transfer, the capital gain should be recomputed by taking

into account only those transfers which are completed by registered deeds of transfer to the individual purchasers in the relevant previous years.

On a rectification application filed by the assessee an order was made modifying the order which had been made earlier in which it is stated that the

appeal had been dismissed, into an order which merely said the appeal is accordingly disposed of.

We may first consider the question as to whether there was a transfer by reason of the execution of the agreement of sale and delivery of

possession of the property on August 19, 1966, under the law as it then stood. Section 2(47) of the Act, as it then stood, defined ""transfer"" in

relation to a capital asset, as including ""the sale, exchange or relinquishment of the asset, or the extinguishment of any rights therein, or the

compulsory acquisition thereof under any law"".

The agreement to sell itself contemplates the execution of conveyance in favour of the nominees of the third party to the agreement. The payment

of the part of the amount agreed to be paid under that agreement was to be made only on dates subsequent to the date of the agreement.

However, 50 per cent, of that amount was to be paid only in the succeeding year. The conveyance deed was to be executed in respect of the

portions of the property and when nominees of the third party to the agreement were brought to the assessee. Having regard to these facts, it was

submitted by counsel for the assessee that there was no transfer merely by virtue of the agreement.

Counsel in this context relied on the decision of the Supreme Court in Alapati Venkataramiah Vs. Commissioner of Income Tax Hyderabad, .

That case arose u/s 12B of the Indian Income Tax Act, 1922, which used the word ""transfer"". In that decision, the court held that in the context in

which it was used, ""transfer"" meant effective conveyance of the capital asset to the transferee and that delivery of possession of immovable

property could not, by itself, be treated as equivalent to conveyance of the immovable property.

Having regard to the law that prevailed in the relevant assessment year, we agree with counsel that capital gain can be regarded to have accrued

only when the conveyance deed was executed and not at any earlier point of time. The Tribunal has rightly directed that the capital gain should be

recomputed by taking into account only those transfers which were completed by registered deeds of transfer to the individual purchasers in the

relevant previous years. We, therefore, hold that the capital gain accrued to the assessee only in the year in which the conveyance deeds had been

executed.

As regards the question of the cost of the acquisition of the capital asset, it was submitted by counsel that what was bought by the assessee was

agricultural lands and when the assessee proceeded to sell it for use as house sites and when it was put to non-agricultural use, the market value as

on the date of the agreement should be considered for the purpose of determining the capital gain. It was submitted that an asset which was in the

nature of agricultural land was not an asset for the purpose of levy of capital gain at the relevant time. When that land was converted and put to use

as non-agricultural land it became an asset to which the capital gain provisions would apply, and it is that date that would be relevant for

determining the cost of acquisition. It was, submitted that, that would be the correct approach having regard to the observations of the Supreme

Court in the case of Miss Dhun Dadabhoy Kapadia Vs. Commissioner of Income Tax, Bombay, , wherein it was observed that (page 655):

The High Court, in dealing with this question, had expressed the view that principles of accountancy applicable to valuation of such right to receive

new shares issued by a company are not applicable when computation has to be made for purposes of taxation ; but we are unable to accept this

proposition. In working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or

which an ordinary man of business will resort to when making computation for his business purposes. The principle of accounting indicated by us

above are clearly the principles that must be applied in order to find out the net capital gain or loss arising out of a transaction of the nature with

which we are concerned.

The transaction with which the apex court was concerned in that case was one whereby a shareholder had renounced the right to acquire

additional shares. The assessee''s claim was that the profit that was realised by renouncing the right would be a profit which she realised by

renouncing the right to the additional shares and it must be set off against the loss by way of depreciation in the value of her original shares as the

right to receive the additional shares was embedded in the original shares and by renouncing that right the value of the original shares stood

reduced. The court accepted that stand of the assessee and held that the capital gain that was derived from renouncing the right to receive

additional shares must be determined by setting off the depreciation in the value of the shares originally held, against the profit realised from

renouncing the right to receive additional shares.

That decision of the apex court and the observations made thereunder do not support the case pleaded for the petitioner here. The petitioner

here did not suffer any loss which was required to be set off against his gain, a loss which was an inevitable consequence of the sale transaction.

The assessee had acquired the land at a certain value and when the assessee sold those lands, it was sold at a much higher value. The cost of

acquisition did not change. It remained constant. The fact that by the time the assessee so sold, it was to be put to use for non-agricultural

purposes, did not involve any additional cost being incurred by the assessee. The object of applying commercial principles of accounting is to

ascertain the real profit which can appropriately be regarded as a capital gain and brought to tax. Here in this case, the real extent of the gain is

obviously the difference between the price at which the assessee sold the property and the price which the assessee had paid for acquiring the

property.

Counsel contended that when the agricultural land was sold for the purpose of use as non-agricultural land, it amounted to the assessee

bringing into existence a new asset and the date on which that asset was created was to be regarded as the date of acquisition, and the market

value prevailing on that date should be treated as his cost of acquisition. In this context counsel referred to the decision reported in Commissioner

of Income Tax, Bombay City I, Bombay Vs. Bai Shirinbai K. Kooka, . In the case relied on by counsel the court held that when a capital asset is

converted into stock-in-trade and thereafer sold, the cost of acquisition should be taken with reference to the date on which the capital asset was

converted into stock-in-trade. In this case no such question arises as the asset of the assessee was not treated as stock-in-trade and also there was

no claim made on that ground.

All that the assessee did here was to sell the land which it had acquired several years earlier at a much lower price, and had agreed to execute

the conveyance in favour of the nominees of the persons to whom the assessee agreed to sell the property. So far as the assessee was concerned,

the person who agreed to buy the land was the one who was required to pay the price as fixed in the agreement.

This court had an occasion to consider a case which was more or less similar in the case of M. Nachiappan Vs. Commissioner of Income Tax,

. In that case, the agricultural lands had been acquired by the karta of a Hindu undivided family which was later converted into housing sites at a

partition. Thereafter, the assessee received some of the housing sites so formed which were later sold. The cost of acquisition of the land so sold

was determined by the court as the cost at which the karta had acquired the agricultural lands and not the cost as on the date of conversion into

house sites or the date of the partition at which the sites were allotted to the share of the assessee.

The Tribunal has correctly held that the cost of acquisition is the cost of acquisition of the agricultural land and not the notional cost as on the

date the lands were put to non-agricultural use.

We, therefore, answer the questions referred to us by holding that the Tribunal was right in giving the finding that the land ceased to be

agricultural when the assessee agreed to sell the same for use as house sites ; that the Tribunal was right in holding that the cost of acquisition is the

cost to the assessee when it acquired the agricultural land; that the Tribunal was right in holding that capital gains accrued to the assessee and that

such accrual was in the year in which the sale deeds were executed.