Mortgage by conditional sale is not a transfer for capital gains until foreclosure makes it absolute.

A mortgage by conditional sale remains a mortgage, not an outright transfer, while the repayment condition continues to subsist under section 58(c) of the Transfer of Property Act. The mortgagor retains title until the condition fails and foreclosure occurs, so no completed transfer arises on execution of the mortgage deed. For capital gains purposes under section 2(47) of the Income-tax Act, transfer is triggered only when the mortgage becomes absolute on foreclosure, and capital gains can arise only in that later year.

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Issues: Whether a mortgage by conditional sale constitutes a transfer for the purposes of capital gains under section 2(47) of the Income-tax Act, 1961, and whether such transfer arises in the year of execution of the mortgage deed or only in the year of foreclosure.

Analysis: Section 58(c) of the Transfer of Property Act treats a mortgage by conditional sale as a mortgage, not an outright sale, so long as the condition embedded in the document has not failed. On execution of such a deed, the mortgagor retains title and the mortgagee does not acquire ownership unless and until the condition for repayment is not fulfilled and the mortgage is foreclosed. Consequently, there is no completed transfer when the mortgage is created; the transfer, if any, arises only when the mortgage becomes absolute on foreclosure.

Conclusion: The transaction was not a transfer in the year in which the mortgage by conditional sale was created. It became a transfer only in the year of foreclosure, and capital gains could arise only in that later year.

Ratio Decidendi: A mortgage by conditional sale remains a mortgage until the stipulated condition fails and foreclosure occurs, and it is only on foreclosure that the transaction matures into a transfer for capital gains purposes.

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