1962 (2) TMI 93 - HC - Income Tax

Court determines sale date for tax purposes, assessee wins case, awarded costs.

The court ruled in favor of the assessee, determining that the sale of immoveable properties was effected on February 26, 1949, not December 1, 1946, for ... - Issues Involved:1. Whether the sale by the assessee of its immoveable properties to Hall and Anderson Ltd., a public company, was effected on December 1, 1946, within the meaning of Section 12B(1) of the Indian Income-tax Act.2. Whether by virtue of the second proviso to sub-section (1) of section 12B, the entire sum of capital gains was exempt from charge and not merely 1/6th portion thereof being the value of 1/6th portion of the premises let out to tenants.3. In arriving at the actual cost of the premises as on January 1, 1939, whether the assessee is entitled to claim under the third proviso to sub-section (2) of section 12B to deduct the whole of the depreciation allowed in the assessments since January 1, 1939, i.e., Rs. 1,44,642, from out of the fair market value, before allocating the actual cost between the 5/6th portion of the premises occupied and 1/6th portion let.Issue-wise Detailed Analysis:Issue 1: Date of Sale for Tax PurposesThe primary question was whether the sale of immoveable properties by the assessee to Hall and Anderson Ltd. was effected on December 1, 1946, or February 26, 1949, for the purposes of Section 12B(1) of the Indian Income-tax Act. The court noted that the Indian Income-tax Act does not define 'sale,' and thus, the definition from the Transfer of Property Act was applied. According to Section 54 of the Transfer of Property Act, the transfer of ownership in exchange for a price paid or promised requires a registered instrument for immoveable property valued at Rs. 100 or more. The court concluded that although the assessee had parted with the immoveable property on December 1, 1946, the legal ownership did not transfer until the execution and registration of the sale deed on February 26, 1949. Therefore, the sale for income-tax purposes was deemed to have occurred on February 26, 1949, not December 1, 1946. This interpretation was supported by the Supreme Court case of Commissioner of Income-tax v. Bhurangya Coal Co., which established that ownership of immoveable property does not transfer until the execution of a registered sale deed.Issue 2: Exemption of Capital GainsThe second issue was whether the entire sum of capital gains was exempt from tax under the second proviso to sub-section (1) of section 12B, or only 1/6th portion thereof, corresponding to the value of the tenanted portion of the premises. The court found that 1/6th of the property was tenanted, while the remaining 5/6th was used by the assessee for its business. Under Section 9 of the Indian Income-tax Act, the income from property used for business purposes is not chargeable under the head 'income from property.' Consequently, only the 1/6th portion of the property that was tenanted would be exempt from capital gains tax, while the remaining 5/6th would not be exempt. This interpretation was consistent with the precedent set by the Madras High Court in Sri Kannan Rice Mills Ltd. v. Commissioner of Income-tax.Issue 3: Depreciation DeductionThe third issue concerned whether the assessee could deduct the entire depreciation allowed since January 1, 1939, from the fair market value of the property before allocating the actual cost between the 5/6th portion occupied for business and the 1/6th portion let out. The income-tax authorities had estimated the fair market value of the property as Rs. 25,00,000 as of January 1, 1939, and did not accept the assessee's valuation. The court held that depreciation could only be allowed on the portion of the property used for business purposes, not on the tenanted portion, as Section 9 of the Act does not provide for depreciation allowances on property income. Therefore, the assessee's claim to deduct the entire depreciation amount was not accepted.Conclusion:The court ruled in favor of the assessee on the first issue, determining that the sale was effected on February 26, 1949. Consequently, the answers to the second and third issues were rendered redundant. The assessee was awarded the costs of the reference.