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Issues: (i) Whether the sale of immoveable properties was effected on 1 December 1946 for the purposes of section 12B(1) of the Indian Income-tax Act, 1922; (ii) whether, if the sale date was 1 December 1946, the entire capital gain was exempt under the second proviso to section 12B(1) or only the portion attributable to the tenanted area; (iii) whether, in computing actual cost under the third proviso to section 12B(2), the assessee was entitled to deduct the whole depreciation allowed since 1 January 1939 before apportionment.
Issue (i): Whether the sale of immoveable properties was effected on 1 December 1946 for the purposes of section 12B(1) of the Indian Income-tax Act, 1922.
Analysis: The transfer concerned immoveable property, and for such property the concept of sale had to be understood with reference to the Transfer of Property Act. A contract for sale does not itself create title, and ownership of immoveable property passes only by a registered instrument. Although possession and full payment had passed in 1946, the legal title remained with the assessee until execution and registration of the conveyance. Section 47 of the Registration Act, 1908 did not assist the revenue, because the document itself was not registered until 1949 and could operate only from that date.
Conclusion: The sale was not effected on 1 December 1946; the issue was answered in favour of the assessee.
Issue (ii): Whether, if the sale date was 1 December 1946, the entire capital gain was exempt under the second proviso to section 12B(1) or only the portion attributable to the tenanted area.
Analysis: The proviso exempted gains arising from property the income of which was chargeable under section 9. Only the tenanted one-sixth portion answered that description, while the remaining five-sixths was used by the assessee for business and was outside section 9. The statutory exemption therefore extended only to the portion whose income was chargeable under the head of property income.
Conclusion: Only the one-sixth tenanted portion was exempt; the issue was answered partly in favour of the assessee and partly against it.
Issue (iii): Whether, in computing actual cost under the third proviso to section 12B(2), the assessee was entitled to deduct the whole depreciation allowed since 1 January 1939 before apportionment.
Analysis: The proviso did not require a different treatment for the tenanted and business portions of the property. Depreciation was allowable only on the portion used for business, because the property-income portion did not carry depreciation allowances under section 9. The whole depreciation claimed by the assessee could not therefore be deducted from the entire property value before allocating the cost between the two portions.
Conclusion: The claim to deduct the whole depreciation was rejected; the issue was answered against the assessee.
Final Conclusion: The reference succeeded on the principal question of the date of sale, with the result that the capital gains charge did not arise; the remaining questions were answered only partly in the assessee's favour or against it, and costs followed the assessee.
Ratio Decidendi: For capital gains on immoveable property, sale occurs when legal ownership passes by a duly executed and registered conveyance, not merely when possession and payment are transferred under an agreement.
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