Separate reconveyance terms do not create a mortgage by conditional sale; capital gains substitution failed without proof of understatement.

A sale and a repurchase condition contained in separate instruments cannot be treated as a mortgage by conditional sale under the proviso to section 58(c) of the Transfer of Property Act, so surrounding circumstances and alleged intention are excluded; the assessee was therefore treated only as holding the relevant interest. Sections 52(1) and 52(2) of the Income-tax Act applied only on proof of the statutory requirements of understatement, tax-avoidance motive, and receipt of more than declared consideration; in the absence of such material, the declared sale price could not be replaced by the fair market value. The balance stamp duty and registration charges were also allowable in computing capital gains.

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Issues: (i) Whether the assessee was the owner of the property or had only an interest in it for capital gains purposes; (ii) Whether sections 52(1) and 52(2) of the Income-tax Act, 1961, applied so as to substitute the fair market value of the property; (iii) Whether the assessee was entitled to deduction of the balance stamp duty and registration charges claimed in computing capital gains.

Issue (i): Whether the assessee was the owner of the property or had only an interest in it for capital gains purposes.

Analysis: The condition for reconveyance was contained in a separate document and not in the document effecting or purporting to effect the sale. Under the proviso to section 58(c) of the Transfer of Property Act, 1882, a transaction cannot be treated as a mortgage by conditional sale when the sale and the condition for repurchase are embodied in separate instruments. In such a case, enquiry into surrounding circumstances, subsequent conduct, or alleged intention of the parties is excluded.

Conclusion: The assessee was not to be treated as the owner on the footing suggested by the Revenue, and the Tribunal's finding that he had only the relevant interest was upheld, in favour of the assessee.

Issue (ii): Whether sections 52(1) and 52(2) of the Income-tax Act, 1961, applied so as to substitute the fair market value of the property.

Analysis: For section 52(1), the Revenue had to establish not only connection between transferor and transferee but also understatement with the object of avoiding or reducing capital gains tax liability; no such finding was recorded. For section 52(2), the Revenue had to show both understatement and receipt of more than the declared consideration; the Tribunal found that there was no material of any on-money payment. In the absence of these foundational facts, the statutory conditions for invoking either sub-section were not satisfied.

Conclusion: Sections 52(1) and 52(2) were inapplicable and the declared sale consideration could not be replaced by Rs. 1,40,000, in favour of the assessee.

Issue (iii): Whether the assessee was entitled to deduction of the balance stamp duty and registration charges claimed in computing capital gains.

Analysis: The Tribunal allowed the balance amount after examining the computation of capital gains, and no infirmity or contrary material was shown to displace that view.

Conclusion: The deduction was allowable as claimed, in favour of the assessee.

Final Conclusion: The reference was answered substantially in favour of the assessee on all questions decided on merits, while one question was left unanswered for want of prosecution.

Ratio Decidendi: Under the proviso to section 58(c) of the Transfer of Property Act, 1882, a sale and a condition for reconveyance embodied in separate documents cannot be treated as a mortgage by conditional sale, and sections 52(1) and 52(2) of the Income-tax Act, 1961 apply only when the Revenue proves the specific statutory conditions for understatement and tax-avoidance or extra consideration.

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