Capital gains on transfer pendente lite depend on substance, and no tax arose where the assessee received no taxable accretion.

A transferee pendente lite who later joins only as a confirming party in a conveyance under a decree for specific performance does not incur capital gains tax merely because of accounting entries. The court looked to the substance of the transaction and found that the assessee received no sale consideration in its own right, recovered only its original investment, and had no enforceable right to receive money from the purchaser. On those facts, no taxable accretion arose and no capital gains accrued in the assessee's hands under section 12B of the Indian Income-tax Act, 1922.

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Issues: Whether, on the facts and circumstances of the case, the transaction resulted in capital gains chargeable to tax in the hands of the assessee under section 12B of the Indian Income-tax Act, 1922.

Analysis: The property was acquired by the assessee during pending litigation and its rights were subject to the outcome of the specific performance proceedings. A transfer pendente lite does not defeat the decree-holder's rights, and the assessee was later required to join only as a confirming party under the appellate court's order. The court looked to the substance of the transaction rather than the book entries, and found that the assessee had not received the sale consideration of Rs. 1,30,000, had only recovered what it had originally invested, and had no enforceable right to receive money from the purchaser. On the facts found, the assessee did not derive any taxable accretion from the conveyance.

Conclusion: No capital gains accrued to the assessee and the reference was answered against the revenue and in favour of the assessee.

Ratio Decidendi: Where a transferee pendente lite joins only as a confirming party in a conveyance executed pursuant to a decree for specific performance, and the transferee does not receive any part of the sale consideration or any taxable gain in substance, no capital gains can be brought to tax in its hands merely on the basis of accounting entries.

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