Feredoon K. Irani V. Fifth Income Tax Officer.

High Court Of Judicature At Bombay

IT APPEAL NO. 410 (BOM.) OF 1985 [ASSESSMENT YEAR 1981-82]

Judgment Date:
17-09-1985

Feredoon K. Irani ..Petitioner

Fifth Income Tax Officer. ..Respondent

Bench:
{NULL }

Citation:

[1986] 15 ITD 627 (MUM) ;

Per Shri B. S. Ahuja, Judicial Member - The assessee is in appeal against the order of the
Commissioner (Appeals) holding that the assessee is liable to pay capital gains on transfer of a flat
in Shreyas co-operative housing society in favour of Shri Yogendra Kumar Modi.

2. During the accounting year ending 31-3-1981, the assessee agreed to sell flat No. 1 in Shreyas
building which belonged to the assessee. The agreement was entered into on 28-8-1980. The
assessee received a sum of Rs. 6 lakhs being the full consideration for the flat and agreed to
relinquish in favour of Shri Yogendra Kumar Modi, all the right, title and interest in the flat along
with qualifying shares in the Shreyas Co-operative Housing Society Ltd.

3. The assessee, however, had not declared any capital gains for taxation in his return of income.
It was contended that the co-operative society had still not accepted the application of the
transferee for being recognised as a member and, therefore, the sale had not become effective and
complete. Since the society had not agreed to transfer the ownership of the flat to the purchaser
and the matter was under litigation, the assessee claimed that the transfer had not been effected.
The ITO held that the form duly signed by the parties was lodged by the purchaser with the
society on 14-1-1981. The ITO did not accept this contention because for the purposes of section
45, read with section 2(47), of the Income Tax Act, 1961 (the Act), the assessee had definitely
relinquished his right, title and interest in the flat in favour of Shri Yogendra Kumar Modi.
Therefore, there was an effective transfer and with the approval of the IAC under section 144B of
the Act, he brought the capital gains to tax. He held that the transfer of shares in the name of

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 Feredoon K. Irani V. Fifth Income Tax Officer.

purchaser in the records of the society is a mere formality which may be completed in due
course. In the Maharashtra Co-operative Societies Act, 1960, no registration of the conveyance
deed was required to complete the transfer of a flat.

4. The assessee took the matter in appeal before the Commissioner (Appeals) and contested this
order. The Commissioner (Appeals) noted that the purchaser, Shri Yogendra Kumar Modi was a
tenant of this flat which was being used for non-residential purposes, while Shri Yogendra Kumar
Modi was a director of Modi Spg. & Wvg. Mills Co. Ltd. Who (the Company) purchased the flat in
Shri Yogendra Kumar Modi's name. Though the sale was effected in the name of Shri Yogendra
Kumar Modi, the company which was the purchaser was already a tenant of the said flat which
was being used for non-residential purposes. The committee of the co-operative society had refused
to recognise the purchaser as a member of the society because the flat was being used for an
office in the residential building and so far as Shri Yogendra Kumar Modi was concerned, he
already owned a flat in a residential building in Bombay.

5. Before the Commissioner (Appeals), it was argued that the assessee, in law, continued to be the
owner of the flat because the society had not recognised the membership of Shri Yogendra Kumar
Modi. Therefore, capital gain was not attracted unless the transfer of the capital asset was
completed. Reliance was placed on certain authorities for the proposition that for assessing the
income from house property, ownership would not be transferred by mere agreement to sell till
the sale deed is registered. The Commissioner (Appeals) has referred to the definition of the
transfer in section 2(47), in relation to the capital asset to include sale, exchange or
relinquishment of the asset or the extinguishment of the rights therein or the compulsory
acquisition thereof. The assessee had also executed the transfer form of shares for being submitted
to the co-operative society. Thus, so far the assessee is concerned, he had abandoned all his rights
over the property and no eventuality has been pointed out under which, after completing the acts
required by the purchaser, i.e., the signing of the transfer form and executing the necessary
documents, he could be called upon to refund the purchase price, if the society does not register
the transfer form and executing the necessary documents, he could be called upon to refund the
purchase price, if the society does not register the transfer in favour of the purchaser. The
assessee had done every thing that he was required to do to make an effective transfer and,
therefore, so far as he was required to do to make an effective transfer and, therefore, so far as
he was concerned, the relinquishment of rights was complete. This was clear from the fact that in
the dispute between the society and the purchaser, the assessee was not even made a party to
the litigation. The Commissioner (Appeals) held that the decisions relied upon did not apply
because in the case of a flat in a building owned by a co-operative society no registration of the
sale deed was contemplated by the law. In the case of shares of a limited company, the transfer
of shares is complete once the shares are handed over and it is not necessary that actual change
of name should also be made in the companys name as held by the Supreme Court in the case of
Seth R. Dalmia v. CIT : [1977]110ITR644(SC) .

6. The assessee is aggrieved by this order and is in appeal. We have heard the learned counsel
for the assessee and the department representative. The arguments proceeded on the same lines
as before the Commissioner (Appeals). The contention urged on behalf of the assessee was that
the transfer was not complete till the co-operative society agreed to accept the purchaser as a

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 Feredoon K. Irani V. Fifth Income Tax Officer.

member and that the society had refused to do. The assessee, it was urged was still liable to
refund the price because the purchaser had not become the owner of this flat. The learned
departmental representative supported the orders of the authorities below because so far as the
definition of transfer under section 2(47) is concerned, the transfer was complete.

7. We have considered the rival contentions. We were taken through the provisions of the
Maharashtra Co-operative Societies Act. There is a bar under section 47(2) of the Maharashtra Co-
operative Societies Act to the transfer of the property or interest in the property which is subject
to a charge in favour of the society under section 47(1) without the previous permission of the
society and under section 47(3) any transfer made in contravention of sub-section (2) shall be void.
The Supreme Court had occasion to consider the provisions of the Maharashtra Co-operative
Societies Act in Ramesh Himmatlal Shah V. Harsukh Jadhavji Joshi : AIR1975SC1470 . The
question that arose in that case was whether a flat in a tenant co-partnership housing society
under the Maharashtra Co-operative Societies Act, is liable to attachment and sale in execution of
a decree against a member in whose favour or for whose benefit the same has been allotted by
the society. The Supreme Court considered the provisions of sections 31,29 and 47 of the
Maharashtra Co-operative Societies Act, along with the relevant rules and held as follows :

"... The right to occupy a flat of this type, assumes significant importance and acquires under the
law a stamp of transferability in furtherance of the interest of commerce. In absence of clear and
unambiguous legal provisions to the contrary, it will not be a public interest nor in the interest of
commerce to impose a ban on salability of these flats by a tortuous process of reasoning. The
prohibition, if intended by the Legislature, must be in express terms [1974] 76 Bom. LR 375
reversed.

There is no absolute prohibition in the Act or in the Rules or in the Bye laws against transfer of
interest of a member in the property belonging to the society. The only transfer which void under
the Act is one made in contravention of sub-section (2) of section 47." (p. 1470)

The Supreme Court further held that in section 29, there was not even a provision of prior
consent for transfer of shares or interest in such property. Section 29 read with rule 24 of the
Maharashtra Co-operative Societies Rules, 1961, shows that there is no prohibition as such against
transfer of a share to a member or even to a non-member if he consents to be a member and
makes an application for membership by purchasing five shares as provided under bye-law 9. In
paragraph 23, their Lordships further held as follows :

"... We have seen there is no absolute prohibition against transfer of a right to occupation of the
flat or even to transfer a share. The auction purchaser is presumed to know the limitations under
which he has purchased the right to occupy the flat in Court auction. If ultimately the society
turns down his application for membership (which of course cannot be done except for valid
reasons) it is up to him to take such course of action as available under the law. Such a remote
contingency, per se, will not make the particular right of the judgment-debtor in the flat non
attachable or non-saleable." (p. 1477)

8. It is, thus, clear that firstly, accordingly to this decision of the Supreme Court, the right to

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 Feredoon K. Irani V. Fifth Income Tax Officer.

occupy the flat is independent of the right to hold shares in a co-operative society and secondly,
that both these rights are transferable without the prior consent of the co-operative society. The
assessee in this case has done all that was required of him to make an effective transfer, i.e., he
gave possession of the flat, executed a transfer deed of the property and also all the shares in the
co-operative housing society. Thereafter, he went out of the picture except so far as he may be
required to state any proceedings under the law that he had affixed his signature to the various
documents for a consideration to make the transfer effective. He cannot, in law, be required to
refund the consideration because if the transferee cannot obtain membership of the society, it will
be for no fault of the assessee and unless the purchaser can prove, which is nobody's case, that
the assessee have a defective title, the assessee cannot be made to refund the consideration
received for the transfer. Therefore, so far as the assessee is concerned, the transfer was complete
and effective because no registered deed of conveyance is required under section 47. The rulings
on which reliance was placed before the Commissioner (Appeals) pertain to those immovable
properties in respect of which registration of the sale deed is compulsory before a transfer
becomes effective, which have no application to the case before us.

9. That apart under section 2(47), the transfer was complete firstly because the assessee sold his
right, title and interest in the property and secondly, he completely relinquished the asset in
favour of the purchaser. It cannot, therefore, be said that the sale was not complete and that till
the purchaser is recognised by the co-operative society as a member, the assessee cannot be
called for to pay tax on capital gains. We do not agree that the sale by the assessee was one
prohibited by law and that in executing the documents to make an effective sale, he has
contravened any law which would invalidate the sale altogether. The sale is complete and effective
so far as the assessee is concerned. He was, therefore, rightly taxed on capital gains. We find no
merit in the appeal which is dismissed.

10. The appeal is dismissed.

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