Kantawala, C.J.
1. This reference relates to a question relating to taxation of capital gains made by the assessee upon assignment of the leasehold interest in favour of certain persons. Reassessment proceedings under section 34 of the Indian Income-tax Act, 1922, were started against the assessees who are an association of persons for the year 1959-60, the corresponding accounting year being the year ending March 31, 1958. The facts in brief are as under :
Under an agreement with the Governor of Bombay one G. P. Sonawala and one Hirabhai A. Patel agreed to take on lease from the Government certain plots of land in the Reclamation area in Bombay including plot No. 84 admeasuring 1,267 sq. yds. This agreement was entered into with the Governor of Bombay in the year 1942 or 1943. On May 1, 1945, the solicitors of Sonawala and Patel wrote to the Collector of Bombay stating that they had nominated the assessees as the persons by whom separate leases of plot No. 84 would be accepted and, therefore, the lease deeds might be executed by the Government in favour of the assessees. The assessees gave their consent to such leases being executed in their favour. This plot was in the possession of the military authorities and the military authorities handed over possession of this plot to the assessees on December 6, 1946. A draft of the lease of be executed on behalf of the Government of Bombay was prepared in 1949 which refers to the original agreement between Sonawala and Patel on the one hand and the Governor of Bombay on the other and the payment of a premium of Rs. 83,938.
2. On August 23, 1951, an agreement was entered into between the assessees and one Jivan Baliram Revaskar for assignment of the right, title, and interest of the assessees in this plot. Pursuant to this agreement a sum Rs. 50,000 was paid by Jivan Baliram Revaskar to the assessees. The assignment was to be completed on or before December 31, 1955, and the balance of the consideration amount was to be paid on completion of the deed of assignment. Pursuant to clause 9 of the agreement the assessees handed over possession of the plot to Jivan Baliram on or about December 31, 1950, so as to enable him to start construction work on the plot. As purchaser, Jivan Baliram failed to observe the terms and conditions of the agreement, the earnest amount of Rs. 50,000 was forfeited by the assessees and the agreement was cancelled. The assessees filed a suit being Suit No. 317 of 1953 in the High Court of Judicature at Bombay, Original Side, against Jivan Baliram for a declaration that the sum of Rs. 50,000 was rightfully forfeited by the assessees and that they were entitled to vacant and peaceful possession of the plot together with all structures standing thereon and that Jivan Baliram should be ordered to hand over peaceful possession of the said plot forthwith. A decree was passed in the said suit on July 21, 1953, declaring that the forfeiture was legal and Jivan Baliram was decreed to hand over peaceful possession of the plot to the assessees and was directed to pay the costs of the suit to the assessees. Ultimately, an indenture of lease was executed by the Governor of Bombay on May 12, 1954, and it was duly registered on January 24, 1955. The indenture of lease provided that the assessees shall enjoy the property as tenants-in common for a term of 999 years computed from April 19, 1943.
3. On February 4, 1955, the assessees entered into an agreement with one Ramchand Hiranandani to assign their right, title and interest in plot No. 84 for a sum of Rs. 2,60,000 out of which a sum of Rs. 25,000 was to be paid on execution of the agreement, a further sum of Rs. 35,000 was to be paid on the assessees giving possession of the plot to Ramchand Hiranandani and the balance of Rs. 2 lakhs was to be paid as provided in the agreement. Ultimately, a deed of assignment was executed by the assessees in favour of Ramchand Hiranandani on March 23, 1959. There was some delay in registration of this deed of assignment and it was ultimately registered in year 1964. When reassessment proceedings were commenced against the assessees under section 12B of the Act for the assessment year 1959-60, it was sought to be, inter alia, contended on their behalf that no proceedings would lie for the assessment year 1959-60, but such proceedings could only be commenced for the assessment year 1956-57, if at all since the agreement of sale was entered into with Ramchand Hiranandani on February 4, 1955, and the first payment was received on October 31, 1955. The Income-tax Officer held that as the deed of assignment was executed it became complete and the title to the property had passed to the purchaser, Ramchand Hiranandani, on March 23, 1959, and so the capital gains ought to be assessed for the year under consideration. The Income-tax Officer required the assessees to state whether they would like to exercise the option of the substitution of the fair market value as on January 1, 1954, and if so, the assessees might prove the cost of the land as on January 1, 1954. The assessees contended that the market value of the plot as on January 1, 1954, was to be calculated at the rate of Rs. 195 per sq. yd. That contention was not accepted by the Income-tax Officer. He took the view that as the purchase of the plot by the assessees was completed only on January 24, 1955, when the indenture of lease was registered in their favour, the assessees were not entitled to substitution of the value as on January 1, 1954, under the under the third proviso to section 12B(2) of the Act. In other words, the Income-tax Officer took the view that the assessees were not the owners of the property on January 1, 1954, and, therefore, the capital gains could be only the difference between the cost and the selling price. He computed the capital gains at Rs. 2,26,062. He arrived at this figure by deducting from Rs. 2,60,000 being the sale price of the plot a sum of Rs. 83,938 less the earnest money of Rs. 50,000 which was forfeited in the transaction with Jivan Baliram. On an appeal by the assessees the Appellate Assistant Commissioner accepted the contention of the assessees holding that there was no effective sale of the plot of land during the relevant accounting period and, therefore, he cancelled the order passed by the Income-tax Officer. On an appeal by the revenue, the Income-tax Tribunal held that as the sale deed by the assessees in favour of Ramchand Hiranandani was executed on March 23, 1959, i.e., during the year under consisderation, the provisions of section 12B stood attracted notwithstanding the fact that the deed of assignment was registered in the year 1964. The Tribunal took the view that once a deed of assignment is registered it will relate back to the date of execution of the deed. The Tribunal further held that the assessees were the owners of the property even prior to January, 1954, and were entitled to substitution of the market value as on January 1, 1954. In coming to this conclusion the Tribunal took into account the fact that the assessees had performed and observed all the terms necessary to constitute a transfer; that the assessees in accordance with the terms of the agreement with the Government had taken possession of the property and continued to be in possession and had exercised the rights of ownership in that property; that the assessees were always ready and willing to perform their part of the contract. The Tribunal also referred to the provisions of section 53A of the Transfer of Property Act and observed that the assessees were entitled to all equities even though a formal document of lease deed was not executed and got registered. The Tribunal also pointed out the anomalous position that was adopted by the revenue, namely, for determining the actual cost incurred by the assessees for purchasing the property the cost incurred in the year 1945 was taken into account, but still it was contended that the assessees were not the owners of the property on January 1, 1954. The Tribunal directed the Income-tax Officer to fix the value as on January 1, 1954, after hearing the assessees and considering any material or submissions that may be made by the assessees on this matter and directed him to compute and capital gains in the light of the findings and directions given in the order. On these facts, the question referred to for our determination is as under :
'Whether, on the facts and the circumstances of the case, the assessees were entitled to the substitution of the market value of the property as on January 1, 1954, in accordance with the third proviso to section 12B(2) of the Indian Income-tax Act, 1922 ?'
4. Mr. Joshi on behalf of the revenue contended that as the indenture of lease in respect of plot No. 84 was executed in favour of the assessees by the Governor of Bombay on May 12, 1954, and as the said indenture of lease was duly registered on January 24, 1955, the assessees could not be regarded as the owners of the property as on January 1, 1954, and the Tribunal was not justified in directing the Income-tax Officer to fix the value as on January 1, 1954. Mr. Joshi urged that the Tribunal was not justified in invoking the provisions of section 53A of the Transfer of Property Act, because under that section a passive equity by way of defence is created in favour of a defendant; that section 53A cannot be availed of by the parties to assert their right in a court of law and, therefore, the assessees cannot be regarded as owners of the leasehold interest on January 1, 1954, as the lease the executed on May 12, 1954, and duly registered on January 24, 1955.
5. If regard be had to the provisions of the indenture of lease, then this contention of Mr. Joshi can be disposed of very briefly. We do not intend to refer to the provisions of section 53A of the Transfer of Property Act or invoke any assistance therefrom. Undisputed facts are that pursuant to an agreement between the assessees on the one hand and Sonawala and Patel on the other, possession of plot No. 84 was handed over to the assessees on December 6, 1946.
6. Since that date the assessees are in possession of this plot and they have entered into more than one agreement in respect thereof. As usual, considerable time elapses before a lease is executed by a public body like the State Government. Accordingly, in this case in respect of plot No. 84 the lease was executed by the Government in favour of the assessees on May 12, 1954, and it was duly registered on January 24, 1955. It is quite apparent that once a document which is required by law to be registered is registered it will relate back to the date of execution of the document. The lease in favour of the assessees is for a period of 999 years commencing from April 9, 1943. We have to consider whether, if such is the position under the terms of the lease, the assessees can be entitled to claim the benefit of one of the provisos to section 12B of the Act.
7. Section 12B of the Act was inserted by Act 22 of 1947, and it was later on substituted by the Finance (No. 3) Act, 1956, which came into force on 1st April, 1957. Under this section 'the tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale...or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which they sale...or transfer took place'. How the amount of capital gains is to be computed is laid down in sub-section (2). Under that sub-section the amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale...or transfer of the capital asset is made, namely :
(i) expenditure incurred solely in connection with such sale....or transfer;
(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12.
8. There are four provisos to sub-section (2) and we are concerned in the present case with proviso No. 3. That proviso is as under :
'Provided further that where the capital asset became the property of the assessee, or of the previous owner where the cost of the capital asset to the previous owner is to be taken in accordance with sub-section (3), before the 1st day of January, 1954, he may, on proof of the fair market value thereof on the said date to the satisfaction of the Income-tax Officer, substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset, and which shall be reduced by the amount of depreciation, if any, allowed to the assessee after the said date and increased or diminished, as the case may be, any adjustment made under clause (vii) of sub-section (2) of section 10.'
9. This proviso, therefore, contemplates that in case a capital asset is acquired prior to January 1, 1954, the owner has an option for computation of the capital gains to take into account the actual cost or the market value of such property on January 1, 1954. The argument of Mr. Joshi on behalf of the revenue is that as the indenture of lease in favour of the assessees was executed by the Governor of Bombay only on May 12, 1954, it cannot be said that the leasehold interest in plot No. 84 belonged to the assessees on January 1, 1954. He submitted that a leasehold interest for a period of 999 years can only be created by a registered instrument and until such an instrument is executed and got registered, it cannot be said that the assessees have acquired a leasehold interest. There cannot be any quarrel with any such submission made on behalf of the revenue. However, the point to be considered is whether on January 1, 1954, on the facts of the present case, the assessees can be regarded as owners of leasehold interest in plot No. 84. From what date the assessees became owners of the leasehold interest can only be found if regard be had to the provisions of the indenture of lease executed in their favour by the Governor of Bombay on May 12,1254. That indenture clearly provides that the lease is for a period of 999 years commencing from April 9, 1943. The incorporation of such a provision in the indenture of lease shows that once the lease is executed in the manner required by law, the assessees acquired the leasehold interest in the property not from the date of execution of the lease but from April 9, 1943. It is not disputed that in fact from December, 1946, the assessees were in actual possession of the property. We are only concerned with the question whether the assessees can be regarded as owners of the leasehold interest in January 1, 1954. If the lease is to be effective from April 9, 1943, can it be said that from and after that date or even on January 1, 1954, which is the relevant date, the Governor of Bombay was full owner of the property or was merely having a lessor's interest in the property After a registered lease of the type in the present case was executed the Governor of Bombay had merely a lessor's interest in plot No. 84 from and after April 9, 1943. So, on the relevant date, namely, January 1, 1954, the assessees were the lessees of the leasehold interest under the indenture of lease which was later on executed on May 12, 1954, and got registered on January 24, 1955. In view of this indenture of lease, having regard to the retrospective operation being given to the commencement of the lease, the assessees became the owners of the leasehold interest much prior to January 1, 1954, and they will be entitled to exercise the option in computing the capital gains having regard to the market value of the leasehold interest on January 1, 1954, subject to such adjustment as may be permissible in law. Thus, the Tribunal was justified in holding that the assessees were entitled to the substitution of the market value of the leasehold interest as on January 1, 1954, for the purpose of computation of capital gains in the present case.
10. Thus, the answer to the question referred to us is in the affirmative and in favour of the assessees. The revenue shall pay the costs of the assessees.