1. One Shri J. Narayana Murthy has been adjudged as an insolvent by the order of the Sub-Court, Vijayawada in I.P. No. 2 of 1974. On 30-11-1974 all the properties owned by him vested in the Official Receiver, Krishna District, Machilipatnam. 94 cents of vacant land situated in Gummadala village was sold by the Official Receiver for Rs. 3,50,000 and the sale deeds were executed on 16-12-1980. The cost of acquisition of this property when Shri J. Narayana Murthy purchased it was Rs. 25,000 as on 10-12-1962. The ITO sought to assess the balance of Rs. 3,25,000 to capital gains tax. The property was subjected to mortgage since the purchasers had undertaken to discharge the mortgage liability with interest. The ITO increased the sale consideration by adding the mortgage debt of Rs. 34,000 and interest payable thereon amounting to Rs. 26,520. Thus, he determined the total sale consideration at Rs. 4,10,520 from which he deducted the cost of acquisition at Rs. 25,000 and the balance of Rs. 3,85,520 was held to be liable to capital gains tax. He issued notice under Section 139(2) of the Income-tax Act, 1961 ('the Act') to the Official Receiver who filed a nil return. It was contended by him that Shri J. Narayana Murthy ceased to be the owner of the land. He as Official Receiver is trustee of the creditors and distributed the dividends in accordance with the statutory provisions.
No capital gain arose on the sale of the land as consequent on the declaration of Shri J. Narayana Murthy as insolvent he ceased to have any right in the property sold and the Official Receiver was vested with those properties. The ITO did not accept the above submissions.
The draft assessment order was forwarded to the IAC for direction under Section 144B of the Act proposing to levy capital gains tax on the sale of the land. The IAC approved the draft assessment order. Accordingly, the ITO finalised the assessment order. After allowing deduction under Section 80T of the Act amounting to Rs. 1,00,130 from Rs. 3,85,520, he determined the income at Rs. 2,85,390 and levied the capital gains tax.
On appeal, the Commissioner (Appeals) upheld the same.
2. Before the Commissioner (Appeals) it was urged that the land is agricultural land and no capital gains tax is leviable. But he held that the agricultural land in question is situated within the urban agglomeration and so capital gains tax is leviable. Against the said order the present appeal has been preferred by the assessee.
3. The learned counsel for the appellant/Official Receiver strongly urged that Shri J. Narayana Murthy has been adjudged as insolvent and all the properties owned by him vested in the Official Receiver. The Official Receiver acted only as a trustee of the creditors to sell the properties and distribute the proceeds as dividends amongst them. Since Shri J. Narayana Murthy ceased to be the owner, no capital gains tax would be leviable on the sale of land by the Official Receiver. The learned counsel also submitted that Official Receiver is not included in Section 160(1)(iii) of the Act. He further urged that no capital gains tax is leviable on sale of agricultural land. The learned departmental representative submitted that the Official Receiver comes under Section 160(1)(iii) capital gain is a deemed income. So assessment made on the Official Receiver is valid. He submitted that capital gains tax is leviable on the sale of land of Shri J. Narayana Murthy. Thus, he supported the orders of the lower authorities.
4. We have considered the rival submissions. Shri J. Narayana Murthy who was the owner of 94 cents of vacant land in Gummadala village was adjudged as an insolvent by the Court of Subordinate Judge, Vijayawada in I.P. No. 2 of 1974 on 30-11-1974. As per the orders of the Court all the properties owned by him vested in the Official Receiver. The Official Receiver sold 94 cents of vacant land for Rs. 3,50,000.
5. The question for consideration is whether the profit or gain arising on the sale of the said land by the Official Receiver is liable to capital gains. Under Section 27 of the Provincial Insolvency Act, 1920, the Court has the power to pass an order of adjudication adjudicating a person as insolvent. Thereafter, provisions of Section 28 of the said Act would automatically ensue. On adjudication the property of the insolvent vests in the Court or Official Receiver under Sub-section (2) of Section 28 and shall become divisible among the creditors. In the instant case the property of the insolvent has vested in the Official Receiver who took over the property on 30-11-1974 as per the orders of the Court. Once, the property vests in the Official Receiver he becomes the legal owner of the property. The intendment of Section 28(2) is to make the entire estate of the insolvent vest in the Official Receiver and to make it available for distribution among the body of creditors.
The effect of vesting is that the ownership of the property is transferred by operation of law to the Official Receiver who becomes its legal owner. The insolvent loses all rights, title or interest in the property once, it is vested in the Official Receiver. The Official Receiver is the officer of the Court and he is appointed by the Government under the Act. The property will be held by him in trust for the creditors and he has no interest of his own. Once, the property vests in him he has the power to sell the same.
6. In Paleti Chandrayya v. Yeruva Chinnappa Reddi AIR 1941 Mad. 753, the Madras High Court held that the legal consequence of adjudication in bankruptcy is that the ownership of the insolvent in all the property owned and possessed by him on the date of adjudication is divested from him and vested in the Official Receiver. In Kripa Nath v.Ganga Prasad AIR 1962 All. 256, the Allahabad High Court held that the vesting of the property in the Official Receiver not only gives him right of possession of the property and deal with it but amounts to legal transfer of the right, title and interest of the insolvent in the Official Receiver as a result of the vesting and ceases to be the property of the insolvent. As a result of the order of adjudication, all the rights and interest which the insolvent had in the property got transferred by operation of law to the Court or the Official Receiver.
In Shyam Kali Bai v. R.N. Verma AIR 1956 Nagpur 57, the Nagpur High Court held that on the making of an order of adjudication the whole of the property of the insolvent vests in the Official Receiver and becomes divisible amongst his creditors. The effect of vesting is that the ownership of the property is transferred by operation of law to the Official Receiver who becomes its legal owner and the insolvent loses all rights, title or interest in the property on passing of the vesting order.
7. The ratio laid down in the above cases squarely apply to the instant case. Shri J. Narayana Murthy has been adjudged as insolvent. The Official Receiver has taken possession of the property on 30-11-1974 as per the order of the Court. Under Section 28(2) the property has vested in the Official Receiver and he has become the legal owner of the property. By operation of law the insolvent has lost all rights, title and interest in the property as it is vested in the Official Receiver.
Though the insolvent under Section 67 of the Provincial Insolvency Act is entitled to surplus of the sale proceeds of the property that may remain after all the creditors are paid off it is not a legal right but is a mere hope or expectation. This is well settled by the decisions of the Nagpur High Court in Shyam Kali Bai's case (supra) and of the Allahabad High Court in Raghubir Singh v. Balkishen AIR 1952 All. 328.
In the latter decision it was held that Section 67 gives him only a contingent right in the surplus left after satisfaction of the debt but so long as the debt has not been completely discharged no question of his retaining any interest in the property can arise. The property for the purpose of payment of debts vests completely in the Official Receiver to the complete divestment of the debtor.
8. In our view on the sale of the insolvent's property effected by the Official Receiver no capital gain arises in the hands of the Official Receiver. He was only discharging the statutory functions vested in him under the Provincial Insolvency Act. Once he takes over the property of the insolvent as per the orders of the Court the property vests in him which he sells for the benefit of the creditors and the sale proceeds are distributed amongst the creditors. Thus, no capital gain would arise in his hands. Even presuming that capital gain would arise in his hands there is no cost in respect of the property sold so far as the Official Receiver is concerned as he has neither acquired any property nor paid any price for it. What is contemplated in Section 48(ii) of the Act, is an asset in the acquisition of which it is possible to envisage the cost. As there is no cost of the asset no capital gain would be leviable. Section 49 of the Act also has no application to the case of an Official Receiver as the vesting in him does not come in the modes of acquisition provided in Section 49. Hence, the cost to the previous owner cannot be deemed as the cost of asset in the hands of the Official Receiver. Thus, no capital gain is leviable in the instant case. In this connection we may refer to the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, wherein it was held that what is contemplated by Section 48(ii) is an asset in the acquisition of which it is possible to envisage the cost and none of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost can be conceived. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section for the levy of capital gains tax. In that case it was held that transfer of goodwill initially generated in a new business does not give rise to a capital gain for the purpose of income-tax. The decision of the Calcutta High Court in the matter of In re. Official Assignee for Bengal [1937] 5 ITR 233 is distinguishable and it has no application to a case of capital gain.
Section 160(1)(iii) also has no application as the Official Receiver has not received any income for the benefit of the insolvent and so he cannot be treated as representative-assessee. Thus, in our view on the sale of the insolvent's property by the Official Receiver no capital gain tax would be leviable. Thus, we cancel the orders of the lower authorities in levying capital gains tax, on the sale of the land by the Official Receiver.
9. We also find force in the alternative contention of the assessee. In our view no profit or gain arises on the sale of agricultural land in view of the decision of the Bombay High Court in the case of Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO [1981] 128 ITR 87. For deciding whether any agricultural operations have been carried on the land the matter should go back to the ITO.