Sec. 54 of Income Tax Act - PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE. - agreement of sale for 1.32 crores in the year 2002 - sale effected in year 2004 due to pending of disputes - in the mean while in the year 2003 a new house was purchased by the income of selling of old house - exemption - as such not shown in income tax returns as not taxable - A.O. assessed tax as the sale was effected in the year 2004 but not in the year 2003 or prior to it - discarded the agreement of sale - Apex court held that In our opinion, such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation we can say that some right, in respect of the said property, belonging to the appellants had been extinguished and some right had been created in favour of the vendee/transferee, when the agreement to sell had been executed. Thus, a right in respect of the capital asset, viz. the property in question had been transferred by the appellants in favour of the vendee/transferee on 27th December, 2002. The sale deed could not be executed for the reason that the appellants had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated. In view of the aforestated peculiar facts of the case and looking at the definition of the term ‘transfer” as defined under Section 2(47) of the Act, we are of the view that the appellants were entitled to relief under Section 54 of the Act in respect of the long term capital gain which they had earned in pursuance of transfer of their residential property being House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of
a new asset/residential house. The appeals are, therefore, allowed with no order as to costs. The impugned judgments are quashed and set aside and the Authorities are directed to re-assess the income of the appellants for the Assessment Year 2005-2006, after taking into account the fact that the appellants were entitled to the relief, subject to fulfilment of other conditions.=
Upon transfer of the house property, long term capital gain had arisen, but
as the appellants had purchased a new residential house and the amount of
the capital gain had been used for purchase of the said new asset,
believing that the long term capital gain was not chargeable to income tax
as per the provisions of Section 54 of the Income Tax Act, 1961
(hereinafter referred to as ‘the Act’), the appellants did not disclose the
said long term capital gain in their return of income filed for the
Assessment Year 2005-2006.
In the assessment proceedings for the Assessment Year 2005-2006 under
the Act, the Assessing Officer was of the view that the appellants were not
entitled to any benefit under Section 54 of the Act for the reason that the
transfer of the original asset, i.e. the residential house, had been
effected on 24th September, 2004 whereas the appellants had purchased
another residential house on 30th April, 2003 i.e. more than one year prior
to the purchase of the new asset and therefore, the appellants were made
liable to pay income tax on the capital gain under Section 45 of the Act.
“54. PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE.
(1) Subject to the provisions of sub-section (2), where in the case of an
assessee being an individual or a Hindu undivided family, the capital gain
arises from the transfer of a long-term capital asset, being buildings or
lands appurtenant thereto, and being a residential house, the income of
which is chargeable under the head “Income from house property” (hereafter
in this section referred to as the original asset), and the assessee has
within a period of one year before or two years after the date on which the
transfer took place purchased, or has within a period of three years after
that date constructed, a residential house, then, instead of the capital
gain being charged to income-tax as income of the previous year in which
the transfer took place, it shall be dealt with in accordance with the
following provisions of this section, that is to say, –
(i) If the amount of the capital gain is greater than the cost of the
residential house so purchased or constructed (hereafter in this section
referred to as the new asset), the difference between the amount of the
capital gain and the cost of the new asset shall be charged under section
45 as the income of the previous year; and for the purpose of computing in
respect of the new asset any capital gain arising from its transfer within
a period of three years of its purchase or construction, as the case may
be, the cost shall be nil; or
(ii) If the amount of the capital gain is equal to or less than the cost of
the new asset, the capital gain shall not be charged under section 45; and
for the purpose of computing in respect of the new asset any capital gain
arising from its transfer within a period of three years of its purchase or
construction, as the case may be, the cost shall be reduced by the amount
of the capital gain.”
Upon perusal of Section 54(1) of the Act, it is very clear that relief
under Section 54 of the Act in respect of the long term capital gain can be
availed only if a residential house i.e. a new asset is purchased within
one year before or within two years after the date on which the transfer of
the residential house/original asset takes place. In the instant case, the
residential house had been transferred by the appellants-assessees on 24th
September, 2004 whereas they had purchased another house on 30th April,
2003. Thus, the new asset was purchased more than one year prior to the
date on which the transfer in respect of the residential house had been
effected.
For the aforestated reasons, the Assessing Officer did not grant benefit
under Section 54 of the Act and therefore, the assessment order had been
challenged by the appellants before the Commissioner of Income Tax
(Appeals).=
Consequences of execution of the agreement to sell are also very clear and
they are to the effect that the appellants could not have sold the property
to someone else. In practical life, there are events when a person, even
after executing an agreement to sell an immoveable property in favour of
one person, tries to sell the property to another. In our opinion, such an
act would not be in accordance with law because once an agreement to sell
is executed in favour of one person, the said person gets a right to get
the property transferred in his favour by filing a suit for specific
performance and therefore, without hesitation we can say that some right,
in respect of the said property, belonging to the appellants had been
extinguished and some right had been created in favour of the
vendee/transferee, when the agreement to sell had been executed.
Thus, a right in respect of the capital asset, viz. the property in
question had been transferred by the appellants in favour of the
vendee/transferee on 27th December, 2002. The sale deed could not be
executed for the reason that the appellants had been prevented from dealing
with the residential house by an order of a competent court, which they
could not have violated.
In view of the aforestated peculiar facts of the case and looking at the
definition of the term ‘transfer” as defined under Section 2(47) of the
Act, we are of the view that the appellants were entitled to relief under
Section 54 of the Act in respect of the long term capital gain which they
had earned in pursuance of transfer of their residential property being
House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of
a new asset/residential house.
The appeals are, therefore, allowed with no order as to costs. The
impugned judgments are quashed and set aside and the Authorities are
directed to re-assess the income of the appellants for the Assessment Year
2005-2006, after taking into account the fact that the appellants were
entitled to the relief, subject to fulfilment of other conditions.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL Nos.5899-5900 OF 2014
(Arising out of SLP (c) Nos.16958-59 of 2013)
Sh. Sanjeev Lal Etc. Etc. Appellants
Versus
Commissioner of Income Tax, Chandigarh & Anr. Respondents
JUDGMENT
ANIL R. DAVE, J.
Leave granted.
As facts of both the appeals are similar, at the request of the learned
counsel appearing for the parties, both the appeals had been heard
together.
Being aggrieved by the judgments delivered by the High Court of Punjab and
Haryana in ITA Nos. 153 & 154 of 2012 dated 29th January, 2013, these
appeals have been preferred by the assessees.
The facts giving rise to the present litigation, in a nutshell, are as
under:
A residential house, being House No. 267 situated in Sector 9-C,
Chandigarh, was a self acquired property of Shri Amrit Lal, who had
executed a Will whereby life interest in the aforestated house had been
given to his wife and upon death of his wife, the house was to be given in
favour of two sons of his pre-deceased son - late Shri Moti Lal and his
widow. One of the above stated grand children and the daughter-in-law of
Shri Amrit Lal are the appellants in these appeals. Upon death of Shri
Amrit Lal, possession of the house was given to his widow. His widow, Smt.
Shakuntla Devi expired on 29th August, 1993. Upon death of Smt. Shakuntla
Devi, as per the Will, the ownership in respect of the house in question
came to be vested in the present appellants and another grandchild of late
Shri Amrit Lal.
The appellants had decided to sell the house and with that intention they
had entered into an agreement to sell the house with Shri Sandeep Talwar on
27th December, 2002 for a consideration of Rs. 1.32 crores. Out of the
said amount, a sum of Rs.15 lakhs had been received by the appellants by
way of earnest money. As the appellants had decided to sell the house in
question, they had also decided to purchase another residential house
bearing house No. 528 in Sector 8, Chandigarh so that the sale proceeds,
including capital gain, can be used for purchase of the aforestated House
No. 528. The said house was purchased on 30th April, 2003 i.e. well within
one year from the date on which the agreement to sell had been entered into
by the appellants.
The validity of the Will had been questioned by Shri Ranjeet Lal, who was
another son of the deceased testator Shri Amrit Lal, by filing a civil
suit, wherein the trial court, by an interim order had restrained the
appellants from dealing with the house property. During the pendency of
the suit, Shri Ranjeet Lal expired on 2nd December, 2000 leaving behind him
no legal heirs. The suit filed by him had been dismissed in May, 2004 as
there was no representation on his behalf in the suit.
Due to the interim relief granted in the above stated suit, the appellants
could not execute the sale deed till the suit came to be dismissed and the
validity of the Will was upheld. Thus, the appellants executed the sale
deed in 2004 and the same was registered on 24th September, 2004.
Upon transfer of the house property, long term capital gain had arisen, but
as the appellants had purchased a new residential house and the amount of
the capital gain had been used for purchase of the said new asset,
believing that the long term capital gain was not chargeable to income tax
as per the provisions of Section 54 of the Income Tax Act, 1961
(hereinafter referred to as ‘the Act’), the appellants did not disclose the
said long term capital gain in their return of income filed for the
Assessment Year 2005-2006.
In the assessment proceedings for the Assessment Year 2005-2006 under
the Act, the Assessing Officer was of the view that the appellants were not
entitled to any benefit under Section 54 of the Act for the reason that the
transfer of the original asset, i.e. the residential house, had been
effected on 24th September, 2004 whereas the appellants had purchased
another residential house on 30th April, 2003 i.e. more than one year prior
to the purchase of the new asset and therefore, the appellants were made
liable to pay income tax on the capital gain under Section 45 of the Act.
Relevant portion of Section 54 of the Act reads as under:
“54. PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE.
(1) Subject to the provisions of sub-section (2), where in the case of an
assessee being an individual or a Hindu undivided family, the capital gain
arises from the transfer of a long-term capital asset, being buildings or
lands appurtenant thereto, and being a residential house, the income of
which is chargeable under the head “Income from house property” (hereafter
in this section referred to as the original asset), and the assessee has
within a period of one year before or two years after the date on which the
transfer took place purchased, or has within a period of three years after
that date constructed, a residential house, then, instead of the capital
gain being charged to income-tax as income of the previous year in which
the transfer took place, it shall be dealt with in accordance with the
following provisions of this section, that is to say, –
(i) If the amount of the capital gain is greater than the cost of the
residential house so purchased or constructed (hereafter in this section
referred to as the new asset), the difference between the amount of the
capital gain and the cost of the new asset shall be charged under section
45 as the income of the previous year; and for the purpose of computing in
respect of the new asset any capital gain arising from its transfer within
a period of three years of its purchase or construction, as the case may
be, the cost shall be nil; or
(ii) If the amount of the capital gain is equal to or less than the cost of
the new asset, the capital gain shall not be charged under section 45; and
for the purpose of computing in respect of the new asset any capital gain
arising from its transfer within a period of three years of its purchase or
construction, as the case may be, the cost shall be reduced by the amount
of the capital gain.”
Upon perusal of Section 54(1) of the Act, it is very clear that relief
under Section 54 of the Act in respect of the long term capital gain can be
availed only if a residential house i.e. a new asset is purchased within
one year before or within two years after the date on which the transfer of
the residential house/original asset takes place. In the instant case, the
residential house had been transferred by the appellants-assessees on 24th
September, 2004 whereas they had purchased another house on 30th April,
2003. Thus, the new asset was purchased more than one year prior to the
date on which the transfer in respect of the residential house had been
effected.
For the aforestated reasons, the Assessing Officer did not grant benefit
under Section 54 of the Act and therefore, the assessment order had been
challenged by the appellants before the Commissioner of Income Tax
(Appeals). The appeal, so far as it pertained to the benefit under Section
54 of the Act was concerned, had been dismissed and therefore, the
appellants had approached the Income Tax Appellate Tribunal. The Tribunal
also upheld the orders passed by the Commissioner and therefore, the
appellants had approached the High Court by filing appeals under Section
260 A of the Act, which were dismissed by virtue of the impugned judgments.
Thus, the appellants are in appeal before this Court.
The learned counsel appearing for the appellants had mainly submitted that
the authorities below and the High Court had committed an error in
interpretation of Section 54 of the Act. According to him, though the
property in question had been apparently transferred on 24th September,
2004 and the new asset i.e. new residential house had been purchased on
30th April, 2003 i.e. more than one year prior to the date on which the
property had been sold, the authorities ought to have considered the date
on which the agreement to sell had been effected by the appellants for
transfer of the property in question as the date of transfer of the
house/original asset. The said agreement had been signed on 27th December,
2002 i.e. which was well within the period prescribed under Section 54 of
the Act. If one considers 27th December, 2002 as the date on which the
property had been transferred or that a right in the property had been
transferred, the appellants would become entitled to the benefit under
Section 54 of the Act.
So as to substantiate his submissions, learned counsel for the appellants
had submitted that the appellants wanted to transfer the property in
question and therefore, they had entered into an agreement to sell on 27th
December, 2002, but unfortunately they could not execute the sale deed on
account of the litigation which was pending in respect of the property in
question and due to an order restraining the appellants from dealing with
the property. In view of the order passed by the civil court, the
appellants could not execute the sale deed and the delay was only on
account of a factor which was beyond the control of the appellants.
According to the learned counsel appearing for the appellants, the date on
which the agreement to sell had been executed ought to have been treated as
the date of transfer. He had referred to the provisions of Section 2(47)
of the Act which defines the term “transfer”. The term “transfer” has been
given an inclusive definition and according to the said definition,
whenever there is an extinction of any right in respect of a capital asset,
such an extinction would mean transfer of the property. He had, therefore,
submitted that by virtue of the agreement to sell, a right had been created
in favour of the buyer of the property and certain right in respect of the
residential house, which the appellants had, had been extinguished and
therefore, 27th December, 2002 ought to have been considered as the date
of transfer.
The learned counsel had also relied upon certain judgments delivered by
different High Courts to support his submissions.
On the other hand, the learned counsel appearing for the Revenue
Authorities had vehemently submitted that by mere execution of an agreement
to sell, right of the vendor/transferor in respect of the property cannot
be extinguished. According to him, no sale of the property in question had
been effected, when the agreement to sell had been executed on 27th
December, 2002. According to him, the appellants had sold the original
asset on 24th September, 2004 and had purchased a new house/new asset on
30th April, 2003 i.e. one year before sale of the original asset and
therefore, the benefit under Section 54 of the Act could not have been
availed by the appellants and therefore, the Revenue Authorities as well as
the High Court were absolutely correct by not granting the benefit claimed
by the appellants.
We had heard the learned counsel at length and have also considered the
relevant provisions of the Act and the judgments cited by the learned
counsel.
Upon plain reading of Section 54 of the Act, it is very clear that so as to
avail the benefit under Section 54 of the Act, one must purchase a
residential house/new asset within one year prior or two years after the
date on which transfer of the residential house in respect of which the
long term capital gain had arisen, has taken place.
In the instant case, the following three dates are not in dispute. The
residential house was transferred by the appellants and the sale deed had
been registered on 24th September, 2004. The sale deed had been executed
in pursuance of an agreement to sell which had been executed on 27th
December, 2002 and out of the total consideration of Rs.1.32 crores, Rs. 15
lakhs had been received by the appellants by way of earnest money when the
agreement to sell had been executed and a new residential house/new asset
had been purchased by the appellants on 30th April, 2003. It is also not
in dispute that there was a litigation wherein the Will of late Shri Amrit
Lal had been challenged by his son and the appellants had been restrained
from dealing with the house in question by a judicial order and the said
judicial order had been vacated only in the month of May, 2004 and
therefore, the sale deed could not be executed before the said order was
vacated though the agreement to sell had been executed on 27th September,
2002.
If one considers the date on which it was decided to sell the property,
i.e. 27th December, 2002 as the date of transfer or sale, it cannot be
disputed that the appellants would be entitled to the benefit under the
provisions of Section 54 of the Act because long term capital gain earned
by the appellants had been used for purchase of a new asset/residential
house on 30th April, 2003 i.e. well within one year from the date of
transfer of the house which resulted into long term capital gain.
The question to be considered by this Court is whether the agreement to
sell which had been executed on 27th December, 2002 can be considered as a
date on which the property i.e. the residential house had been transferred.
In normal circumstances by executing an agreement to sell in respect of an
immoveable property, a right in personam is created in favour of the
transferee/vendee. When such a right is created in favour of the vendee,
the vendor is restrained from selling the said property to someone else
because the vendee, in whose favour the right in personam is created, has a
legitimate right to enforce specific performance of the agreement, if the
vendor, for some reason is not executing the sale deed. Thus, by virtue of
the agreement to sell some right is given by the vendor to the vendee. The
question is whether the entire property can be said to have been sold at
the time when an agreement to sell is entered into. In normal
circumstances, the aforestated question has to be answered in the negative.
However, looking at the provisions of Section 2(47) of the Act, which
defines the word “transfer” in relation to a capital asset, one can say
that if a right in the property is extinguished by execution of an
agreement to sell, the capital asset can be deemed to have been
transferred. Relevant portion of Section 2(47), defining the word
“transfer” is as under:
“2(47) “transfer”, in relation to a capital asset, includes,-
(i)…………….
(ii) the extinguishment of any rights therein; or
………………………………”
Now in the light of definition of “transfer” as defined under Section
2(47) of the Act, it is clear that when any right in respect of any capital
asset is extinguished and that right is transferred to someone, it would
amount to transfer of a capital asset. In the light of the aforestated
definition, let us look at the facts of the present case where an agreement
to sell in respect of a capital asset had been executed on 27th December,
2002 for transferring the residential house/original asset in question and
a sum of Rs. 15 lakhs had been received by way of earnest money. It is
also not in dispute that the sale deed could not be executed because of
pendency of the litigation between Shri Ranjeet Lal on one hand and the
appellants on the other as Shri Ranjeet Lal had challenged the validity of
the Will under which the property had devolved upon the appellants. By
virtue of an order passed in the suit filed by Shri Ranjeet Lal, the
appellants were restrained from dealing with the said residential house and
a law-abiding citizen cannot be expected to violate the direction of a
court by executing a sale deed in favour of a third party while being
restrained from doing so. In the circumstances, for a justifiable reason,
which was not within the control of the appellants, they could not execute
the sale deed and the sale deed had been registered only on 24th September,
2004, after the suit filed by Shri Ranjeet Lal, challenging the validity of
the Will, had been dismissed. In the light of the aforestated facts and in
view of the definition of the term “transfer”, one can come to a conclusion
that some right in respect of the capital asset in question had been
transferred in favour of the vendee and therefore, some right which the
appellants had, in respect of the capital asset in question, had been
extinguished because after execution of the agreement to sell it was not
open to the appellants to sell the property to someone else in accordance
with law. A right in personam had been created in favour of the vendee, in
whose favour the agreement to sell had been executed and who had also
paid Rs.15 lakhs by way of earnest money. No doubt, such contractual right
can be surrendered or neutralized by the parties through subsequent
contract or conduct leading to no transfer of the property to the proposed
vendee but that is not the case at hand.
In addition to the fact that the term “transfer” has been defined under
Section 2(47) of the Act, even if looked at the provisions of Section 54 of
the Act which gives relief to a person who has transferred his one
residential house and is purchasing another residential house either before
one year of the transfer or even two years after the transfer, the
intention of the Legislature is to give him relief in the matter of payment
of tax on the long term capital gain. If a person, who gets some excess
amount upon transfer of his old residential premises and thereafter
purchases or constructs a new premises within the time stipulated under
Section 54 of the Act, the Legislature does not want him to be burdened
with tax on the long term capital gain and therefore, relief has been given
to him in respect of paying income tax on the long term capital gain. The
intention of the Legislature or the purpose with which the said provision
has been incorporated in the Act, is also very clear that the assessee
should be given some relief. Though it has been very often said that
common sense is a stranger and an incompatible partner to the Income Tax
Act and it is also said that equity and tax are strangers to each other,
still this Court has often observed that purposive interpretation should be
given to the provisions of the Act. In the case of Oxford University Press
v. Commissioner of Income Tax [(2001) 3 SCC 359] this Court has observed
that a purposive interpretation of the provisions of the Act should be
given while considering a claim for exemption from tax. It has also been
said that harmonious construction of the provisions which subserve the
object and purpose should also be made while construing any of the
provisions of the Act and more particularly when one is concerned with
exemption from payment of tax. Considering the aforestated observations
and the principles with regard to the interpretation of Statute pertaining
to the tax laws, one can very well interpret the provisions of Section 54
read with Section 2(47) of the Act, i.e. definition of “transfer”, which
would enable the appellants to get the benefit under Section 54 of the Act.
Consequences of execution of the agreement to sell are also very clear and
they are to the effect that the appellants could not have sold the property
to someone else. In practical life, there are events when a person, even
after executing an agreement to sell an immoveable property in favour of
one person, tries to sell the property to another. In our opinion, such an
act would not be in accordance with law because once an agreement to sell
is executed in favour of one person, the said person gets a right to get
the property transferred in his favour by filing a suit for specific
performance and therefore, without hesitation we can say that some right,
in respect of the said property, belonging to the appellants had been
extinguished and some right had been created in favour of the
vendee/transferee, when the agreement to sell had been executed.
Thus, a right in respect of the capital asset, viz. the property in
question had been transferred by the appellants in favour of the
vendee/transferee on 27th December, 2002. The sale deed could not be
executed for the reason that the appellants had been prevented from dealing
with the residential house by an order of a competent court, which they
could not have violated.
In view of the aforestated peculiar facts of the case and looking at the
definition of the term ‘transfer” as defined under Section 2(47) of the
Act, we are of the view that the appellants were entitled to relief under
Section 54 of the Act in respect of the long term capital gain which they
had earned in pursuance of transfer of their residential property being
House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of
a new asset/residential house.
The appeals are, therefore, allowed with no order as to costs. The
impugned judgments are quashed and set aside and the Authorities are
directed to re-assess the income of the appellants for the Assessment Year
2005-2006, after taking into account the fact that the appellants were
entitled to the relief, subject to fulfilment of other conditions.
…………………….J.
(ANIL R. DAVE)
……………………..J.
(SHIVA KIRTI SINGH)
NEW DELHI
JULY 01, 2014.
a new asset/residential house. The appeals are, therefore, allowed with no order as to costs. The impugned judgments are quashed and set aside and the Authorities are directed to re-assess the income of the appellants for the Assessment Year 2005-2006, after taking into account the fact that the appellants were entitled to the relief, subject to fulfilment of other conditions.=
Upon transfer of the house property, long term capital gain had arisen, but
as the appellants had purchased a new residential house and the amount of
the capital gain had been used for purchase of the said new asset,
believing that the long term capital gain was not chargeable to income tax
as per the provisions of Section 54 of the Income Tax Act, 1961
(hereinafter referred to as ‘the Act’), the appellants did not disclose the
said long term capital gain in their return of income filed for the
Assessment Year 2005-2006.
In the assessment proceedings for the Assessment Year 2005-2006 under
the Act, the Assessing Officer was of the view that the appellants were not
entitled to any benefit under Section 54 of the Act for the reason that the
transfer of the original asset, i.e. the residential house, had been
effected on 24th September, 2004 whereas the appellants had purchased
another residential house on 30th April, 2003 i.e. more than one year prior
to the purchase of the new asset and therefore, the appellants were made
liable to pay income tax on the capital gain under Section 45 of the Act.
“54. PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE.
(1) Subject to the provisions of sub-section (2), where in the case of an
assessee being an individual or a Hindu undivided family, the capital gain
arises from the transfer of a long-term capital asset, being buildings or
lands appurtenant thereto, and being a residential house, the income of
which is chargeable under the head “Income from house property” (hereafter
in this section referred to as the original asset), and the assessee has
within a period of one year before or two years after the date on which the
transfer took place purchased, or has within a period of three years after
that date constructed, a residential house, then, instead of the capital
gain being charged to income-tax as income of the previous year in which
the transfer took place, it shall be dealt with in accordance with the
following provisions of this section, that is to say, –
(i) If the amount of the capital gain is greater than the cost of the
residential house so purchased or constructed (hereafter in this section
referred to as the new asset), the difference between the amount of the
capital gain and the cost of the new asset shall be charged under section
45 as the income of the previous year; and for the purpose of computing in
respect of the new asset any capital gain arising from its transfer within
a period of three years of its purchase or construction, as the case may
be, the cost shall be nil; or
(ii) If the amount of the capital gain is equal to or less than the cost of
the new asset, the capital gain shall not be charged under section 45; and
for the purpose of computing in respect of the new asset any capital gain
arising from its transfer within a period of three years of its purchase or
construction, as the case may be, the cost shall be reduced by the amount
of the capital gain.”
Upon perusal of Section 54(1) of the Act, it is very clear that relief
under Section 54 of the Act in respect of the long term capital gain can be
availed only if a residential house i.e. a new asset is purchased within
one year before or within two years after the date on which the transfer of
the residential house/original asset takes place. In the instant case, the
residential house had been transferred by the appellants-assessees on 24th
September, 2004 whereas they had purchased another house on 30th April,
2003. Thus, the new asset was purchased more than one year prior to the
date on which the transfer in respect of the residential house had been
effected.
For the aforestated reasons, the Assessing Officer did not grant benefit
under Section 54 of the Act and therefore, the assessment order had been
challenged by the appellants before the Commissioner of Income Tax
(Appeals).=
Consequences of execution of the agreement to sell are also very clear and
they are to the effect that the appellants could not have sold the property
to someone else. In practical life, there are events when a person, even
after executing an agreement to sell an immoveable property in favour of
one person, tries to sell the property to another. In our opinion, such an
act would not be in accordance with law because once an agreement to sell
is executed in favour of one person, the said person gets a right to get
the property transferred in his favour by filing a suit for specific
performance and therefore, without hesitation we can say that some right,
in respect of the said property, belonging to the appellants had been
extinguished and some right had been created in favour of the
vendee/transferee, when the agreement to sell had been executed.
Thus, a right in respect of the capital asset, viz. the property in
question had been transferred by the appellants in favour of the
vendee/transferee on 27th December, 2002. The sale deed could not be
executed for the reason that the appellants had been prevented from dealing
with the residential house by an order of a competent court, which they
could not have violated.
In view of the aforestated peculiar facts of the case and looking at the
definition of the term ‘transfer” as defined under Section 2(47) of the
Act, we are of the view that the appellants were entitled to relief under
Section 54 of the Act in respect of the long term capital gain which they
had earned in pursuance of transfer of their residential property being
House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of
a new asset/residential house.
The appeals are, therefore, allowed with no order as to costs. The
impugned judgments are quashed and set aside and the Authorities are
directed to re-assess the income of the appellants for the Assessment Year
2005-2006, after taking into account the fact that the appellants were
entitled to the relief, subject to fulfilment of other conditions.
2014 – July. Part – http://judis.nic.in/supremecourt/filename=41729
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL Nos.5899-5900 OF 2014
(Arising out of SLP (c) Nos.16958-59 of 2013)
Sh. Sanjeev Lal Etc. Etc. Appellants
Versus
Commissioner of Income Tax, Chandigarh & Anr. Respondents
JUDGMENT
ANIL R. DAVE, J.
Leave granted.
As facts of both the appeals are similar, at the request of the learned
counsel appearing for the parties, both the appeals had been heard
together.
Being aggrieved by the judgments delivered by the High Court of Punjab and
Haryana in ITA Nos. 153 & 154 of 2012 dated 29th January, 2013, these
appeals have been preferred by the assessees.
The facts giving rise to the present litigation, in a nutshell, are as
under:
A residential house, being House No. 267 situated in Sector 9-C,
Chandigarh, was a self acquired property of Shri Amrit Lal, who had
executed a Will whereby life interest in the aforestated house had been
given to his wife and upon death of his wife, the house was to be given in
favour of two sons of his pre-deceased son - late Shri Moti Lal and his
widow. One of the above stated grand children and the daughter-in-law of
Shri Amrit Lal are the appellants in these appeals. Upon death of Shri
Amrit Lal, possession of the house was given to his widow. His widow, Smt.
Shakuntla Devi expired on 29th August, 1993. Upon death of Smt. Shakuntla
Devi, as per the Will, the ownership in respect of the house in question
came to be vested in the present appellants and another grandchild of late
Shri Amrit Lal.
The appellants had decided to sell the house and with that intention they
had entered into an agreement to sell the house with Shri Sandeep Talwar on
27th December, 2002 for a consideration of Rs. 1.32 crores. Out of the
said amount, a sum of Rs.15 lakhs had been received by the appellants by
way of earnest money. As the appellants had decided to sell the house in
question, they had also decided to purchase another residential house
bearing house No. 528 in Sector 8, Chandigarh so that the sale proceeds,
including capital gain, can be used for purchase of the aforestated House
No. 528. The said house was purchased on 30th April, 2003 i.e. well within
one year from the date on which the agreement to sell had been entered into
by the appellants.
The validity of the Will had been questioned by Shri Ranjeet Lal, who was
another son of the deceased testator Shri Amrit Lal, by filing a civil
suit, wherein the trial court, by an interim order had restrained the
appellants from dealing with the house property. During the pendency of
the suit, Shri Ranjeet Lal expired on 2nd December, 2000 leaving behind him
no legal heirs. The suit filed by him had been dismissed in May, 2004 as
there was no representation on his behalf in the suit.
Due to the interim relief granted in the above stated suit, the appellants
could not execute the sale deed till the suit came to be dismissed and the
validity of the Will was upheld. Thus, the appellants executed the sale
deed in 2004 and the same was registered on 24th September, 2004.
Upon transfer of the house property, long term capital gain had arisen, but
as the appellants had purchased a new residential house and the amount of
the capital gain had been used for purchase of the said new asset,
believing that the long term capital gain was not chargeable to income tax
as per the provisions of Section 54 of the Income Tax Act, 1961
(hereinafter referred to as ‘the Act’), the appellants did not disclose the
said long term capital gain in their return of income filed for the
Assessment Year 2005-2006.
In the assessment proceedings for the Assessment Year 2005-2006 under
the Act, the Assessing Officer was of the view that the appellants were not
entitled to any benefit under Section 54 of the Act for the reason that the
transfer of the original asset, i.e. the residential house, had been
effected on 24th September, 2004 whereas the appellants had purchased
another residential house on 30th April, 2003 i.e. more than one year prior
to the purchase of the new asset and therefore, the appellants were made
liable to pay income tax on the capital gain under Section 45 of the Act.
Relevant portion of Section 54 of the Act reads as under:
“54. PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE.
(1) Subject to the provisions of sub-section (2), where in the case of an
assessee being an individual or a Hindu undivided family, the capital gain
arises from the transfer of a long-term capital asset, being buildings or
lands appurtenant thereto, and being a residential house, the income of
which is chargeable under the head “Income from house property” (hereafter
in this section referred to as the original asset), and the assessee has
within a period of one year before or two years after the date on which the
transfer took place purchased, or has within a period of three years after
that date constructed, a residential house, then, instead of the capital
gain being charged to income-tax as income of the previous year in which
the transfer took place, it shall be dealt with in accordance with the
following provisions of this section, that is to say, –
(i) If the amount of the capital gain is greater than the cost of the
residential house so purchased or constructed (hereafter in this section
referred to as the new asset), the difference between the amount of the
capital gain and the cost of the new asset shall be charged under section
45 as the income of the previous year; and for the purpose of computing in
respect of the new asset any capital gain arising from its transfer within
a period of three years of its purchase or construction, as the case may
be, the cost shall be nil; or
(ii) If the amount of the capital gain is equal to or less than the cost of
the new asset, the capital gain shall not be charged under section 45; and
for the purpose of computing in respect of the new asset any capital gain
arising from its transfer within a period of three years of its purchase or
construction, as the case may be, the cost shall be reduced by the amount
of the capital gain.”
Upon perusal of Section 54(1) of the Act, it is very clear that relief
under Section 54 of the Act in respect of the long term capital gain can be
availed only if a residential house i.e. a new asset is purchased within
one year before or within two years after the date on which the transfer of
the residential house/original asset takes place. In the instant case, the
residential house had been transferred by the appellants-assessees on 24th
September, 2004 whereas they had purchased another house on 30th April,
2003. Thus, the new asset was purchased more than one year prior to the
date on which the transfer in respect of the residential house had been
effected.
For the aforestated reasons, the Assessing Officer did not grant benefit
under Section 54 of the Act and therefore, the assessment order had been
challenged by the appellants before the Commissioner of Income Tax
(Appeals). The appeal, so far as it pertained to the benefit under Section
54 of the Act was concerned, had been dismissed and therefore, the
appellants had approached the Income Tax Appellate Tribunal. The Tribunal
also upheld the orders passed by the Commissioner and therefore, the
appellants had approached the High Court by filing appeals under Section
260 A of the Act, which were dismissed by virtue of the impugned judgments.
Thus, the appellants are in appeal before this Court.
The learned counsel appearing for the appellants had mainly submitted that
the authorities below and the High Court had committed an error in
interpretation of Section 54 of the Act. According to him, though the
property in question had been apparently transferred on 24th September,
2004 and the new asset i.e. new residential house had been purchased on
30th April, 2003 i.e. more than one year prior to the date on which the
property had been sold, the authorities ought to have considered the date
on which the agreement to sell had been effected by the appellants for
transfer of the property in question as the date of transfer of the
house/original asset. The said agreement had been signed on 27th December,
2002 i.e. which was well within the period prescribed under Section 54 of
the Act. If one considers 27th December, 2002 as the date on which the
property had been transferred or that a right in the property had been
transferred, the appellants would become entitled to the benefit under
Section 54 of the Act.
So as to substantiate his submissions, learned counsel for the appellants
had submitted that the appellants wanted to transfer the property in
question and therefore, they had entered into an agreement to sell on 27th
December, 2002, but unfortunately they could not execute the sale deed on
account of the litigation which was pending in respect of the property in
question and due to an order restraining the appellants from dealing with
the property. In view of the order passed by the civil court, the
appellants could not execute the sale deed and the delay was only on
account of a factor which was beyond the control of the appellants.
According to the learned counsel appearing for the appellants, the date on
which the agreement to sell had been executed ought to have been treated as
the date of transfer. He had referred to the provisions of Section 2(47)
of the Act which defines the term “transfer”. The term “transfer” has been
given an inclusive definition and according to the said definition,
whenever there is an extinction of any right in respect of a capital asset,
such an extinction would mean transfer of the property. He had, therefore,
submitted that by virtue of the agreement to sell, a right had been created
in favour of the buyer of the property and certain right in respect of the
residential house, which the appellants had, had been extinguished and
therefore, 27th December, 2002 ought to have been considered as the date
of transfer.
The learned counsel had also relied upon certain judgments delivered by
different High Courts to support his submissions.
On the other hand, the learned counsel appearing for the Revenue
Authorities had vehemently submitted that by mere execution of an agreement
to sell, right of the vendor/transferor in respect of the property cannot
be extinguished. According to him, no sale of the property in question had
been effected, when the agreement to sell had been executed on 27th
December, 2002. According to him, the appellants had sold the original
asset on 24th September, 2004 and had purchased a new house/new asset on
30th April, 2003 i.e. one year before sale of the original asset and
therefore, the benefit under Section 54 of the Act could not have been
availed by the appellants and therefore, the Revenue Authorities as well as
the High Court were absolutely correct by not granting the benefit claimed
by the appellants.
We had heard the learned counsel at length and have also considered the
relevant provisions of the Act and the judgments cited by the learned
counsel.
Upon plain reading of Section 54 of the Act, it is very clear that so as to
avail the benefit under Section 54 of the Act, one must purchase a
residential house/new asset within one year prior or two years after the
date on which transfer of the residential house in respect of which the
long term capital gain had arisen, has taken place.
In the instant case, the following three dates are not in dispute. The
residential house was transferred by the appellants and the sale deed had
been registered on 24th September, 2004. The sale deed had been executed
in pursuance of an agreement to sell which had been executed on 27th
December, 2002 and out of the total consideration of Rs.1.32 crores, Rs. 15
lakhs had been received by the appellants by way of earnest money when the
agreement to sell had been executed and a new residential house/new asset
had been purchased by the appellants on 30th April, 2003. It is also not
in dispute that there was a litigation wherein the Will of late Shri Amrit
Lal had been challenged by his son and the appellants had been restrained
from dealing with the house in question by a judicial order and the said
judicial order had been vacated only in the month of May, 2004 and
therefore, the sale deed could not be executed before the said order was
vacated though the agreement to sell had been executed on 27th September,
2002.
If one considers the date on which it was decided to sell the property,
i.e. 27th December, 2002 as the date of transfer or sale, it cannot be
disputed that the appellants would be entitled to the benefit under the
provisions of Section 54 of the Act because long term capital gain earned
by the appellants had been used for purchase of a new asset/residential
house on 30th April, 2003 i.e. well within one year from the date of
transfer of the house which resulted into long term capital gain.
The question to be considered by this Court is whether the agreement to
sell which had been executed on 27th December, 2002 can be considered as a
date on which the property i.e. the residential house had been transferred.
In normal circumstances by executing an agreement to sell in respect of an
immoveable property, a right in personam is created in favour of the
transferee/vendee. When such a right is created in favour of the vendee,
the vendor is restrained from selling the said property to someone else
because the vendee, in whose favour the right in personam is created, has a
legitimate right to enforce specific performance of the agreement, if the
vendor, for some reason is not executing the sale deed. Thus, by virtue of
the agreement to sell some right is given by the vendor to the vendee. The
question is whether the entire property can be said to have been sold at
the time when an agreement to sell is entered into. In normal
circumstances, the aforestated question has to be answered in the negative.
However, looking at the provisions of Section 2(47) of the Act, which
defines the word “transfer” in relation to a capital asset, one can say
that if a right in the property is extinguished by execution of an
agreement to sell, the capital asset can be deemed to have been
transferred. Relevant portion of Section 2(47), defining the word
“transfer” is as under:
“2(47) “transfer”, in relation to a capital asset, includes,-
(i)…………….
(ii) the extinguishment of any rights therein; or
………………………………”
Now in the light of definition of “transfer” as defined under Section
2(47) of the Act, it is clear that when any right in respect of any capital
asset is extinguished and that right is transferred to someone, it would
amount to transfer of a capital asset. In the light of the aforestated
definition, let us look at the facts of the present case where an agreement
to sell in respect of a capital asset had been executed on 27th December,
2002 for transferring the residential house/original asset in question and
a sum of Rs. 15 lakhs had been received by way of earnest money. It is
also not in dispute that the sale deed could not be executed because of
pendency of the litigation between Shri Ranjeet Lal on one hand and the
appellants on the other as Shri Ranjeet Lal had challenged the validity of
the Will under which the property had devolved upon the appellants. By
virtue of an order passed in the suit filed by Shri Ranjeet Lal, the
appellants were restrained from dealing with the said residential house and
a law-abiding citizen cannot be expected to violate the direction of a
court by executing a sale deed in favour of a third party while being
restrained from doing so. In the circumstances, for a justifiable reason,
which was not within the control of the appellants, they could not execute
the sale deed and the sale deed had been registered only on 24th September,
2004, after the suit filed by Shri Ranjeet Lal, challenging the validity of
the Will, had been dismissed. In the light of the aforestated facts and in
view of the definition of the term “transfer”, one can come to a conclusion
that some right in respect of the capital asset in question had been
transferred in favour of the vendee and therefore, some right which the
appellants had, in respect of the capital asset in question, had been
extinguished because after execution of the agreement to sell it was not
open to the appellants to sell the property to someone else in accordance
with law. A right in personam had been created in favour of the vendee, in
whose favour the agreement to sell had been executed and who had also
paid Rs.15 lakhs by way of earnest money. No doubt, such contractual right
can be surrendered or neutralized by the parties through subsequent
contract or conduct leading to no transfer of the property to the proposed
vendee but that is not the case at hand.
In addition to the fact that the term “transfer” has been defined under
Section 2(47) of the Act, even if looked at the provisions of Section 54 of
the Act which gives relief to a person who has transferred his one
residential house and is purchasing another residential house either before
one year of the transfer or even two years after the transfer, the
intention of the Legislature is to give him relief in the matter of payment
of tax on the long term capital gain. If a person, who gets some excess
amount upon transfer of his old residential premises and thereafter
purchases or constructs a new premises within the time stipulated under
Section 54 of the Act, the Legislature does not want him to be burdened
with tax on the long term capital gain and therefore, relief has been given
to him in respect of paying income tax on the long term capital gain. The
intention of the Legislature or the purpose with which the said provision
has been incorporated in the Act, is also very clear that the assessee
should be given some relief. Though it has been very often said that
common sense is a stranger and an incompatible partner to the Income Tax
Act and it is also said that equity and tax are strangers to each other,
still this Court has often observed that purposive interpretation should be
given to the provisions of the Act. In the case of Oxford University Press
v. Commissioner of Income Tax [(2001) 3 SCC 359] this Court has observed
that a purposive interpretation of the provisions of the Act should be
given while considering a claim for exemption from tax. It has also been
said that harmonious construction of the provisions which subserve the
object and purpose should also be made while construing any of the
provisions of the Act and more particularly when one is concerned with
exemption from payment of tax. Considering the aforestated observations
and the principles with regard to the interpretation of Statute pertaining
to the tax laws, one can very well interpret the provisions of Section 54
read with Section 2(47) of the Act, i.e. definition of “transfer”, which
would enable the appellants to get the benefit under Section 54 of the Act.
Consequences of execution of the agreement to sell are also very clear and
they are to the effect that the appellants could not have sold the property
to someone else. In practical life, there are events when a person, even
after executing an agreement to sell an immoveable property in favour of
one person, tries to sell the property to another. In our opinion, such an
act would not be in accordance with law because once an agreement to sell
is executed in favour of one person, the said person gets a right to get
the property transferred in his favour by filing a suit for specific
performance and therefore, without hesitation we can say that some right,
in respect of the said property, belonging to the appellants had been
extinguished and some right had been created in favour of the
vendee/transferee, when the agreement to sell had been executed.
Thus, a right in respect of the capital asset, viz. the property in
question had been transferred by the appellants in favour of the
vendee/transferee on 27th December, 2002. The sale deed could not be
executed for the reason that the appellants had been prevented from dealing
with the residential house by an order of a competent court, which they
could not have violated.
In view of the aforestated peculiar facts of the case and looking at the
definition of the term ‘transfer” as defined under Section 2(47) of the
Act, we are of the view that the appellants were entitled to relief under
Section 54 of the Act in respect of the long term capital gain which they
had earned in pursuance of transfer of their residential property being
House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of
a new asset/residential house.
The appeals are, therefore, allowed with no order as to costs. The
impugned judgments are quashed and set aside and the Authorities are
directed to re-assess the income of the appellants for the Assessment Year
2005-2006, after taking into account the fact that the appellants were
entitled to the relief, subject to fulfilment of other conditions.
…………………….J.
(ANIL R. DAVE)
……………………..J.
(SHIVA KIRTI SINGH)
NEW DELHI
JULY 01, 2014.
