Law Web: When a party is entitled to get long term capital gains even though no sale deed took place?

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.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL Nos.5899-5900 OF 2014

Sh. Sanjeev Lal Vs Commissioner of Income Tax, Chandigarh & Anr.

ANIL R. DAVE, J.

Citation;(2015)5 SCC775

2. 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.

Page 1

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.

Page 2

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 30 th 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 2 nd

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

Page 3

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

Page 4

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

Page 5

asset was purchased more than one year prior to the date on which

the transfer in respect of the residential house had been effected.

10.

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.

11.

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

Page 6

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.

12.

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.

13.

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

Page 7

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.

14.

The learned counsel had also relied upon certain judgments

delivered by different High Courts to support his submissions.

15.

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 27 th December, 2002.

According to him, the appellants had sold the original asset on 24 th

September, 2004 and had purchased a new house/new asset on 30 th

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

Page 8

Authorities as well as the High Court were absolutely correct by not

granting the benefit claimed by the appellants.

16.

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.

17.

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.

18.

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

Page 9

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.

19.

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.

20.

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

Page 10

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

....................................”

21.

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

Page 11

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

Page 12

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.

22.