Thursday, 9 July 2015

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
(Arising out of SLP (c) Nos.16958-59 of 2013)
Sh. Sanjeev Lal Etc. Etc.
Appellants
Versus
Commissioner of Income Tax, Chandigarh & Anr. Respondents

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.
3.
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
2
4.
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
3
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.
5.
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.
6.
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
4
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.
7.
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.
8.
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
5
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.”
9.
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
6
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
7
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
8
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
9
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
10
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
11
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
12
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
13
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.
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
Page 13
14
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.
23.
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.
24.
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.
25.
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
Page 15
16
in Chandigarh and used for purchase of a new asset/residential
house.
26.
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.


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