By TIOL News Service

NEW DELHI, JULY 04, 2014: THE issue before the bench is - Whether when the assessee had transferred its property in favour of transferee but the sale deed was prevented from being excuted because of legal tangles, any investment made out of capital gains cannot be allowed as per the provisions of Sec 54. And the verdict favours the assessee.

Facts of the case

A residential house in 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 in 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 in Chandigarh so that the sale proceeds, including capital gain, can be used for purchase of the aforestated House. 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 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, 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.

On appeal the SC held that,

++ 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;

++ 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;

++ 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.

(See 2014-TIOL-63-SC-IT)