1997 (11) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sole surviving coparcener is entitled to claim the exemption under section 54(1) of the Income-tax Act, 1961, on the capital gains arising from the sale of a residential property.

Detailed Analysis:

Issue 1: Entitlement of Sole Surviving Coparcener to Exemption under Section 54(1) of the Income-tax Act, 1961

Facts:
The assessee, assessed as a Hindu undivided family (HUF) for the assessment year 1982-83, sold a residential property and claimed exemption under section 54(1) of the Income-tax Act, 1961. The Income-tax Officer disallowed the claim, but the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal (ITAT) ruled in favor of the assessee, leading to the present tax case reference.

Arguments by Revenue:
The Revenue argued that the exemption under section 54 of the Act applies only to individuals and not to HUFs. They cited decisions in CIT v. Devarajulu (G.K.) [1991] 191 ITR 211 and Pravin Chand Mohin Kumar v. CIT [1994] 208 ITR 11, which held that the term "assessee" in section 54 refers to a living person and not an HUF.

Arguments by Assessee:
The assessee argued that the property was sold by a sole surviving coparcener in his individual capacity, fulfilling all conditions under section 54 of the Act. They contended that the character of the property as coparcenary property is irrelevant when the property is sold by a sole surviving coparcener with the powers of an individual.

Court's Analysis:
The court examined section 54 of the Act, which provides exemption for capital gains arising from the transfer of a residential property if the proceeds are reinvested in another residential property. The court noted that the assessee was a sole surviving coparcener with his wife and had complied with all conditions under section 54.

The court discussed various precedents, including the Supreme Court decision in N. V. Narendaranath v. CWT [1969] 74 ITR 190, which established that properties received by a sole surviving coparcener on partition remain ancestral properties. However, the sole surviving coparcener has the power to dispose of the property as if it were his separate property.

The court also referred to M. S. P. Rajah v. CGT [1982] 134 ITR 1, which held that a sole surviving coparcener has the powers of an individual to dispose of joint family properties. The Bombay High Court in CIT v. Anil J. Chinai [1984] 148 ITR 3 supported this view, stating that a sole surviving coparcener can dispose of coparcenary property as his separate property.

Conclusion:
The court concluded that the sole surviving coparcener, despite being assessed in the status of an HUF, has the powers of an individual to alienate the property. Therefore, the expression "assessee" in section 54 of the Act should be interpreted to include a sole surviving coparcener. The court held that the exemption under section 54 should be extended to the sale of the house property by a sole surviving coparcener, as all conditions of the section were satisfied.

The court affirmed the decision of the ITAT, holding that the assessee, being a sole surviving coparcener, is entitled to exemption under section 54 of the Act in respect of capital gains arising from the sale of the property. The question of law was answered in the affirmative and against the Revenue, with no order as to costs.