2018 (5) TMI 1275 - HC - Income Tax

Entitlement to benefit of deduction u/s 54F - construction of the flats for personal use was completed before the sale of the capital asset - Held that - The assessee s claim for deduction u/s.54F of the Act cannot succeed except in relation to the transfer of a flat in favour of Kankuben Mansingbhai Patel, which had happened before the completion of construction. In such a case, since construction can be stated to have been carried out after the transfer of the original capital asset, the claim of deduction u/s.54F of the Act cannot be denied. To this limited extent, the appeal succeeds. The Assessing Officer to recompute the deduction accordingly.

Issues Involved:
1. Eligibility for deduction under Section 54F of the Income Tax Act, 1961.
2. Interpretation of "transfer" under Section 2(47) of the Income Tax Act.
3. Timing of construction relative to the date of transfer of the capital asset.
4. Validity of the agreement to sale as a transfer of capital asset.

Detailed Analysis:

1. Eligibility for Deduction under Section 54F of the Income Tax Act, 1961:
The central question was whether the Income Tax Appellate Tribunal (ITAT) was correct in denying the appellant the benefit of deduction under Section 54F. The appellant had demolished a bungalow to construct eight flats, retaining four for personal use and selling the remaining four. The ITAT upheld the revenue authorities' view that since the construction of the flats was completed before the sale of the capital asset, the conditions under Section 54F were not met. This section requires that the construction of a residential house must occur within three years after the transfer of the long-term asset.

2. Interpretation of "Transfer" under Section 2(47) of the Income Tax Act:
The Tribunal and the High Court examined whether the agreement to sale constituted a "transfer" under Section 2(47) of the Act. The appellant argued that the execution of agreements to sale before the completion of construction should be considered a transfer of the capital asset. The court referred to multiple judgments, including the Supreme Court's decision in Sanjeev Lal & others v. CIT, which suggested that certain rights in the capital asset are transferred upon executing an agreement to sale, creating a right in personem.

3. Timing of Construction Relative to the Date of Transfer of the Capital Asset:
The court scrutinized whether the construction of the residential house occurred within the statutory period relative to the transfer date. The Tribunal found that the Building Use Permission was granted on 23.10.2008, and no construction took place after this date. Therefore, the construction was completed before the sale deeds were executed, which did not align with Section 54F's requirement that construction should occur within three years after the transfer date.

4. Validity of the Agreement to Sale as a Transfer of Capital Asset:
The court explored whether an agreement to sale could be considered a transfer of the capital asset. The appellant cited several cases to argue that an agreement to sale should be treated as a transfer. However, the court noted that an agreement to sale does not convey property ownership but creates certain rights and obligations. The court emphasized that the actual transfer of property occurs only upon the execution of a registered sale deed, as per the Transfer of Property Act and Registration Act.

Conclusion:
The High Court concluded that the appellant's claim for deduction under Section 54F could not succeed except for the transfer of one flat, which occurred before the completion of construction. For the remaining flats, the construction was completed before the transfer, disqualifying the appellant from claiming the deduction. The court directed the Assessing Officer to recompute the deduction accordingly, allowing the appeal to this limited extent and disposing of the Tax Appeal.

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