2014 (7) TMI 99 - SC - Income Tax

Exemption of LTCG u/s 54 - transfer - determination of effective date of transfer of original house - assesee entered into an agreement to sell on 27th December, 2002, but unfortunately they could not execute the sale deed on account of the litigation - transfer deed was executed as on 24th September, 2004 - New house property was purchased as on 30th April, 2003 - fulfillment of condition of purchase of a residential house/new asset within one year prior or two years after the date on which transfer of the residential house Held that - 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 ₹ 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. 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. In the case of Oxford University Press v. Commissioner of Income Tax 2001 (1) TMI 79 - SUPREME Court 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. 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, 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 and used for purchase of a new asset/residential house. - Decided in favor of assessee.

Issues Involved:
1. Interpretation of Section 54 of the Income Tax Act, 1961.
2. Determination of the date of transfer of property for capital gains tax exemption.
3. Impact of judicial orders on the execution of sale deeds.

Issue-wise Detailed Analysis:

1. Interpretation of Section 54 of the Income Tax Act, 1961:
The appellants contended that they were entitled to the benefit under Section 54 of the Income Tax Act, 1961, which provides relief from long-term capital gains tax if a new residential house is purchased within one year before or two years after the transfer of the original asset. The appellants had purchased a new house on 30th April, 2003, but the sale deed for the original house was executed on 24th September, 2004. They argued that the agreement to sell dated 27th December, 2002, should be considered the date of transfer, making them eligible for the tax exemption.

2. Determination of the date of transfer of property for capital gains tax exemption:
The appellants argued that the date of the agreement to sell (27th December, 2002) should be treated as the date of transfer. They cited Section 2(47) of the Act, which defines "transfer" to include "the extinguishment of any rights therein." They claimed that by entering into the agreement to sell, they had extinguished their rights in the property, thus effecting a transfer.

The Revenue Authorities contended that the mere execution of an agreement to sell does not extinguish the rights of the vendor and does not constitute a transfer. They maintained that the actual transfer occurred on 24th September, 2004, when the sale deed was executed, and since the new house was purchased more than one year prior to this date, the appellants were not entitled to the benefit under Section 54.

3. Impact of judicial orders on the execution of sale deeds:
The appellants were restrained from executing the sale deed due to a judicial order in a civil suit challenging the validity of the Will under which they inherited the property. This order was vacated in May 2004, after which the sale deed was executed. The appellants argued that the delay in executing the sale deed was beyond their control and should not affect their eligibility for the tax exemption.

Judgment:
The Supreme Court held that the term "transfer" under Section 2(47) of the Act includes the extinguishment of any rights in a capital asset. The Court noted that by executing the agreement to sell on 27th December, 2002, the appellants had created a right in personam in favor of the vendee, which extinguished their rights in the property. Therefore, the date of the agreement to sell should be considered the date of transfer.

The Court further observed that the purpose of Section 54 is to provide relief from capital gains tax to individuals who reinvest in a new residential house. The appellants' inability to execute the sale deed earlier was due to a judicial order, a factor beyond their control. The Court emphasized the need for a purposive interpretation of tax laws to achieve the legislative intent.

Conclusion:
The appeals were allowed, and the impugned judgments were quashed. The Supreme Court directed the Authorities to reassess the income of the appellants for the Assessment Year 2005-2006, considering the appellants' entitlement to the relief under Section 54, subject to the fulfillment of other conditions.

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