2018 (5) TMI 962 - HC - Income Tax

Entitlement to relief u/s 54 - Long term capital gain earned in pursuance of transfer of the residential property and used for purchase of a new asset/residential house - Held that - 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, benefit of exemption u/s 54 allowed.

Issues:
1. Interpretation of Section 54 for claiming deduction on capital gains from the sale of a residential property.
2. Application of the definition of "transfer" under Section 2(47) in the context of tax relief under Section 54.
3. Consideration of the intention of the Legislature in providing relief on long term capital gains.

Interpretation of Section 54:
The High Court analyzed the findings of the ITAT regarding the eligibility of the assessee to claim benefits under Section 54 for investing in a new residential property. The ITAT held that the CIT(A) was justified in granting the benefit as the property sold was a residential house, and the assessee had made investments in a new residential house. The Court noted that the section does not specify the quantum of construction required on the land to qualify as a residential unit, emphasizing that the property must be capable of being used as a residence. The Court upheld the ITAT's decision, emphasizing that the construction of a residential house was evident from the registered sale deed and the presence of essential residential components like rooms, bathrooms, and kitchen areas.

Application of "Transfer" Definition:
The Court referred to the Supreme Court's decision in the case of Sanjeev Lal, highlighting the legislative intention behind Section 54 to provide relief on long term capital gains. The Supreme Court's ruling emphasized that the provision aims to prevent the assessee from being burdened with tax on capital gains if the excess amount from the sale of the old property is reinvested in a new property within the stipulated time frame. The Court stressed the importance of purposive interpretation of tax laws and the need to consider the object and purpose of the provisions. It clarified that the execution of an agreement to sell creates rights in favor of the transferee, and the extinguishment of rights by the transferor qualifies as a transfer under the law.

Legislative Intention and Relief Provision:
The Court reiterated the legislative intent behind Section 54, emphasizing that the provision aims to provide relief to individuals reinvesting in a new residential property after selling the old one. The judgment highlighted that the definition of "transfer" under Section 2(47) must be interpreted in a manner that enables the assessee to benefit from Section 54. The Court allowed the appeals in the referenced case, quashed the impugned judgments, and directed the authorities to re-assess the income of the appellants for the relevant assessment year, considering their entitlement to relief under Section 54.

In conclusion, the High Court dismissed the income tax appeal, citing the alignment of the findings with the Supreme Court's interpretation of the relevant provisions. The judgment emphasized the importance of legislative intent, purposive interpretation of tax laws, and the relief provided to taxpayers under Section 54 for reinvestment in residential properties to mitigate tax burdens on capital gains.

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