Case Law Details

Case Name : CIT Vs Girish L. Ragha (Bombay High Court at Goa)
Appeal Number : Tax Appeal No. 66 of 2015
Date of Judgement/Order : 17/03/2016
Related Assessment Year :
Courts : All High Courts (1347) Bombay High Court (304)

Fact finding authorities below have concurrently come to the conclusion that the consideration amount was in fact paid for the purpose of purchasing the flat to the Developer M/s Ashraya Real Estate Developers. It is also not disputed that the construction was incomplete as there was a dispute between a Bank and the original owner in respect of the subject property. Only after the injunction was vacated, the developers could complete the premises and hand over possession to the respondent which admittedly is beyond the period of two years. On the basis of such fact, as the payment of the total consideration was paid by the respondent, merely because the residential premises were not occupied, as the possession was not delivered to the respondent by the Developer and the deed of conveyance was not executed within such period would not by itself be a ground to deprive the respondent from availing the exemption of payment of capital gain under section 54 of the Income Tax Act.

The word “purchase” can be given both restrictive and wider meaning. A restrictive meaning would mean transactions by which legal title is finally transferred, like execution of the sale deed or any other document of title. “Purchase” can also refer to payment of consideration or part consideration along with transfer of possession under section 53A of the Transfer of Property Act, 1882. Supreme Court way back in 1979 in CIT Andhra Pradesh v. T.N. Aravinda Reddy (1979) 4 SCC 721, however, gave it a wider meaning and it was held that the payment made for execution of release deed by the brother thereby joint ownership became separate ownership for price paid would be covered by the word “purchase”. It was observed that the word “purchase” used in section 54 of the Act should be interpreted pragmatically in a practical manner and legalism shall not be allowed to play and create confusion or linguistic distortion. The argument that “purchase” primarily meant acquisition for money paid and not adjustment, was rejected observing that it need not be restricted to conveyance of land for a price consisting wholly or partly of money’s worth. The word “purchase”, it was observed was of a plural semantic shades and would include buying for a price or equivalent of price by payment of kind or adjustment of old debt or other monetary considerations. It was observed that if you sell a house and make profit, pay Caesar (State) but if you buy a house or build another and thereby satisfy the conditions of section 54, you were exempt. The purpose was plain; the symmetry was simple; the language was plain.

 Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sh. Sanjeev Lal etc. v. CIT, Chandigarh & Anr., decided on 1-7-2014, 2014 (8) SCALE 432 examined section 54 in a case where the assessee had entered into an agreement to sell a house to a third party on 27-12-2002 and had received Rs. 15 lacs by way of earnest money and subsequently received the balance sale consideration of Rs. 1.17 crores (total being Rs.1.32 crores) when the sale deed was executed on 24-9-2004. In the meanwhile, the assessee had purchased another house on 30-4-2003. Benefit under section 54 was denied by the High Court observing that the new house had been purchased prior to execution of the sale and not within one year prior to sale of original asset i.e. new house has been purchased on 30-4-2003 whereas the earlier asset was sold only on 24-9-2004. The Supreme Court allowing the appeal noticed that the agreement to sell was executed on 27-12-2002 but the sale deed could not be executed because of inter-se litigation between the legal heirs, as one of them had challenged the will under which the assessee had inherited the property. The agreement to sell, it was held had given some rights to the vendor and reduced or extinguished rights of the assessee. This, it was observed was sufficient for the purpose of section 2(47), which defines the term transfer in relation to a capital asset. In the light of the factual matrix, it was observed that the intention behind section 54 was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to sub serve the object and more particularly when one was concerned with exemption from payment of tax. The assessee, therefore, succeeded. The observations made in the said decision are also relevant on the question whether the payments made by the assessee to the person with whom he had entered into an earlier agreement to sell should be allowed to be set off as expenses incurred in relation to the sale deed which was executed.

More direct are the two decisions of Madhya Pradesh High Court in Shashi Verma (Smt.) v. CIT (1997) 224 ITR 106 and Calcutta High Court in CIT v. Smt. Bharati C. Kothari (2000) 244 ITR 352. In Shashi Verma (supra), the assessee had invested the sale consideration for purchase of a flat from Delhi Development Authority and had paid part installments. Reversing the decision of the Tribunal and allowing the appeal of the assessee, the High Court observed that the Tribunal had adopted a pedantic approach without noticing the fact that the capital gain was Rs. 31,980 whereas the installments paid were Rs. 71,256, i.e. much more than the amount of capital gain. Reference was made to Circular No. 471 dated 15-10-1986 (1986) 162 ITR (Stat.) 41. It was observed that section 54 of the Act says that assessee could have constructed the house and not that the construction should have necessarily been completed. Noticing that it was not easy to construct a house within the time limit of three years and under the Government schemes, construction takes years. When substantial investment was made in the construction and it should be deemed that sufficient steps had been taken and it satisfied requirement of section 54.

What has been stated in the judgment of the Madhya Pradesh High Court in 1997, in practical terms and in reality still holds good. This is a matter of common knowledge that flats or apartments being constructed by builders take time. The Government Housing Boards also take time and seldom adhere to the promised date. Similar view has been taken in Bharati C. Kothari (supra) wherein reference was made to the decision of Andhra Pradesh High Court in CIT v. Shahzada Begum (Mrs.)(1988) 173 ITR 397 and it was observed that assessee had entered into an agreement within two years for purchase of a flat which was under construction. Payment for the said flat was made within three years from the date of sale of the first property. No doubt the assessee was not constructing the new asset herself but she had purchased the flat.

Moreover, in Bharati C. Kothari’s Case (supra) it was stated as under:-

“The purpose behind the exemption under section 54(1) is that if any assessee sells his residential house and purchases a new house against those sale considerations that capital gains tax arising out of the sale of the earlier house should not be taxed. Whether the assessee himself constructs the house or he gets it constructed by a contractor or a third party that does not make any difference. The basic requirement for the purpose of relief under section 54(1), is that the assessee should invest the sale proceeds in the construction of a residential house, which has been constructed for the assessee. Keeping in view the above observations and reasons given by the Tribunal, no case is made out for interference.”

It was observed that the basic purpose behind section 54 is to ensure that the assessee is not taxed on the capital gains, if he replaces his house with another house and spends money earned on the capital gains within the stipulated period.

The view  gets support from sub-section (2) to section 54. sub-section (2) to section 54 requires the assessee to deposit unspent amount not utilized by the assessee for purchase or construction of a new asset before the date of furnishing of return, in a specified account. It further states that the amount, if already utilized for purchase or construction of the new asset with the amount so deposited will be deemed to be cost of a new asset subject to the proviso. The word “purchase” is used in sub- section (2) and indicates that the said word is not restricted or confined to registered sale deed or even possession but has a wider connotation. The proviso supports the aforesaid interpretation and stipulates that the amount deposited but not utilized wholly or partly for purchase or construction of new asset within the specified period will be charged to tax under section 45 in the previous year in which the period of three years from the date of transfer of original asset expired. The period of three years is stipulated as this is the longer period specified in the sub-section (1) to section 54. It is only the balance amount which is not utilized which is to be brought and charged to tax. The entire amount of sale consideration or the capital gains is not to be brought to tax, but the unspent amount/figure is taxed.’

We are in respectful agreement with the view taken by the Delhi High Court in the case of the CIT v. Kuldeep Singh [2014] 226 Taxman 133   to come to the conclusion that the purchase would be computed when the consideration is duly paid by the assessee for the purpose of purchasing the premises and the construction had already commenced by the builder which remained to be completed on account of the litigation. In the present case, the learned Tribunal has noted that the assessee has sold the property on 1-12-2009 and the assessee has made the payment on 16-3-2010. The assessee was required to get the house and occupancy certificate on or before 1-12-2011. But however, the assessee got the occupancy certificate of the property on 17-1-2014. The learned Tribunal further noted that the assessee submitted the documentary evidence to show that after purchasing the property there was a civil suit filed by the other parties and the assessee could not complete the construction and the licence for constructing the house was accordingly delayed. The learned Tribunal further noted that Commissioner (Appeals) in his order relied upon the decision of the Madras High Court in the case of CIT v. Sardarmal Kothari (2008) 302 ITR 286 wherein, it is held that in order to get the benefit under section 54 of the Income Tax, the assessee need not complete the construction of the house and occupy the same. It is further noted that the assessee has invested the money and the occupancy certificate is delayed which is beyond the control of the assessee then the assessee is entitled for deduction under section 54 of the Act. The learned Tribunal as such found that the assessee was entitled for deduction under section 54 of the Act and consequently, dismissed the appeal of the Revenue. Considering the said facts and the ratio of the judgment referred to herein above, we find that there is no substantial question of law which arises for consideration in the present appeal under section 260A of the Income Tax Act, 1961. Hence, no case is made out by the appellant for interference in the order passed by the Income Tax Appellate Tribunal. The appeal stands accordingly rejected.

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