Exemption u/s 54 cannot be denied merely because payment is made but possession is not obtained – Delhi HC


CIT v Kuldeep Singh (ITA No: 117/2014 dated 12th August, 2014) (Delhi High Court)

Background:

The assessee in his return had declared a taxable income of Rs.47,88,579/- after claiming benefit of Section 54 of the Act of Rs.37,86,273 on sale consideration of Rs.2 crores declared as income from capital gains on the sale of house property.  The Assessing Officer referred to the copy of the flat buyers agreement dated 9th February, 2006 between the assessee and the builder and observed that the ownership in the new property would be conferred on the date of issuance of occupation certificate. Further, the expected date of completion was 36 months from the date of the agreement dated 9th February, 2006 i.e. 8th February, 2009. He held that the assessee was not entitled to benefit of Section 54 as he had not purchased the new property within a period of one year before the sale of first property on 3rd June, 2005 or within two years from the date on which the transfer took place. The assessee had not constructed residential house within three years from 3rd June, 2005.  

HELD:

  • It is accepted position and it is not disputed by the Revenue that Rs.37,86,273/- had been invested by the assessee for purchase of the property.
  • However, legal title in the said property was not passed or transferred to the assessee within a period of two years from the date of sale of the first property on 3rd June, 2005. The property it is apparent was still under construction though the builder had entered into and executed the flat buyers agreement with the assessee dated 9th February, 2006.
  • The said agreement mentions the apartment number and gives specific detail of the property. The payments were linked to stage of construction and that amount of Rs.2,90,46,250/- was payable within 27 months of booking i.e. on or before 12th February, 2008 and the total cost of flat/apartment was Rs. 3,13,09,375/-.
  • 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 vs. 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.
  • Recently Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sh. Sanjeev Lal Etc.Etc. vs. CIT, Chandigarh & Anr., decided on 01/07/2014, 2014 (8) SCALE 432 again examined Section 54 and held that the principle of purposive interpretation should be applied to subserve the object and more particularly when one was concerned with exemption from payment of tax
  • Reliance is further placed on Madhya Pradesh High Court in the case of Shashi Verma (Smt.) vs. CIT [1997] 224 ITR 106 and Calcutta High Court in CIT vs. Smt. Bharati C. Kothari (2000) 244 ITR 352. 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.
  • 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. 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

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