Sanjeev Lal & Anr. vs. CIT & Anr. [2014] 365 ITR 389 (SC)
A residential house, being house No.267 situated in Sector 9-C, Chandigarh, was a self acquired property of Shri Amrit Lal, who had executed a Will whereby life interest in the aforesaid house had been given to his wife and upon death of his wife, the house was to be given in favour of two sons of his pre-deceased son – Late Shri Moti Lal and his widow. Upon the death of Shri Amrit Lal, possession of house was given to his widow. His widow, Smt. Shakuntala Devi expired on 29th August, 1993. Upon the death of Smt. Shakuntala Devi, as per the Will, the ownership in respect of the house in question came to be vested in the assessee and another grandchild of the late Shri Amrit Lal.
The assessee had decided to sell the house and with that intention they had entered into an agreement to sell the house with Shri Sandeep Talwar on 27th December, 2002, for a consideration of Rs.1.32 crore. Out of the said amount, a sum of Rs.15 lakh had been received by way of earnest money. As the assessee had decided to sell the house in question, he had also decided to purchase another residential house bearing house No.528 in Sector 8, Chandigarh, so that the sale proceeds, including capital gain, can be used for purchase of the aforesaid house No.528. The said house was purchased on 30th April, 2003, i.e., well within one year from the date on which the agreement to sell had been entered into by the assessee.
The validity of the Will had been questioned by Shri Ranjeet Lal, who was another son of the deceased testator, Shri Amrit Lal, by filing a civil suit, wherein the trial court, by an interim order had restrained the appellants from dealing with the house property. During the pendency of the suit, Shri Ranjeet Lal expired on 2nd December, 2000, leaving behind him no legal heirs. The suit filed by him had been dismissed in May, 2004, as there was no representative on his behalf in the suit.
Due to the interim relief granted in the above stated suit, the assessee could not execute the sale deed till the suit came to be dismissed and the validity of the Will was upheld. Thus, the assessee executed the sale deed in 2004 and the same was registered on 24th September, 2004.
Upon transfer of the house property, long-term capital gain had arisen, but as the assessee had purchase a new residential house and the amount of the capital gain had been used for purchase of the said new asset. Believing that the long-term capital gain was not chargeable to income-tax as per the provisions of section 54 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the assessee did not disclose the said long-term capital gain in his return of income filed for the assessment year 2005-06.
In the assessment proceedings for the assessment year 2005-06 under the Act, the Assessing Officer was of the view that the assessee was not entitled to any benefit u/s. 54 of the Act for the reason that the transfer of the original asset, i.e., the residential house, had been effected on 24th September, 2004, whereas the assessee had purchased another residential house on 30th April, 2003, i.e., more than one year prior to the purchase of the new asset and, therefore, the assessee was made liable to pay income-tax on the capital gain u/s. 45 of the Act.
The appeal, as far as it pertained to the benefit u/s. 54 of the Act was concerned, had been dismissed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the Income-tax Appellate Tribunal. The Tribunal also upheld the orders passed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the High Court by filing appeals u/s. 260A of the Act, which were dismissed. Thus, the assessee approached the Supreme Court.
The Supreme Court observed that upon plain reading of section 54 of the Act, it is very clear that so as to avail of the benefit u/s. 54 of the Act, one must purchase a residential house/new asset within one year prior or two years after the date on which transfer of the residential house in respect of which the long-term capital gain had arisen has taken place.
The Supreme Court noted that in the instant case, the following three dates were not in dispute. The residential house was transferred by the appellants and the sale deed had been registered on 24th September, 2004. The sale deed had been executed in pursuance of an agreement to sell which had been executed on 27th December, 2002, and out of the total consideration of Rs.1.32 crore, Rs.15 lakh had been received by the appellants by way of earnest money when the agreement to sell had been executed and a new residential house/new asset had been purchased by the appellants on 30th April, 2003. It was also not in dispute that there was litigation wherein the will of the late Shri Amrit Lal had been challenged by his son and the assessee had been restrained from dealing with the house in question by a judicial order and the said judicial order had been vacated only in the month of May, 2004, and, therefore, the sale deed could not be executed before the said order was vacated though the agreement to sell had been executed on 27th December, 2002.
The Supreme Court remarked that if one considers the date on which it was decided to sell the property, i.e., 27th December, 2002, as the date of transfer or sale, it cannot be disputed that the assessee would be entitled to the benefit under the provisions of section 54 of the Act, because longterm capital gain earned by the appellants had been used for purchase of a new asset/residential house on 30th April, 2003, i.e., well within one year from the date of transfer of the house which resulted into long-term capital gain.
According to the Supreme Court, the question therefore to be considered was whether the agreement to sell which had been executed on 27th December, 2002, can be considered as a date on which the property, i.e., the residential house had been transferred.
The Supreme Court held that in normal circumstances by executing an agreement to sell in respect of an immoveable property, a right in person is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.
Consequences of execution of the agreement to sell are also very clear and they are to the effect that the appellants could not have sold the property to someone else. in practical life, there are events when a person, even after executing an agreement to sell an immovable property in favour of one person, tries to sell the property to another. In our opinion, Such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and, therefore, without hesitation it could be said that some right, in respect of the said property, belonging to the assessee had been extinguished and some right had been created in favour of the vendee/ transferee, when the agreement to sell had been executed.
Thus, a right in respect of the capital asset, viz., the property in question had been transferred by the assessee in favour of the vendee/transferee on 27th december, 2002. The sale deed could not be executed for the reason that the assessee 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 aforesaid peculiar facts of the case and looking at the definition of the term “transfer” as defined u/s. 2(47) of the Act, the Supreme Court was of the view that the assessee was entitled to relief u/s. 54 of the act in respect of the long-term capital gain, which he had earned in pursuance of transfer of his residential property being house No. 267, Sector-9-C, situated in Chandigarh and used for purchase of a new asset/residential house.
