IT: Transfer of immovable property takes place on execution of sale deed and, therefore, to hold that upon mere execution of agreement to sell, immovable property gets transferred to purchaser, even within extended definition of section 2(47), would be incorrect

IT: Benefit of deduction under section 54F in case of construction of residential house, is available only when construction is completed within a period of three years after date of transfer of long-term capital asset and, therefore, where construction took place prior to date of transfer, conditions of section 54F were not fulfilled and, consequently, assessee's claim for deduction was to be rejected

[2018] 93 taxmann.com 453 (Gujarat)

HIGH COURT OF GUJARAT

Ushaben Jayantilal Sodhan

v.

Income Tax Officer*

AKIL KURESHI AND B.N. KARIA, JJ.

R/TAX APPEAL NO. 393 OF 2014

MAY 1, 2018

FACTS

-The assessee was an individual. She owned a piece of land with a bunglow on such land. The assessee demolished the bunglow to construct 08 flats on the land, some of which would be occupied by her for her own residence and the rest she intended to sell. The assessee retained four flats for sale.

-The assessee considered the proportionate land apportioned to the 04 flat purchasers as sale of land belonging to her and disclosed long-term capital gain of Rs.58,87,176. The development permission was granted by the competent authority on 29-07-2006 and Building Use Permission was granted on 23-10-2008. The assessee filed her return claiming deduction under section 54F.

-The Assessing Officer, raised an objection to the assessee's claim of deduction from the capital gains received by her on the ground that no construction was carried out after 23-10-2008, which was the date on which the Building Use Permission was granted. The flats were sold after such date by executing the sale deeds. This was not in tune with the statutory requirements for claiming deduction under section 54F.

-The Tribunal noted that the construction of the building was carried on between 01-02-2007 and 23-10-2008. Since the Building Use Permission was granted on 23-10-2008, it could safely be held that no construction activity took place after such date. According to the Tribunal, for grant of deduction under section 54F, in case of construction of a residential house, the condition was that the assessee had to, within a period of three years after the date of transfer of long-term asset, construct a residential house. In the present case, the construction took place prior to the date of transfer and, therefore, the conditions of section 54F were not fulfilled. Accordingly, the Tribunal confirmed order passed by the Assessing Officer rejecting assessee's claim for deduction.

-On appeal:

HELD

-Section 45 pertains to capital gains. Sub-section (1) thereof provides that any profit or gain arising from the transfer of a capital asset effected in the previous year shall, save and otherwise provided in sections 54, 54B, etc., be chargeable to tax under the head 'capital gains' and shall be deemed to be the income of the previous year when the transfer took place. The terms 'capital asset' and 'transfer' have been defined under sections 2(14) and 2(47) of the Act respectively. Clauses (a) and (b) of section 2(14) define 'capital asset' as (a) a property of any kind held by the assessee, whether or not connected with his business or profession and (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under section 45 the Securities and Exchange Board of India Act, 1992. The remaining portion of this definition is in the nature of exclusion and excludes the stock-in-trade, personal assets, agricultural land, etc. [Para 12]

-Section 54F carries the title 'capital gain on transfer of certain capital assets not to be charged in case of investment in residential house'. Sub-section (1) of section 54F provides for deduction in computation of capital gain arising out of transfer of long-term capital asset if the assessee, within a period of 1 year or before 2 years after the date on which the transfer took place, purchased or within a period of 3 years after such date constructed one residential house. If the cost of new asset is not less than the net consideration in respect of the original asset, the whole of the capital gain would not be charged. Otherwise, the deduction would be proportionate. [Para 13]

-In the context of these provisions, the assessee's case and the rival contentions has to be examined with respect to 3 out of the 4 flats sold by the assessee, the sale deeds were executed after the date of grant of Building Use permission. In plain terms, therefore, after the sale of these flats, no construction was carried out. Therefore, if the date of the sale deeds is considered the crucial date for transfer of the capital asset, the construction preceded the transfer. What sub-section (1) of section 54 requires is that the assessee, after the date of transfer, purchases or within three years after such date, constructs a residential unit, only then the benefit of deduction would be granted. This provision, therefore, provides that construction of the residential unit should be done after the date of transfer but, within three years from such date. Under the circumstances, if the sale deeds are considered on the date on which the transfer of capital asset took place, the case of the assessee would not fall within the parameters of the said provision. [Para 14]

-It is, in this context, that both the sides had strenuously argued the case. The assessee obviously contended that the capital asset, i.e., in the present case, the land of the assessee, should be treated to have been transferred on the date on which the agreement to sale took place. The revenue, for obvious reasons, opposed this proposition. Section 5 of the Transfer of Property Act, 1882 defines the term 'transfer of property' as to mean an act by which a living person conveys property in present or in future to one or more other living persons or to himself or to himself and one or more other living persons.

-Section 54 of the Transfer of Property Act defines 'sale' as a transfer of ownership in exchange for a price paid or promised or part-paid or part promised. It further provides that transfer in case of a tangible immovable property of a value of Rs.100 and above or reversion of other intangible thing can be made only by a registered instrument. It is undisputable that an agreement to sale does not convey a property from one person to another, either in present or even in future. An agreement to sale an immovable property is a bilateral contract under which the two parties, i.e., the buyer and the seller, agree to certain terms and conditions, subject to which the property in question would be transferred by the seller to the buyer for a decided sale consideration. The terms and conditions of the agreement to sale are bound to be different in each case.

-However, the common thread would be the commitment of the owner of the property to convey to the purchaser the right, title and interest in such property upon the purchaser paying the agreed consideration in agreed manner. It is only after such bilateral obligations are discharged that the execution of the sale deed would take place and it is this sale deed, which is compulsorily registrable under section 17 of the Registration Act, 1908, upon being registered, would transfer the right, title and interest in the property in question into the purchaser. It is only upon the execution of the sale deed that the title in the property would vest in the purchaser. [Para 15]

-One must, however, view these transactions in the context of the provisions contained in the Act instead of confining its effect to the Transfer of Property Act and the Registration Act. As noted, section 2(14) defines 'capital asset' inter alia as a property of any kind held by an assessee. Section 2(47) of the Act defines 'transfer' in relation to a capital asset to include sale, exchange or relinquishment of the asset or extinguishment of any rights therein. The term 'transfer' defined under section 2(47) of the Act, thus, has a much wider connotation, as compared to the common parlance understanding or even under the Transfer of Property Act, under which the term 'transfer of property', as noted earlier, has a narrower sweep. It is, perhaps, possible to argue that the agreement to sale gives rise to a capital asset.

-Upon execution of the agreement to sale, the intending purchaser gets a certain right to insist that the title of the property be transferred if he performs his part of the obligation arising out of the agreement. If the seller is unwilling to do so, the intending purchaser may also successfully bring a suit for specific performance by demonstrating that he was and had always been ready and willing to perform his part of the obligations arising out of the agreement. Under an agreement to sale, thus, the seller binds himself to do or not to do certain things in reciprocation of the purchaser performing his part of the obligations. Correspondingly, it may be stated that the seller's right to freely deal in the property in question gets curtailed. It may, therefore, also be possible to argue that upon execution of such an agreement, there was extinguishment of certain rights of the owner and to that extent, there was a transfer of capital asset. The crucial question, however, still begs the answer is can it be stated that the agreement to sale transfers the property in question within the meaning of section 2(47) of the Act? [Para 16]

-The answer has to be in the negative. As discussed earlier, the agreement to sale an immovable property is in the nature of bilateral contract between the seller and the buyer. Under such agreement, the seller agrees to transfer the title in the property to the buyer, upon the buyer performing his part of the obligations, mainly, revolving around the payment of sale consideration on agreed terms. Such agreement to sale, however, has to culminate into a registered sale deed, so as to transfer the title of property in question from the seller to the buyer.

-There may be multiple reasons why such eventuality may never arise and these reasons could be entirely different from the seller refusing to perform his part of the obligations arising out of the contract or for some such reason, the transaction running into legal controversies. Some of the imaginable reasons could be the inability of the seller to clear the title of the property due to which the contract may be frustrated or rescinded with mutual consent or the refusal or inability of the purchaser to pay the sale consideration. [Para 17]

-An agreement to sale immovable property does not cast obligations only on the seller. It is based on reciprocal promises to be performed by both sides. If the purchaser fails to discharge his obligations arising out of the contract, then the agreement may as well not culminate into a final sale deed. Depending on the terms of agreement, the seller may either forfeit the earnest money, rescind the contract or in a given case, sue for specific performance or damages. These are but, a few illustrative examples to appreciate that there can be a wide gap between an agreement to sale and an actual instance of sale being evidenced under a sale deed. To therefore hold that upon mere execution of an agreement to sale of the immovable property gets transferred to the purchaser, even within the extended definition of section 2(47) of the Act, would be incorrect. [Para 18]

-Thus, the assessee's claim for deduction u/s. 54F cannot succeed except in relation to the transfer of a flat in favour of 'K', which had happened before the completion of construction. In such a case, since construction can be stated to have been carried out after the transfer of the original capital asset, the claim of deduction u/s.54F of the Act cannot be denied. To this limited extent, the appeal succeeds. [Para 29]