Recently Supreme Court of India , in Sanjeev Lal vs.Commissioner of Income-tax, Chandigarh stated that exemption U/S 54 would not be denied to an assessee merely because sale deed could not be executed within prescribed time, if the assessee had executed an agreement to sell in respect of the house property and purchased a new property within one year from the date of agreement to sell as per provisions of Section 54. Such execution of the agreement to sell will be considered a valid transfer within the meaning of section 2(47) and consequently relief can be claimed u/s 54.

 Facts of the case:

 The appellants had decided to sell the house, ownership of which came to be vested with the appellants by way of execution of will. They had entered into an agreement to sell the house and received earnest money in the year 2002. As the appellants had decided to sell the house in question, they had also decided to purchase another residential house so that the sale proceeds, including capital gain, can be used for purchase of the afore stated House. The said house was purchased well within one year from the date on which the agreement to sell had been entered into by the appellants.

The validity of the Will was questioned, wherein the trial court, by an interim order had restrained the appellants from dealing with the house property. The suit was consequently dismissed as there was no representation on his behalf in the suit. Due to the interim relief granted in the above stated suit, the appellants could not execute the sale deed till the suit came to be dismissed and the validity of the Will was upheld. Thus, the appellants executed the sale deed in 2004 and the same was registered in 2004.

In the assessment proceedings for the Assessment Year 2005-2006 under the Act, the Assessing Officer was of the view that the appellants were 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 in 2004 whereas the appellants had purchased another residential house more than one year prior to the purchase of the new asset and therefore, the appellants were made liable to pay income tax on the capital gain under Section 45 of the Act.

It was held that:

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.The term “transfer” has been given an inclusive definition and according to the said definition, whenever there is an extinction of any right in respect of a capital asset, such extinction would mean transfer of the property.

In addition to the fact that the term “transfer” has been defined under Section 2(47) of the Act, even if looked at the provisions of Section 54 of the Act which gives relief to a person who has transferred his one residential house and is purchasing another residential house either before one year of the transfer or even two years after the transfer, the intention of the Legislature is to give him relief in the matter of payment of tax on the long term capital gain. If a person, who gets some excess amount upon transfer of his old residential premises and thereafter purchases or constructs a new premises within the time stipulated under Section 54 of the Act, the Legislature does not want him to be burdened with tax on the long term capital gain and therefore, relief has been given to him in respect of paying income tax on the long term capital gain. The intention of the Legislature or the purpose with which the said provision has been incorporated in the Act, is also very clear that the assessee should be given some relief. In the case of Oxford University Press v. Commissioner of Income Tax [(2001) 3 SCC 359] this Court has observed that a purposive interpretation of the provisions of the Act should be given while considering a claim for exemption from tax. It has also been said that harmonious construction of the provisions which subserve the object and purpose should also be made while construing any of the provisions of the Act and more particularly when one is concerned with exemption from payment of tax. Considering the aforestated observations and the principles with regard to the interpretation of Statute pertaining to the tax laws, one can very well interpret the provisions of Section 54 read with Section 2(47) of the Act, i.e. definition of “transfer”, which would enable the appellants to get the benefit under Section 54 of the Act.

In view of the afore stated peculiar facts of the case and looking at the definition of the term ‘transfer” as defined under Section 2(47) of the Act, the appellants were given relief under Section 54 of the Act in respect of the long term capital gain which they had earned in pursuance of transfer of their residential property and used for purchase of a new asset/residential house.

 

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