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Sec. 54 of Income Tax Act – PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE. – agreement of sale for 1.32 crores in the year 2002 – sale effected in year 2004 due to pending of disputes – in the mean while in the year 2003 a new house was purchased by the income of selling of old house – exemption – as such not shown in income tax returns as not taxable – A.O. assessed tax as the sale was effected in the year 2004 but not in the year 2003 or prior to it – discarded the agreement of sale – Apex court held that 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 we can say that some right, in respect of the said property, belonging to the appellants 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 appellants in favour of the vendee/transferee on 27th December, 2002. The sale deed could not be executed for the reason that the appellants 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 aforestated peculiar facts of the case and looking at the definition of the term ‘transfer” as defined under Section 2(47) of the Act, we are of the view that the appellants were entitled to 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 being House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of a new asset/residential house. The appeals are, therefore, allowed with no order as to costs. The impugned judgments are quashed and set aside and the Authorities are directed to re-assess the income of the appellants for the Assessment Year 2005-2006, after taking into account the fact that the appellants were entitled to the relief, subject to fulfilment of other conditions.= Sh. Sanjeev Lal Etc. Etc. Appellants Versus Commissioner of Income Tax, Chandigarh & Anr. Respondents = 2014 – July. Part – http://judis.nic.in/supremecourt/filename=41729

Sec. 54 of Income Tax Act –  PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE. – agreement of sale for 1.32 crores in the year 2002 – sale effected in year 2004  due to pending of disputes – in the mean while in the year 2003 a new house was purchased by the income of selling of old house – exemption – as such not shown in income tax returns as not taxable – A.O. assessed tax as the sale was effected in the year 2004 but not in the year 2003 or prior to it – discarded the agreement of sale – Apex court held that 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 we can say  that  some  right, in respect of the said  property,  belonging  to  the  appellants  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  appellants  in  favour   of   the vendee/transferee on 27th December, 2002.    The  sale  deed  could  not  be executed for the reason that the appellants 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 aforestated peculiar facts of the case  and  looking  at  the definition of the term ‘transfer” as defined  under  Section  2(47)  of  the Act, we are of the view that the appellants were entitled  to  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  being House No. 267, Sector 9-C, situated in Chandigarh and used for  purchase  of

a new asset/residential house. The appeals are,  therefore,  allowed  with  no  order  as  to  costs.   The impugned judgments are  quashed  and  set  aside  and  the  Authorities  are directed to re-assess the income of the appellants for the  Assessment  Year 2005-2006, after taking into account  the  fact  that  the  appellants  were entitled to the relief, subject to fulfilment of other conditions.=


Upon transfer of the house property, long term capital gain had arisen,  but

as the appellants had purchased 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 appellants did not disclose  the

said long term capital  gain  in  their  return  of  income  filed  for  the

Assessment Year 2005-2006.

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 under Section 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  appellants  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  appellants  were  made

liable to pay income tax on the capital gain under Section 45 of the Act.

“54. PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE.

(1)   Subject to the provisions of sub-section (2), where in the case of  an

assessee being an individual or a Hindu undivided family, the  capital  gain

arises from the transfer of a long-term capital asset,  being  buildings  or

lands appurtenant thereto, and being a  residential  house,  the  income  of

which is chargeable under the head “Income from house  property”  (hereafter

in this section referred to as the original asset),  and  the  assessee  has

within a period of one year before or two years after the date on which  the

transfer took place purchased, or has within a period of three  years  after

that date constructed, a residential house, then,  instead  of  the  capital

gain being charged to income-tax as income of the  previous  year  in  which

the transfer took place, it shall be  dealt  with  in  accordance  with  the

following provisions of this section, that is to say, –

(i) If the amount of the capital gain  is  greater  than  the  cost  of  the

residential house so purchased or constructed  (hereafter  in  this  section

referred to as the new asset), the difference  between  the  amount  of  the

capital gain and the cost of the new asset shall be  charged  under  section

45 as the income of the previous year; and for the purpose of  computing  in

respect of the new asset any capital gain arising from its  transfer  within

a period of three years of its purchase or construction,  as  the  case  may

be, the cost shall be nil; or

(ii) If the amount of the capital gain is equal to or less than the cost  of

the new asset, the capital gain shall not be charged under section  45;  and

for the purpose of computing in respect of the new asset  any  capital  gain

arising from its transfer within a period of three years of its purchase  or

construction, as the case may be, the cost shall be reduced  by  the  amount

of the capital gain.”

Upon perusal of Section 54(1) of the Act,  it  is  very  clear  that  relief

under Section 54 of the Act in respect of the long term capital gain can  be

availed only if a residential house i.e. a new  asset  is  purchased  within

one year before or within two years after the date on which the transfer  of

the residential house/original asset takes place.  In the instant case,  the

residential house had been transferred by the appellants-assessees  on  24th

September, 2004 whereas they had purchased  another  house  on  30th  April,

2003.  Thus, the new asset was purchased more than one  year  prior  to  the

date on which the transfer in respect of  the  residential  house  had  been

effected.

For the aforestated reasons, the Assessing Officer  did  not  grant  benefit

under Section 54 of the Act and therefore, the  assessment  order  had  been

challenged  by  the  appellants  before  the  Commissioner  of  Income   Tax

(Appeals).=

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 immoveable  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 we can say  that  some  right,

in respect of the said  property,  belonging  to  the  appellants  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  appellants  in  favour   of   the

vendee/transferee on 27th December, 2002.    The  sale  deed  could  not  be

executed for the reason that the appellants 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 aforestated peculiar facts of the case  and  looking  at  the

definition of the term ‘transfer” as defined  under  Section  2(47)  of  the

Act, we are of the view that the appellants were entitled  to  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  being

House No. 267, Sector 9-C, situated in Chandigarh and used for  purchase  of

a new asset/residential house.

The appeals are,  therefore,  allowed  with  no  order  as  to  costs.   The

impugned judgments are  quashed  and  set  aside  and  the  Authorities  are

directed to re-assess the income of the appellants for the  Assessment  Year

2005-2006, after taking into account  the  fact  that  the  appellants  were

entitled to the relief, subject to fulfilment of other conditions.

2014 – July. Part – http://judis.nic.in/supremecourt/filename=41729 for full text – LAW FOR ALL

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