Sec 54F time limit for Purchase of House should be considered from date of agreement to sell

By | July 20, 2019
(Last Updated On: July 20, 2019)

HIGH COURT OF GUJARAT

Kishorbhai Harjibhai Patel

v.

Income Tax Officer

J.B. PARDIWALA AND A.C. RAO, JJ.

R/TAX APPEAL NO.1378 OF 2018

JULY  8, 2019

B.S. Soparkar for the Appellant. Varun K. Patel for the Respondent.

B.S. Soparkar for the Appellant. Varun K. Patel for the Respondent.

JUDGMENT

 

J.B. Pardiwala, J. – This Tax Appeal under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’), is at the instance of the assessee and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad ‘A’ Bench, Ahmedabad, dated 18th June 2018 in the ITA No.587/AHD/2017 for the Assessment Year 2013-14.

2. This Tax Appeal came to be admitted on the following two substantial questions of law :

“1.Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the order of the CIT(A) denying deduction of Rs.40,74,793/- u/s 54F of the Act by holding that the land in question was not transferred in a period stipulated under the Income Tax Act?
2.Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the order of the CIT(A) denying deduction of 26,74,283/- u/s 54B of the Act by holding that the land in question was non-agricultural land and exemption under the section was only available to agricultural land?”

3. We proceed to consider the first question as regards the deduction of Rs.40,74,793/- under Section 54F of the Act.

4. The Assessing Officer, while disallowing the exemption claimed by the assessee under Section 54F of the Act, observed as under :

“The reply furnished by the assessee has been considered.

The same is not acceptable. As stated hereinabove that for claiming exemption u/s.54F, the assessee has to purchase within one year before the date of transfer or two years after the date of transfer or constructed within 3 years after the date of transfer [or from the date of receipt of compensation in the case of compulsory acquisition], one residential house. In the case of the assessee, the transfer of the land took place on 03/07/2012 and as such the residential house should have been purchased within preceding one year i.e. on or after 04/07/2011. However, the assessee has purchased the residential house on 22/04/2010 i.e. beyond the time allowed as per the provisions of section 54F of the Act. As such the exemption claimed by the assessee u/s 54 of the Act at Rs.40,74,793/-is not allowable. It was the contention of the assessee that the section 54F of the Act is a beneficial provision for promoting the construction of residential house and requires to be construed liberally for achieving that purpose. Even the assessee’s contention is accepted then any assessee can claim exemption u/s.54F of the Act out of the capital gain arisen from the transfer of any long term capital asset [not being a residential house], if the assessee purchased any residential house in any time preceding the date of transfer of the capital asset. This was not the intention of the legislature. Further. the Circular No. 359 dated 10/05/1983 is not applicable to the facts of the assessee’s case. Here in the case of the assessee, the fact remains that the assessee has purchased the residential house on 22/04/2010 i.e. beyond the time allowed as per the provisions of section 54F of the Act. The conditions laid down in section 54F of the Act have not been fulfilled by the assessee. Therefore, the exemption u/s.54F of the Act claimed by the assessee at Rs.40,74,793/- is disallowed and added to the total income of the assessee. Penalty proceedings u/s.271(1)(c) of the Act are initiated separately for furnishing inaccurate particulars of income.”

5. In appeal preferred by the assessee, the CIT(A) observed as under :

“I have considered the facts of the case, the submission of the appellant and the AO’s observations. A perusal of the assessment order shows that the appellant had not made any submission before the AO that it should be allowed exemption u/s 54F of the IT Act on account of the fact that he had entered into sale agreement with the purchaser on 13.08.2010 and hence, the house purchased by him on 22.04.2010 was within one year of the transfer of the land. This is a new argument taken by the appellant during the course of the current appellate proceedings on the basis of the decision of the Hon’ble Supreme Court of India in the case of Sanjeevlal (supra). But, the fact involved in the decision in the case of Sanjeevlal (supra) are entirely different from the facts involved in the appellant’s case. In the case of Sanjeevlal, the assessee had entered into an agreement to sell the house on December 27, 2002. But the sale deed could not be executed by him because of the fact that the will, by virtue of which he had inherited the house, had been challenged in the Court by another person and only after the decision in that case, the assessee could execute the sale deed. During the pendency of proceedings relating to challenge of the will, the Court had restrained the assessee from the dealing with the house property. Meanwhile the assessee had purchased another house on 30.04.2003 whereas the sale deed of the original house could be executed only on September 24, 2004. Under such peculiar circumstances, the Hon’ble Supreme Court held as follows:

“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.”

In the present case also a peculiar fact was involved, but it was entirely different from the facts of the decision in the case of Sanjeev Lal (supra). In the present appeal, the agricultural land owned by the appellant, was being transferred for non agricultural purposes. The purchaser in this case was not an agriculturist which is evident from the facts narrated in the agreement to sale executed on 13.08.2010. In this sale agreement, it has been clearly mentioned that the sale deed will be executed only after the said land is converted to non agricultural land. The sale agreement also mentions that on the date of its execution, no possession was given to the purchaser. Besides, it has been clearly mentioned that possession will be given at the time of executing the sale seed of the said property. Relevant parts of the English Translation of the sale agreement as provided by the appellant himself are as follows:

“3. Schedule selling property’s absolute possession will be given us the execute to you the execute at the time of executing registered sale deed of said property at that time we the executor have to give to you the execute, such is decided.

4. After transferring the above said schedule property into non agricultural as mentioned above on paying said sale consideration amount by executing registered sale deed, you the executor are rightful. But, you the executee, by paying sale consideration amount and ready to execute sale deed and then also at that time we the executors does not execute registered sale deed to you the executee and/or for that does any excuses then at that time you the executees, to gets special existence of this Banakhat Agreement and by filing suit against us in court, at court way are rightful to execute registered sale deed and at that time to you getting all the expenses responsibility will be of the executors.”

Thus, the sale agreement makes it very clear that neither any possession was given to the purchaser nor any right was given to the purchaser for enforcing the sale agreement prior to conversion of the land from agricultural land to non agricultural land and payment of the sale consideration by the purchaser. Thus, no right was created by virtue of sale agreement which can be considered as transfer with the meaning of Section 2(47) of the IT Act, 1961.”

6. In further appeal by the assessee to the ITAT, the Tribunal held as under :

“We have heard the rival contentions and perused the material on record. The assessee has claimed exemption u/s. 54 of the act of Rs. 40,74,793/-. The assessing officer has noticed that according to the provisions of section 54F of the act, the said exemption is available if the assessee has purchased within one year before the date of transfer or two years after the date of transfer or constructed within 3 years after the date of transfer (or from the date of receipt of compensation in the case of compulsory acquisition) one residential house. In the light to the above provision, the assessing officer has observed that the transfer of the land was taken placed on 03/07/2012, however, the assessee had purchased the residential house on 22/04/2010 beyond the stipulated conditions laid down in section 54F of the act. The assessee claimed that he has executed an agreement to sell the agricultural land to Smt. Aneetben M.Patel on 13-08- 2010 and the conveyance deed was executed on 03-07-2012. The assessee contended that he has entered into sale agreement with the buyer on 13-08-2010 and the new house was purchased on 22/04/2010 which was within one year of the transfer of the land. The assessee has placed reliance on the judgment of hon’ble supreme court of India in the case of Sanjeev Lal v. CIT 365 ITR 389. In the case of Sanjeev Lal, the assessee had received earnest money of 15 lacs when entered into agreement on 27th Dec, 2002. It is held that a right in respect of the capital asset, viz. the property in question had been transferred by the appellants in favour of the vendor/transferee on Dec 27, 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. We have perused the decision in the case of Sanjeevlal case of the Hon’ble Supreme Court wherein the assessee has entered into an agreement to sell the house on 27th Dec, 2002 and the sale deed could not be executed for the reason that the assessee had been prevented from dealing with the residential house by the order of the court due to pending litigation. The relevant part of the judgment of Hon’ble Supreme Court of India in the case of Sanjiv Lal v. CIT 365 ITR 389 is reproduced as under :

“23. 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.

24. 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.

25. 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.

26. 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 fulfillment of other conditions.”

It is crystal clear that the decision in the case of Sanjeevlal was delivered after taking into account the peculiar facts of the case that the sale deed could not be executed because of the pending litigation and the competent court has prohibited the assessee to execute the sale deed therefore it is held that the assessee was entitled for relief under section 54 of the act. However, in the case of the assessee, we did not find any such peculiar circumstances which have prohibited the assessee to execute the sale deed. We have also considered all the judicial pronouncements referred by the assessee and we find facts of the case of the assessee are distinguishable, therefore, the same are not applicable to the case of the assessee. Further when the assessee has executed agreement to sale on 13.08.2010 the land was agricultural land and agreement to sale was made with non-agricultural person. However, transfer of agricultural land to non- agricultural is prohibited in the state of Gujarat as per the provision of section 43 of the Bombay Tenancy& Agricultural Lands Act 1948 as applicable to the state of Gujarat. Therefore, no right can be enforced by the buyer as the land was agricultural land by virtue of sale agreement. After considering the above facts and findings, we uphold the decision of the ld. CIT(A) that the land was transferred only on 03-07-2012 when a registered sale deed was executed and it was absolutely correct that there was no creation of any right of the purchaser in the said land as the same were prohibited by the law relating to transfer of agricultural land as existing in the state of Gujarat.”

7. Thus, it appears that all the three Revenue authorities, having regard to the facts of the present case, took the view that for the purpose of claiming exemption under Section 54F of the Act, the assessee is supposed to purchase residential house within one year before the date of the transfer or two years after the date of the transfer or construct house within three years after the date of the transfer. The Revenue authorities took notice of the fact that in the case on hand the transfer of the land took place on 3rd July 2012, and in such circumstances, the residential house should have been purchased by the assessee within the preceding one year, i.e. on or after 4th July 2011. The Revenue authorities took notice of the fact that the assessee had purchased the residential house on 22nd April 2010, i.e. beyond the time period as stipulated under Section 54F of the Act. In such circumstances, the claim of the assessee for exemption under Section 54F of the Act at Rs.40,74,793=00 came to be disallowed.

I. SUBMISSIONS ON BEHALF OF THE ASSESSEE :

7. Mr.B.S.Soparkar, the learned counsel appearing for the assessee, vehemently submitted that the Tribunal committed a serious error in concurring with the findings recorded by the Assessing Officer as well as the CIT(A). According to Mr.Soparkar, the law on the subject is well-settled. He submitted that the decision of the Supreme Court, in the case of Sanjeev Lal v. Commissioner of Income-tax, Chandigarh, [2014] 46 taxmann.com 300 (SC), clinches the issue. He vehemently submitted that the Revenue authorities committed a serious error in distinguishing the decision of the Supreme Court in the case of Sanjeev Lal (supra) on facts while completely ignoring the principle of law, or rather the statement of law, that the date of agreement to sell should be taken as the date of transfer of the original asset in terms of Section 2(47) of the Act, 1961. Mr.Soparkar brought to our notice the following events :

DateEvent
03.11.1989The Appellant Assessee purchased the agricultural land.
22.04.2010A new Residential House was purchased by the appellant assessee.
13.08.2010An agreement to sale was entered into for sale of the agricultural land at Rs.4 crore. Amount of Rs.10 lakh towards earnest money was received as part of the agreement.
15.10.2011Possession of the land was handed over to the purchasers of the land.
16.06.2012Competent Authority accorded permission to convert the agricultural land into non-agricultural land.
03.07.2012Sale deed was executed by the seller in favour of the purchaser of the land.

8. Mr.Soparkar vehemently submitted that when an agreement to sell in respect of immovable property is executed, a right in personam is created in favour of the vendee and 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 gets a legitimate right to enforce a specific performance of the agreement. Mr.Soparkar submitted that while considering the provisions of Section 2(47)(ii) of the Act, the Supreme Court, in Sanjeev Lal (supra), took the view that if a right in respect of any capital asset is extinguished and that right is transferred to someone else, it would amount to transfer of a capital asset. Mr.Soparkar submitted that once an agreement to sell is executed in favour of some person, the said person gets a right to transfer the property in his favour and, consequently, some right of the vendor is extinguished. Mr.Soparkar invited the attention of this Court to Explanation (2) to Section 2(47) of the Act, which came to be added by the Finance Act 2012 with retrospective effect on 1st April 1962. According to Mr.Soparkar, the said provision of the Explanation is applicable in the case on hand. He submitted that the said Explanation clearly provides that the transfer of an asset includes dispose of or parting with an asset by way of an agreement.

9. Mr.Soparkar, in the last, submitted that providing for short term and long term capital gains is a beneficial piece of legislation, whereby certain benefits in taxation are given to the assessee on fulfillment of certain conditions. Every such legislation should be construed liberally in favour of the assessee as it is for the benefit of the assessee. In such circumstances referred to above, Mr.Soparkar prays that there being merit in the first question of law, which has been proposed, the same be answered in favour of the assessee.

II. SUBMISSIONS ON BEHALF OF THE REVENUE :

10. Mr.Varun Patel, the learned standing counsel appearing for the Revenue, on the other hand, has vehemently opposed this Tax Appeal. According to Mr.Patel, none of the two questions formulated could be termed as the substantial questions of law. According to Mr.Patel, no error, not to speak of any error of law, could be said to have been committed by the Appellate Tribunal in taking the view that the assessee is not entitled to claim any exemption under Section 54F of the Act, 1961. Mr.Patel submitted that the reliance placed by the learned counsel appearing for the assessee on the decision of the Supreme Court in the case of Sanjeev Lal (supra) is completely misplaced. According to Mr.Patel, in the peculiar facts of the case, the Supreme Court, in the case of Sanjeev Lal (supra), thought fit to grant the benefit of exemption under Section 54F of the Act. Mr.Patel invited our attention to the decision of this Court in the case of Ushaben Jayantilal Sodhan v. Income Tax Officer, reported in [2018] 407 ITR 276 (Guj), wherein a coordinate bench had the occasion to consider the case of Sanjeev Lal (supra). Mr.Patel pointed out that in Ushaben Jayantilal Sodhan (supra), the coordinate bench distinguished Sanjeev Lal (supra)having regard to the peculiar facts of Sanjeev Lal‘s case (supra). According to Mr.Patel, an agreement to sell does not confer any right, title or interest in the property and, therefore, the Revenue authorities rightly took the view that Sanjeev Lal (supra) would not help the assessee in the present case in any manner. In such circumstances referred to above, Mr.Patel prays that there being no merit in the first question of law, the same be answered in favour of the Revenue.

III. ANALYSIS :

11. Transfer has been defined under Section 2(47) of the Act, which is extracted hereunder :—

“”transfer”, in relation to a capital asset, includes,—

(i)the sale, exchange or relinquishment of the asset ; or
(ii)the extinguishment of any rights therein ; or
(iii)the compulsory acquisition thereof under any law ; or
(iv)in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or
(iv)the maturity or redemption of a zero coupon bond; or
(v)any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi)any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation 1.—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.

Explanation 2.- For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;”

12. Section 54F of the Act, 1961, reads as follows :

“54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.– (1) [Subject to the provisions of sub-section (4), where in the case of an assessee being an individual], the capital gain arises from the transfer of any long-term capital asset not being a residential house (hereinafter 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 (hereafter in this section referred to as the new asset) the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,

(a)if the cost of the new asset is not less than the net consideration in respect of the original asset the whole of such capital gain shall not be charged under section 45;
(b)if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration shall not be charged under section 45 :

Provided that nothing contained in this sub-section shall apply where –

(a)the assessee,—
(i)owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii)purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii)constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b)the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”

Explanation : For the purposes of this section, —

[(i)******]

[1] “net consideration”, in relation to the transfer of a capital asset means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

(2) Where the assessee purchases within the period of [two years] after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house the income from which is chargeable under the head “Income from house property” other than the new asset the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.

(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the cost of such new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.

(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date in which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with any scheme which the Central Government may, by not notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then, —

(i) the amount by which —

(a)the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds
(b)the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset,

shall be charged under section 45 as income of the previous year in which the period of three years from the date or the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw the utilised amount in accordance with the scheme aforesaid.”

13. Thus, the plain reading of Section 54F of the Act indicates that if the capital gain arises from the transfer of any long term capital asset not being a residential house and the assessee has, within a period of one year before or two years after the date on which the transfer takes place, purchased, or within a period of three years after the date, constructs a residential house, then the capital gain shall be dealt with in accordance with the other provisions of Section 54F of the Act.

14. To put it in other words, it is very clear that relief under Section 54F 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 new residential house was purchased by the appellant on 22nd April 2010, whereas the agreement to sell the agricultural land at Rs.4 crore was entered into on 13th August 2010. An amount of Rs.10 lakh towards the earnest money was received by the appellant as part of the agreement. On 15th October 2011, the possession of the land was handed over by the appellant to the purchasers of the land. On 3rd July 2012, the sale-deed came to be executed by the appellant in favour of the purchaser of the land. If one considers the date on which it was decided to sell the land, i.e. 13th August 2010, as the date of transfer or sale, it cannot be disputed that the appellant would be entitled to the benefit under the provisions of Section 54 of the Act because long term capital gain earned by the appellant had been used for purchase of new asset on 22nd April 2010.

15. The question to be considered by this Court is, whether the agreement to sell which had been executed on 13th August 2010 can be considered as the date on which the property, i.e. the agricultural land, had been transferred.

16. In Sanjeev Lal (supra), the Supreme Court examined Section 54 of the Act in a case where the assessee had entered into an agreement to sell a house to a third party on 27th December 2002 and had received Rs.15 lakh by way of an earnest money and later received the balance sale consideration of Rs.1.17 crore (total being Rs.1.32 crore when the sale-deed was executed on 24th September 20040. In the mean while, the assessee purchased another house on 30th April 2003. The High Court denied the benefit under Section 54 of the Act observing that the new house had been purchased prior to the execution of the sale and not within one year prior to the sale of the original asset, i.e. the new house had been purchased on 30th April 2003, whereas the earlier asset was sold only on 24th September 2004. The Supreme Court, allowing the appeal preferred by the assessee, noticed that the agreement to sell was executed on 27th December 2002 but the sale-deed could not be executed because of the interse litigation between the legal heirs, as one of them had challenged the Will under which the assessee had inherited the property. The Supreme Court took the view that the agreement to sell had given some rights to the vendor and reduced or extinguished the rights of the assessee. Thus, what was observed was sufficient for the purpose of Section 2(47) of the Act, which defines the term ‘transfer’ in relation to a capital asset. The Supreme Court observed that the intention behind Section 54 of the Act was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before the transfer.

17. The Supreme Court in the case of Sanjeev Lal (supra) as follows :

“20. The question to be considered by this Court is 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. In normal circumstances by executing an agreement to sell in respect of an immovable property, a right in personam 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 agreement to sell some right is given by the vendor to the vendee. 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. Relevant portion of Section 2(47), defining the word “transfer” is as under:

‘2(47) “transfer”, in relation to a capital asset, includes,-

(i)******

(ii) the extinguishment of any rights therein; or ‘

21. Now in the light of definition of “transfer” as defined under Section 2(47) of the Act, it is clear that when any right in respect of any capital asset is extinguished and that right is transferred to someone, it would amount to transfer of a capital asset. In the light of the aforestated definition, let us look at the facts of the present case where an agreement to sell in respect of a capital asset had been executed on 27th December, 2002 for transferring the residential house/original asset in question and a sum of Rs. 15 lakhs had been received by way of earnest money. It is also not in dispute that the sale deed could not be executed because of pendency of the litigation between Shri Ranjeet Lal on one hand and the appellants on the other as Shri Ranjeet Lal had challenged the validity of the Will under which the property had devolved upon the appellants. By virtue of an order passed in the suit filed by Shri Ranjeet Lal, the appellants were restrained from dealing with the said residential house and a law-abiding citizen cannot be expected to violate the direction of a court by executing a sale deed in favour of a third party while being restrained from doing so. In the circumstances, for a justifiable reason, which was not within the control of the appellants, they could not execute the sale deed and the sale deed had been registered only on 24th September, 2004, after the suit filed by Shri Ranjeet Lal, challenging the validity of the Will, had been dismissed. In the light of the aforestated facts and in view of the definition of the term “transfer”, one can come to a conclusion that some right in respect of the capital asset in question had been transferred in favour of the vendee and therefore, some right which the appellants had, in respect of the capital asset in question, had been extinguished because after execution of the agreement to sell it was not open to the appellants to sell the property to someone else in accordance with law. A right in personam had been created in favour of the vendee, in whose favour the agreement to sell had been executed and who had also paid Rs.15 lakhs by way of earnest money. No doubt, such contractual right can be surrendered or neutralized by the parties through subsequent contract or conduct leading to no transfer of the property to the proposed vendee but that is not the case at hand.

22. 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. Though it has been very often said that common sense is a stranger and an incompatible partner to the Income Tax Act and it is also said that equity and tax are strangers to each other, still this Court has often observed that purposive interpretation should be given to the provisions of the Act. In the case of Oxford University Press v. CIT [2001] 247 ITR 658/115 Taxman 69 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.

23. 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 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.

24. 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.

25. 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.”

18. Thus, the Supreme Court took the view that although the agreement to sell ordinarily would not confer any right, title or interest yet, having regard to the definition of the term ‘transfer’ under Section 2(47)(ii), the agreement to sell would extinguish the rights in the property. The Supreme Court, in no uncertain terms, has observed that by virtue of the agreement to sell, some rights are given by the vendor to the vendee. Simultaneously, the Supreme Court also went into the facts of the cases and explained, why the appellant therein was not able to execute the sale-deed. We are not concerned with the facts of Sanjeev Lal (supra). We are only concerned with the principle of law as laid down in Sanjeev Lal (supra).

19. In our opinion, the Revenue authorities were not justified in distinguishing the case of Sanjeev Lal (supra) on facts.

20. Our attention was invited by the learned counsel appearing for the Revenue to the decision of this Court in the case of Ushaben Jayantilal Sodhan (supra). We take notice of the fact that the coordinate bench took the view that an agreement to sell is in the nature of a bilateral contract between the seller and the buyer. The bench took the view that an agreement to sell would not confer any right, title or interest in favour of the proposed purchaser and it would not extinguish the rights of the owner till a valid sale-deed is executed. We may quote the relevant observations of the coordinate bench thus :

“16. We 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) of the Act 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 u/s.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 ?

17. In our opinion, 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.

18. 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 itself gets transferred into the purchaser, even within the extended definition of Section 2(47) of the Act, would be incorrect.

19. In this context, we must first refer to the judgment of the Supreme Court in case of Sanjeev Lal (supra) on which heavy reliance was placed by counsel for the assessee. It was a case in which the assessee owned an immovable property, namely, a house, situated in Chandigarh. He decided to sell the house, for which an agreement to sale was executed on 27.12.2002 for a sale consideration of Rs.1.32 Crores. Out of such amount, a sum of Rs.15 Lakhs was received by the assessee by way of earnest money. The assessee also intended to purchase another house property in Chandigarh out of the sale proceeds. The house was purchased on 30.04.2003, which was within 01 year from the date of execution of the agreement to sale. Before the sale deed could be executed, the validity of the Will under which the assessee had received the property was called in question by another son of the deceased testator by filing a Civil Suit. The trial Court granted interim injunction restraining the assessee from dealing with the property. However, during the pendency of the suit, the plaintiff died leaving behind no heirs and the suit was dismissed in May 2004. It was due to the interim injunction that the assessee could not execute the sale deed. Upon dismissal of the suit, the sale deed was executed on 24.09.2004.

19.1 In this context, the assessee’s claim for deduction of capital gain arose. The Revenue argued that the assessee was not entitled to benefit of Section 54 of the Act since the transfer of the capital asset took place on 24.09.2004 whereas, the assessee had purchased another residential house on 30.04.2003, i.e. more than 01 year prior to the sale of the asset. The Supreme Court noted that Section 54 of the Act clearly provides that in order to avail benefit under the said Section, one must purchase a residential house or a new asset, within 01 year prior to or 02 years after the date on which the transfer of residential house in respect of which the long term capital gain had arisen, has taken place. The Court, therefore, noted that looking to the relevant dates, if one considers the date on which the assessee had decided to sell the property as the date of transfer or sale, then the appellant-assessee would be entitled to benefits under Section 54 of the Act. The Court, therefore, posed a question to itself whether the agreement to sale, which was executed on 27.12.2002, can be considered as a date on which the property, i.e. the residential house, had been transferred. The Court observed that in normal circumstances, by executing an agreement to sale of an immovable property, a right in personem is created in favour of the transferrer. In such situation, the vendee is restrained from selling the property to anyone else. However, the question still remains whether the entire property can be said to have been sold at the time when the agreement to sale was entered into. The Court was of the opinion that in normal circumstances, such question had to be answered in the negative. The Court, thereafter, referred to the provisions of Section 2(47) of the Act giving expanded meaning to the term “transfer” and further observed in light of the said definition that one can come to the conclusion that some right in respect of the capital asset in question had been transferred and that such right with respect to the capital asset had been extinguished, after execution of the agreement to sale. The Court also observed that, no doubt, such contractual right can be surrendered and neutralized by the parties by subsequent contract or conduct. But, such was not the case on hand. The Court also noted that 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 the competent Court. The Court, in view of such peculiar facts of the case and looking to the definition of “transfer” u/s.2(47) of the Act, was of the view that the assessee was entitled to relief u/s.54 of the Act.

20. This judgment, contrary to what was strenuously canvassed before us, does not lay down a blanket proposition that without there being anything else, upon execution of an agreement to sale of an immovable property, the asset, i.e. the property in question, itself stands transferred. Main thrust in the said case was that the assessee, after having executed an agreement to sale the property, was prevented from executing the sale deed by an injunction of the Court. In the meantime, he had already purchased the new property. These were the peculiar facts of that case.”

21. We take notice that once again the coordinate bench went into the facts of Sanjeev Lal’s case (supra) and took the view that in the peculiar facts and circumstances, Sanjeev Lal was not able to execute the sale-deed. With profound respect to the decision of the coordinate bench, we are of the view that the fundamental principle of law explained by the Supreme Court in Sanjeev Lal’s case (supra) could be said to have been overlooked. The Income Tax Act gives a precise definition to the term ‘transfer’. Section 2(47)(ii) of the Act talks about extinguishment of rights. The Supreme Court, in Sanjeev Lal’s case (supra), is very clear that an agreement to sell would extinguish the rights and the same would amount to transfer within the meaning of Section 2(47) of the Act, 1961. This definition of transfer given in the Income Tax Act is only for the purpose of income tax.

22. The question is, whether the word “extinguishment” used in Section 2(47) of the Act would apply to such an agreement of sale ? In Black’s Law Dictionary, 4th Edn., Page-696, the word “extinguishment” has been variously defined as meaning a complete wiping out, destruction, annihilation, termination, cancellation or extinction and it is ordinarily used in relation to right, title, interest, charge, debt, power, contract or estate (see Corpus Juris Secundum, volume 35, page 294). Also see CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj). The agreement to sell would also fall, according to Sanjeev Lal (supra), within the scope of the expression “extinguishment of rights” in a capital asset and would, thus, be a transfer of capital asset.

23. A Division Bench of the Allahabad High Court had the occasion to consider Sanjeev Lal (supra) in the case of Commissioner of Income-tax-II, Agra v. Shimbhu Mehra, reported in [2016] 65 taxmann.com 142 (Allahabad). In the Tax Appeal before the Allahabad High Court, the question of law was as under :

“Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is legally justified in confirming the findings of the learned CIT(A) holding that the agreement to sell the land under consideration was made on 04.07.2001, prior to insertion of section 50C of I.T. Act, 1961 ignoring the fact that the sale deed was executed in April, 2003, the sale consideration agreed upon was paid in April, 2003 and the possession of the land was handed over to the transferee after execution of Sale Deed ?”

24. The Division Bench of the Allahabad High Court, after referring to the definition of the term ‘transfer’ as defined under Section 2(47) of the Act in para 11 proceeded to observe in paragraphs-12 and 13 as under :

“12. Sub-clause (ii) of Section 2(47) of the Act states that the transfer, in relation to a capital asset, includes the extinguishment of any rights therein. In Sanjeev Lal v. CIT [2014] 365 ITR 389/225 Taxman 239/46 taxmann.com 300 (SC), the Supreme Court considered the question as to whether the date on which the agreement for sale was executed could be considered the date on which the property was transferred. The Supreme Court held that when an agreement to sell in respect of immovable property is executed, a right in personam is created in favour of the vendee and 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 gets a legitimate right to enforce a specific performance of the agreement. The Supreme Court, while considering the provisions of Section 2(47) (ii) of the Act held that if a right in respect of any capital asset is extinguished and that right is transferred to someone else, it would amount to transfer of a capital asset. The Supreme Court held that once an agreement to sell is executed in favour of some person, the said person gets a right to get the property transferred in his favour and, consequently, some right of the vendor is extinguished.”

25. A Division Bench of the Delhi High Court in the case of Commissioner of Income Tax II v. Kuldeep Singh, reported in 2014 (226) Taxman 133, while examining Section 54 of the Act, had the occasion to consider Sanjeev Lal (supra). Sanjiv Khanna, J. (as His Lordship then was), speaking for the bench, observed as under :

“9. Recently Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sanjeev Lal v. CIT [2014] 46 taxmann.com 300 again examined Section 54 in a case where the assessee had entered into an agreement to sell a house to a third party on 27th December, 2002 and had received Rs.15 lacs by way of earnest money and subsequently received the balance sale consideration of Rs.1.17 crores (total being Rs.1.32 crores) when the sale deed was executed on 24th September, 2004. In the meanwhile, the assessee had purchased another house on 30th April, 2003. Benefit under Section 54 was denied by the High Court observing that the new house had been purchased prior to execution of the sale and not within one year prior to sale of original asset i.e. new house has been purchased on 30th April, 2003 whereas the earlier asset was sold only on 24th September, 2004. The Supreme Court allowing the appeal noticed that the agreement to sell was executed on 27th December, 2002 but the sale deed could not be executed because of inter-se litigation between the legal heirs, as one of them had challenged the will under which the assessee had inherited the property. The agreement to sell, it was held had given some rights to the vendor and reduced or extinguished rights of the assessee. This, it was observed was sufficient for the purpose of Section 2(47), which defines the term transfer in relation to a capital asset. In the light of the factual matrix, it was observed that the intention behind Section 54 was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to subserve the object and more particularly when one was concerned with exemption from payment of tax. The assessee, therefore, succeeded. The observations made in the said decision are also relevant on the question whether the payments made by the assessee to the person with whom he had entered into an earlier agreement to sell should be allowed to be set off as expenses incurred in relation to the sale deed which was executed.”

26. A Division Bench of the Bombay High Court (Panaji Bench), in the case of Commissioner of Income Tax, Aaykar Bhavan, Patto, Panaji Goa v. Girish L.Ragha, reported in 2016 (239) Taxman 449, also had the occasion to consider Sanjeev Lal (supra). While examining the question whether the Income Tax Appellate Tribunal was justified to come to the conclusion that merely purchasing a flat for the purpose of seeking exemption of capital gain within a period of two years would imply taking the actual possession and also completion certificate of such premises within such period. The bench observed as under :

“9. Recently Supreme Court in Civil Appeal Nos. 5899-5900/2014 titled Sh. Sanjeev Lal Etc. v. CIT, Chandigarh & Anr., decided on 01/07/2014, 2014 (8) SCALE 432 again examined Section 54 in a case where the assessee had entered into an agreement to sell a house to a third party on 27th December, 2002 and had received Rs.15 lacs by way of earnest money and subsequently received the balance sale consideration of Rs.1.17 crores (total being Rs.1.32 crores) when the sale deed was executed on 24th September, 2004. In the meanwhile, the assessee had purchased another house on 30th April, 2003. Benefit under Section 54 was denied by the High Court observing that the new house had been purchased prior to execution of the sale and not within one year prior to sale of original asset i.e. new house has been purchased on 30th April, 2003 whereas the earlier asset was sold only on 24th September, 2004. The Supreme Court allowing the appeal noticed that the agreement to sell was executed on 27th December, 2002 but the sale deed could not be executed because of inter-se litigation between the legal heirs, as one of them had challenged the will under which the assessee had inherited the property. The agreement to sell, it was held had given some rights to the vendor and reduced or extinguished rights of the assessee. This, it was observed was sufficient for the purpose of Section 2(47), which defines the term transfer in relation to a capital asset. In the light of the factual matrix, it was observed that the intention behind Section 54 was to give relief to a person who had transferred his residential house and had purchased another residential house within two years of transfer or had purchased a residential house one year before transfer. It was only the excess amount not used for making purchase or construction of the property within the stipulated period, which was taxable as long term capital gain while on the amount spent, relief should be granted. Principle of purposive interpretation should be applied to subserve the object and more particularly when one was concerned with exemption from payment of tax. The assessee, therefore, succeeded. The observations made in the said decision are also relevant on the question whether the payments made by the assessee to the person with whom he had entered into an earlier agreement to sell should be allowed to be set off as expenses incurred in relation to the sale deed which was executed.”

27. A Division Bench of the Karnataka High Court, in the case of Lahar Singh Siroya v. Assistant Commissioner of Income-Tax, reported in 2015 LawSuit (Kar) 3019, also had the occasion to consider Sanjeev Lal (supra). While answering the following question of law –

“Whether the Tribunal was justified in law in holding that the income has to be treated as short term capital gains when the assessee had entered into an agreement to sell on 1.4.1995 and had paid a substantial advance of Rs.40.00 lakhs even though the sale deed may have been executed on 5.12.2002 on payment of further sum of Rs.1.00 lakh?”

Vineet Saran, J. (as His Lordship then was), speaking for the bench, observed as under :

“9. In the case of Sanjeev lal (supra), the Apex Court was considering a case where an agreement to sell his property was entered into by the assessee therein on 27.12.2002 for a consideration of Rs.1.32 crores, out of which only Rs.15.00 lakhs had been paid to the assessee as earnest money. The assessee therein then purchased another house on 30.04.2003. However, since there was litigation initiated with regard to the property after the assessee had entered into an agreement to sell it, the sale deed could not be executed by him till the matter was settled, and ultimately the sale deed was executed by the assessee only on 24.09.2004. The assessee therein claimed the benefit of Section 54 on the ground that the property had been purchased by him within two years of the agreement to sell his property, which was entered into on 27.12.2002. After considering the fact that the sale deed could not be executed immediately after the agreement because of pending litigation, the Apex Court, in the facts of that case, held that the, “the authorities ought to have considered the date on which the agreement to sell had been effected by the appellants for transfer of property in question as the date of transfer of the house/original asset”.

10. The benefit of Section 54 of the Act is to be given only when the assessee purchases a property one year prior to the sale of his property or two years after such sale. In the case before the Apex Court, even though the purchase of the property by the assessee was on 30.04.2003, which was not within one year prior to the execution of the sale deed dated 24.09.2004, yet the benefit was given by the Apex Court to the assessee on the ground that it was within two years of the agreement to sell executed on 27.12.2002.

11. The facts of the present case are similar, if not on a stronger footing than that in the case of Sanjeev Lal (supra). In the said case, while entering into an agreement to sell, an advance of only Rs.15.00 lakhs, out of Rs.1.32 crores, had been paid; whereas in the case at hand, an advance of Rs.40.00 lakhs had been given at the time of agreement entered into on 1.4.1995 out of the total sale price of Rs.41.00 lakhs, for which the sale deed was executed on 5.12.2002.

12. Providing for short term and long term capital gains is a beneficial piece of legislation, whereby certain benefit in taxation is given to the assessee on fulfillment of certain conditions. Every such legislation is to be construed liberally in favour of the assessee, as it is for the benefit of the assessee. When the purpose is to give a benefit, then technicalities in law should not come in the way of such benefit being given. In the facts of the present case, applying the ratio of the decision of the Apex Court in the case of Sanjeev Lal (supra), in our opinion, the assessee would be entitled to the benefit of long term capital gain.”

28. Thus, in view of the aforesaid discussion, we are of the opinion that the Appellate Tribunal was not right in law in confirming the order of the CIT(A) denying the deduction under Section 54F of the Act on the premise that the land in question was not transferred within the stipulated period as provided under Section 54F of the Act.

29. Section 54F is a beneficial provision and is applicable to an assessee when the old capital asset is replaced by a new capital asset in the form of a residential house. Once an assessee falls within the ambit of a beneficial provision, then the said provision should be liberally interpreted. The Supreme Court in the case of CCE v. Favourite Industries, [2012]7 SCC 153, has succinctly observed thus :

“21. Furthermore, this Court in Associated Cement Companies Ltd. v. State of Bihar [(2004) 7 SCC 642], while explaining the nature of the exemption notification and also the manner in which it should be interpreted has held: (SCC p. 648, para 12)

“12. Literally ‘exemption’ is freedom from liability, tax or duty. Fiscally it may assume varying shapes, specially, in a growing economy. In fact, an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden of progressive approach of fiscal provisions intended to augment State revenue. But once exception or exemption becomes applicable no rule or principle requires it to be construed strictly. Truly speaking, liberal and strict construction of an exemption provision is to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction. (See Union of India v. Wood Papers Ltd. [(1990) 4 SCC 256 : 1990 SCC (Tax) 422] and Mangalore Chemicals and Fertilisers Ltd. v. Dy. CCT [1992 Supp (1) SCC 21] to which reference has been made earlier.)”

22. In G.P. Ceramics (P.) Ltd. v. Dy. Commissioner, Trade Tax (2009) 2 SCC 90], this Court has held: (SCC pp. 101-02, para 29)

“29. It is now a well-established principle of law that whereas eligibility criteria laid down in an exemption notification are required to be construed strictly, once it is found that the applicant satisfies the same, the exemption notification should be construed liberally. [See CTT v. DSM Group of Industries [(2005)1 SCC 657] (SCC para 26); TISCO Ltd. v. State of Jharkhand [(2005)4 SCC 272] (SCC paras 42-45); State Level Committee v. Morgardshammar India Ltd. [(1996)1 SCC 108]; Novopan India Ltd. v. CCE & Customs [1994 Supp (3) SCC 606] ; A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala [(2007)2 SCC 725] and Reiz Electrocontrols (P.) Ltd. v. CCE. [(2006)6 SCC 213]”

30. We now propose to consider the second question. The second question has something to do with the denial of deduction under Section 54B of the Act on the premise that the land in question was non-agricultural and the exemption under Section 54B is available only to an agricultural land. In the aforesaid context, the findings recorded by the Assessing Officer are as follow :

“As stated hereinabove, for claiming exemption under section 54B of the Act, capital gain arising from the transfer of land, being used by an individual or his parents or Hindu Undivided Family for agricultural purpose for a period of 2 years, immediately preceding the date of transfer, are exempt from tax if the assessee has purchased another land for agricultural purpose within a period of 2 years from the date of such transfer. In this case, on perusal of the sale deed dated 3.7.2012, it was noticed that the land sold by the assessee along with other is a ‘non agricultural land’. There is no ambiguity in the matter that the land sold by the assessee and other was a non agricultural land. It was the contention of the assessee that as per the agreement to sale, it was clear that the assessee has entered into sale transaction of agriculture land only and as a matter of convenience and just to expedite the conversion process, on the request of the buyer, the assessee got converted the agricultural land into non agricultural one and all the expenditure has been borne by the buyer only. As per section 63 of the Gujarat Tenancy and Agricultural Lands Act, 1948 a non agriculturist cannot purchase agricultural land. In this case, if the purchaser is an agriculturist, she would have purchased the same in her name. Simply mentioning in the agreement to sale that the liability of making the agricultural land into non agricultural land is of the buyer will not change the character of the non agricultural land sold by the assessee to agricultural land. The intention of the buyer of the land was to purchase non agricultural land. The agreement to sale cannot override the sale agreement made and registered by the assessee before the Registrar. The Stamp duty paid is also for the non agricultural land. On the date of sale, the land in question was non agricultural land. In this case, it is fact that the land sold by the assessee is a non agricultural land as such exemption under section 54B of the Act is not allowable to the assessee. Exemption under section 54B of the Act is eligible only out of capital gain arising from the transfer of land, being used by an individual or his parents or Hindu Undivided Family for agricultural purpose for a period of 2 years, immediately preceding the date of transfer, if the assessee has purchased another land for agricultural purpose within a period of 2 years from the date of such transfer.”

31. The aforesaid findings of the Assessing Officer came to be affirmed by the CIT(A) holding as under :

“…on account of the fact that at the time of execution of the sale agreement, the land was agriculture in nature, no legal transfer of the same to the purchaser was possible. Hence, it is evident that no legal right, of the purchaser was created in land by such agreement as this agreement was invalid and hence, is required to be ignored. Consequently, there was no extinguishment of any of the appellant’s rights in this land at the time of the execution of the agreement to sale and hence, the decision in the case of Sanjeevlal (supra) is inapplicable to the facts of the current appeal.

Now, the appellant has also claimed that part possession of the land was given to the purchaser vide possession receipt dated 15.10.2011. This possession receipt is also of no help to the appellant. Firstly, due to the fact that as on that date also, the land had not been converted into non agricultural land and hence, by law the appellant was not entitled to hand over the possession of the agricultural land to the purchaser. Besides said purchase receipt is also of 15.10.2011, whereas, the house property had been purchased by the appellant on 22.4.2010 and hence, the same being beyond one year from the date of handing over the possession, the appellant was not entitled for deduction under section 54F.

Further to this, from the registered sale deed executed on 3.7.2012, it is seen that the deed clearly mentions that it is in respect of sale of non agricultural open land. This fact has been clearly mentioned in Schedule. Thus, on the date of sale, the land was not in the nature of agricultural land and it was only due to this fact that the appellant was able to sell the land to a non agriculturist. Thus, it was only by virtue of the registered sale deed, the legal right of the purchaser was created in this land and hence, the legal transfer within the meaning of section 2(47) of the Act took place. It may be mentioned here that the sale deed itself mentions that the permission of converting the land into non agricultural land was by the appropriate authority on 16.5.2012. Due to this 10.5.1983 issued by the Board in connection with relief under section 54E would apply with equal force to relief under section 54B also. Inasmuch as the above circular has been issued by the Board keeping in view the purpose and spirit of section 54, same consideration would apply for relief under section 54B also, because if an agriculturalist has disposed off his agricultural land and obtained possession of another agricultural land for the purpose of being used for agricultural purposes the same benefit available under the Board’s circular should be extended to the assessee governed by section 54B also in this connection, it is also necessary to consider the question whether the investment should be made in new agricultural land necessarily within a period of two years after the date of transfer or not. Applying the spirit of the circular of the Board, it could be said that the investment made prior to the date of transfer would also be eligible and should be considered as investment made out of sale proceeds into sale transaction of agricultural land only. As a matter of convenience and just to expedite the conversion process, buyer requested the assessee to get the land converted into non agricultural land. The buyer has also agreed to bear all the conversion expenses. Only upon request of the buyer and for the benefit of buyer, the assessee converted land from agriculture to non agriculture. The assessee recovered entire conversion expenses from the buyer. The agreement to sale was of agriculture land only and the intention of the assessee is quite clear to sale agricultural land only. But for the smooth processing of the sale transaction, the assessee required to convert the land into non agricultural land.”

32. Thus, the CIT(A) took the view that the assessee is not entitled to claim exemption under Section 54B of the Act, as on the date of the transfer the land was non-agricultural. The aforesaid findings of the CIT(A) ultimately came to be affirmed by the Appellate Tribunal, holding as under :

“The assessee has also claimed exemption under section 54B of the Act on the sale of agricultural land. The assessee has claimed exemption under section 54B for making investment in agricultural land at Ranu (18.11.2011) and Dudhwada (18.4.2013) respectively. On perusal of the sale deed dated 3.7.2012, it was noticed that the assessee had sold non agricultural land whereas as per the provisions of section 54B of the Act the exemption is available on the sale of agricultural land and further investment out of the such sale proceeds in the agricultural land as per the conditions stipulated in the said Section. Further as elaborated above in this order the decision of Honourable Supreme Court in the case of Sanjeevlal (supra) is distinguishable from the facts of the case of the assessee as delay in sale of land was occurred because of prohibition imposed by the order of the court. The Learned CIT(A) has also placed reliance on the decision of the Honourable High Court of Bombay in the case of V.A. Trivedia 1998, 38 Taxman 102 (Bom) as elaborated supra in the findings of the Learned CIT(A) wherein, it is held that when the land was conveyed to the buyer in the character of non agricultural it was not entitled for exemption given to agricultural land. After considering the above facts and findings, we uphold the decision of Learned CIT(A) that the assessee is not entitled for deduction under section 54B of the Act. Therefore, the appeal of the assessee is dismissed.”

33. The issue as regards the deduction under Section 54B of the Act, in our opinion, has not been considered properly or rather legally. The legal position as to when land can be said to be agricultural land has been considered in several decisions of this High Court and by the Supreme Court in CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133. This Court, in Smt.Chandravati Atmaram Patel v. CIT [1978] 114 ITR 302, had the occasion to consider this question. At page-312 of the Report, the position was summarised as under :

“In this case, the law, therefore, is very clear. If the land is actually used for agricultural purpose as shown by Manilal Somnath’s case [1977] 106 ITR 917 (Guj) and also by the Supreme Court in CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133, it can be said to be agricultural land, at least, prima facie, as agricultural land could be said to be land which is either actually used or ordinarily used or meant to be used for agricultural purposes. If it is actually used at the relevant date for agricultural purposes and there are no special features, for example, building plot being actually used as a stopgap arrangement for agricultural purposes or a building site being used for agricultural purposes, actual user or ordinary use or intention to use the land for agricultural purposes or land is meant to be used for agricultural purposes, it would be ‘agricultural land’. Secondly, potential use of the land as agricultural land is totally immaterial. Thirdly, entries in the record of rights are good prima facie evidence regarding agricultural land and if the presumption raised either from actual user of the land or from agricultural use of the land is to be rebutted, there must be material on the record to rebut that presumption. The approach of the fact-finding authorities, namely, the income-tax authorities and the Tribunal, should be to consider the question from the point of view of presumption arising from entries in the record of rights or actual user of the land and then consider whether that presumption is dislodged by the presence of other factors in the case.”

34. The aforesaid decision in Smt.Chandravati Atmaram Patel (supra) later came to be followed in the case of Chhotalal Prabhudas (HUF), (1979)116 ITR 631.

35. In Himatlal Govindji v. CWT [1977] 106 ITR 658, a plot of land which was already converted to non-agricultural use for the purpose of the Land Revenue Code was being cultivated pending the finalization of the transaction of sale.

36. In Manilal Somnath, (1977) 106 ITR 917, this Court pointed out that although the land might have the potential non-agricultural value, yet that factor by itself did not mean that the land had ceased to be agricultural land or that it had lost the character of agricultural land.

37. In Manilal Somnath (supra), at page-929 of the Report, it has been pointed out :

“Under section 63 of the Tenancy Act, no sale of any land or interest therein shall be valid in favour of a person who is not an agriculturist unless the Collector or an officer authorized by the State Government in this behalf grants permission for such sale on such conditions as may be prescribed. Under section 2, sub-section (8) of the Tenancy Act, “land” means land which is used for agricultural purposes and it is, therefore, obvious that it was for the sale of land used for agricultural purpose for which the City Deputy Collector acting under section 63 of the Bombay Tenancy and Agricultural Lands Act granted permission. There is nothing to show that between the date of the permission, namely, March 24, 1967, and April 7, 1967, that is, the execution of the sale deed by the assessee in favour of Tarakkunj Co-operative Housing Society Ltd., agricultural operations which were being carried on were by way of stopgap arrangement. We are not, in the present case, concerned with the question whether agricultural operations were such as a prudent agriculturist would carry out. The sole question that we have to decide is whether on the date of the sale by the assessee-Hindu undivided family to Tarakkunj Co-operative Housing Society Ltd. on April 7, 1967, the land was agricultural land or not. As T.U. Mehta J. has pointed out in Narandas Motilal’s case [1971] 80 ITR 39 (Guj), the fact that the land was being used for agricultural purposes till the date of the sale raises a prima facie presumption that it was agricultural land.”

At page 931, it was further observed :

“It is true that permission to sell the land to Tarakkunj Co-operative Housing Society Ltd. was granted on condition that the land would be used for residential purposes and the application for permission under section 63 of the Bombay Tenancy and Agricultural Lands Act was applied for on the footing that, after the sale, the land would be used for residential purposes. But that only goes to show that, after the date of the sale, this land was to cease to be agricultural land. The permission granted by the City Deputy Collector under section 63 of the Bombay Tenancy and Agricultural Lands Act clearly goes to show that in case the land did not cease to be agricultural land, the permission would be treated as cancelled and, therefore, the sale in favour of Tarakkunj Co-operative Housing Society Ltd. would be infructuous and the land would revert back to the assessee. In such an eventuality, the land would still continue to be agricultural land because the permission to sell to a non-agriculturist would be treated as cancelled. That eventuality has not happened and as pointed out it was some time in February, 1969, that the permission for non-agricultural use was granted to the purchaser…”

38. Prima facie, it appears to us that the Revenue authorities got confused between Section 43 of the Bombay Tenancy and Agricultural Lands Act on one hand and Section 63 of the said Act on the other. It appears that the sale-deed came to be executed and registered on 3rd July 2012. The permission to transfer the land was accorded by the authority concerned on 16th May 2012. The Revenue authorities took the view that the date of agreement to sell cannot be taken into consideration as the same would not amount to ‘transfer’ within Section 2(47) of the Act and also took the view that the agreement to sell was in breach of Section 43 of the Bombay Tenancy and Agricultural Lands Act. We may clarify that an agricultural land can be of two types. There is something called, ‘old tenure land’ and ‘new tenure land’. If it is a new tenure land, then the transaction would be governed by Section 43 of the Bombay Tenancy Act, whereas if it is an old tenure land but still an agricultural land, then the transaction would be governed by Section 63 of the Bombay Tenancy Act. There is nothing on record to indicate that the land in the case on hand was a new tenure land. We are unable to understand why Section 43 has been quoted and discussed by the Revenue authorities. Let us assume for the time being that the agreement to sell was invalid on account of breach of Section 63 of the Bombay Tenancy Act, but it is a settled position of law that an invalid transaction would remain valid unless it is declared to be invalid by the competent authority under the provisions of the Bombay Tenancy Act. It is axiomatic under the Bombay Tenancy and Agricultural Lands Act that when permission is granted by the authorities concerned for sale of agricultural land to a non-agriculturist, the land does not cease to be an agricultural land merely because of such permission being granted. If the conditions of the permission are not complied with, the land in respect of which permission was granted under Section 63 would revert to its original character of agricultural land. On one hand, the Revenue authorities say that the agreement to sell was invalid as it was between an agriculturist and a non-agriculturist and such agreement could not have been executed in favour of the purchaser, being a non-agriculturist, without the permission of the competent authority. However, ultimately when the permission came to be granted by the authority despite such agreement to sell and when the assessee herein transferred the land, the Revenue authorities now say that the said land was non-agricultural and, therefore, the assessee is not entitled to claim exemption under Section 54B of the Act.

39. As emphasized in the case of Manilal Somnath (supra), mere granting of the permission under Section 63 does not alter the agricultural character of the land, and on that aspect of the matter, we are of the opinion that the Tribunal has obviously erred in law.

40. We are of the view that the second question with respect to Section 54B of the Act should be re-looked by the Tribunal in light of what has been observed by us, more particularly, the decisions referred to by us of this Court.

41. In the result, this Tax Appeal is partly allowed.

42. So far as the question no.1 is concerned, the same is answered in favour of the assessee and against the Revenue. So far as the question no.2 is concerned, we deem fit to remit the matter to the Appellate Tribunal.

43. We clarify that we have not expressed any final opinion so far as the question no.2 with regard to Section 54B of the Act is concerned. The Tribunal shall hear the assessee as well as the Revenue once again so far as the question no.2 is concerned, and having regard to the stance of both the sides, the evidence & the position of law, decide the issue afresh in accordance with law.

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