USHABEN JAYANTILAL SODHAN vs. INCOME TAX OFFICER

This   Tax   Appeal   filed   by   the   assessee   was admitted   for   consideration   of   the   following substantial question of law; “Whether   in the  facts  and  circumstances  of the case, the Income Tax Appellate Tribunal was   right   in   law   in   holding   that   the appellant would not be entitled to benefit of deduction under section 54F of the Income Tax Act, 1961 since the construction of the flats for   personal   use   was   completed   before   the sale of the capital asset ?”

The facts, being peculiar, we may notice them at   the   outset.   The   appellant­assessee   is   an individual.   The   appeal   arises   out   of   the assessee’s   Return   for   the   A.Y.   2009­10. The assessee owned land with a bunglow on such land. The assessee demolished the bunglow to construct 08   flats   on   the   land,   some   of   which   would   be occupied by her for her own residence. The rest she intended to sell. The assessee retained 04 flats   for   her   own   use.   The   remaining   04   were meant   for   sale.   The   details   of   the   names   of buyers   of   these   flats,   dates   of   agreements   to sale, dates of sale deeds and details of payments received by the assessee under the agreements to sale are as under; Sr. No. Name of the Buyer Date of Sale Deed Date of Agreement to Sale Date of cheques & payment 1 Kankuben Mansingbhai Patel & Vipulbhai Mansingbhai Patel 10/09/08 19.01.2008 19.01.2008 – Rs.11,00,000/- 11.02.2008 – Rs.14,00,000/- 2 Naishadh Rajendra Diwanji & Toral

The   issue   eventually   reached   the   Tribunal. The Tribunal, by the impugned judgment, confirmed the view of the revenue authorities by making the following observations; “12. With respect to holding the assessee to be not eligible for deduction u/s.54F, it is an undisputed fact and also noted by CIT(A) that the transfer with respect to 4 flats by means of registered sales deed took place in FY   2008­09   relevant   to   AY   2009­10. He   has also given a finding that the building was constructed between 01.02.2007 and 23.10.2008 and the BU permission was granted by AMC on 23.10.2008

In   the   case   of   Smt.   Tarulata   Shyam   & others  v.  CIT  (1977)   108  ITR  345  (SC)  the Hon’ble Apex Court has held that there is no scope  for  importing  into   the  statute   words which are not there. Such importation would be,   not   to   construe,   but   to   amend   the statute. Even if there be a casus omissus, the   defect   can   be   remedied   only   by legislation

In view of the aforesaid ratio, we are of the view that the contention of the ld. AR that   the   provisions   of   Section   54F   being beneficial provision, cannot be accepted more so when the language of the section is very clear and since section 54F (1) states “has with a period of three years after that date constructed a residential house”. In view of the   aforesaid   facts,   we   find   no   reason   to interfere with the order of CIT(A) and thus dismiss this ground of assessee.”

The   Tribunal,   thus,   noted   that   the construction   of   the   building   was   carried   on between   01.02.2007   and   23.10.2008. Since   the Building   Use   Permission   was   granted   on 23.10.2008,   it   could   safely   be   held   that   no construction activity took place after such date. According to the Tribunal, for grant of deduction u/s.54F of the Income Tax Act, 1961 (“the Act” for   short),   in   case   of   construction   of   a residential   house,   the   condition   is   that   the assessee has to, within a period of three years after the date of transfer of long term asset, construct   a   residential   house.   In   the   present case, the construction took place prior to the date of transfer and therefore, the conditions of Section 54F of the Act were not fulfilled. It is against this judgment that the assessee has filed this Tax Appeal with the above noted question of law being framed.

Appearing for the assessee, learned counsel Shri J.P. Shah submitted that the assessee was occupying   the   bunglow   situated   on   the   land   in question. She desired to construct flats on such land, after demolishing the bunglow. A part of the constructed property would be retained by her for her personal use. The rest would be sold to customers. In all, 08 flats were proposed. When the   construction   was   going   on,   she   found   04 customers   with   whom   agreements   to   sale   were executed. A sizeable earnest money was paid by the customers for purchase of flats. Soon after completion of the construction, final sale deeds were also executed. The entire sequence of events must   be   appreciated   in   proper   perspective.   He contended that the requirements of Section 54F of the Act should not be enforced with rigidity. The intention   of   the   Legislature   was   to   grant deduction in case where the capital gain arising out of sale of land is invested in construction of   a   residential   unit   by   the   assessee.   Such purposive construction of the statutory provision is not discarded even in taxing statutes.

1 Counsel further submitted that upon execution of   the   agreements   to   sale,   there   would   be transfer of capital asset. In the present case, all   agreements   to   sale   were   executed   prior   to completion   of   construction.   The   Tribunal, therefore, committed a serious error in denying benefit of deduction u/s.54F of the Act to the assessee.

In  support  of  his  contentions,  counsel  for the assessee relied on the following decisions; (A) Heavy reliance was placed on the judgment of the Supreme Court in case of Sanjeev Lal & others v. CIT and another reported in [2014] 365 ITR 389 (SC).   On   the   basis   of   such   judgment,   it   was contended   that   upon   execution   of   agreement   to sale, a capital asset gets transferred. For   the   same   purpose,   reliance   was   also placed on the decision of the Division Bench of Delhi   High   Court   in   case   of  Commissioner   of Income­tax II v. Kuldeep Singh reported in [2014] 226 Taxman 133 (Delhi) and also of Allahabad High Court in case of  Commissioner of Income­tax­II, Agra   v.   Shimbhu   Mehra  reported   in  [2016]   236 Taxman 561 (Allahabad). (B) The decision of Supreme Court in case of R.B. Jodha   Mal   Kuthiala   v.   CIT,   Punjab,   J   &   K   and Himachal Pradesh  reported in  [1971] 82 ITR 570 (SC)  was   also   relied   upon,   in   which   it   was observed that for the purpose of Section 9 of the Income­tax   Act,   1922,   the   owner   must   be   the person who can exercise the rights of the owner, not on behalf of the owner but in his own right. (C) The Division Bench of Karnataka High Court in case   of  CIT;   Dy.   Director   of   Income­tax   (INTL TAXN) v. Shakuntala Devi since deceased by her LRS Anupama Banerji, Shakunthala Devi reported in 2016 (389) ITR 366 in which, it was observed that utilization of capital gains in construction of residential   house   would   be   sufficient   to   claim the benefit u/s.54 of the Act. (D) The decision of the Full Bench of Kerala High Court   in   case   of  CIT,   Cochin   v.   Grace   Collis reported in  2001 (248) ITR 323  was cited in the context of Section 2(47) of the Act, in which, it was observed that the expression “extinguishment of   any   rights   therein”   does   include   the extinguishment   of   rights   in   a   capital   asset independent of or otherwise than on account of transfer. (E) The decision of Division Bench of Bombay High Court in case of Chaturbhuj Dwarkadas Kapadia v. Commissioner   of   Income­tax,   Bombay   City­VIII reported in  2003 (260) ITR 491  was cited before us, where the question before the Court was as to in which year the capital gain should be taxed, in   the   context   of   a   development   agreement.   We would refer to the facts of this case in detail later. (F) In   case   of  CIT   (Central)   Hyderabad   v.   G. Venkata Laxmi reported in 2015 (373) ITR 572, the Division   Bench   of   Telangana   and   Andhra   Pradesh High   Court   had   observed   that   in   order   to   get benefit   u/s.54   of   the   Act,   it   does   not   appear that in case of purchase of property with sale proceeds, it has to be reckoned within 03 years and   in   case   of   construction   of   new   building utilizing sale proceeds, the construction has to be completed within a period of 03 years from the sale. (G) In   case   of  CIT   v.   Sambandam   Udaykumar reported in  2012 (345) ITR 389  rendered by the Division   Bench   of   Karnataka   High   Court   in   the context of deduction u/s.54F of the Act, it was observed   that   the   essence   of   the   provision   is whether the assessee who received capital gains has invested in a residential house or not. Once it   is   demonstrated   that   the   consideration received on transfer has been invested, either in purchasing a residential house or in constructing a residential house, even though the transactions are not complete in all respects and as required under   the   law,   that   would   not   dis­entitle   the assessee from the said benefit. (H) The   decision   of   Supreme   Court   in   case   of Vania   Silk   Mills   Pvt.   Ltd.   v.   CIT,   Ahmedabad reported   in  1991   (191)   ITR   647  was   cited,   in which, in the context of the definition of the term “Transfer” in Section 2(47) of the Act, it was   observed   that   the   same   is   inclusive   and therefore,   extends   to   events   and   transactions, which may not, otherwise, be transfer according to its ordinary, popular and natural sense. The expression “extinguishment of any rights therein” will   have   to   be   confined   to   extinguishment   of rights   on   account   of   transfer   and   cannot   be extended   to   mean   any   extinguishment   of   rights independent   or   otherwise   than   on   account   of transfer. (I) A   decision   of   the   Division   Bench   of   this Court   in   case   of  Rustom   Spinners   Ltd.   v.   CIT reported   in  1992   (198)   ITR   351  was   cited,   in which, the assessee had acquired the right under a   sale   agreement   for   a   consideration   of   Rs.5 Lakhs and subsequently, received surplus of Rs.9 Lakhs on assignment of the rights so acquired. The assessee disputed that such surplus could not be taxed as short term capital gain. The Court negatived   such   contention   observing   that   it cannot be stated that no assignment was made by the assessee. Once it is held that there was no frustration   of   the   contract   and   there   was acquisition   of   rights,   the   assessee   would   be liable for tax on the capital gains. (J) Heavy reliance was placed on the decision of the Division Bench of Bombay High Court in case of  CIT,   Bombay   City   I   v.   Tata   Services   Ltd. reported in  [1980] 122 ITR 594  in which it was held   that   the   right   to   obtain   conveyance   in immovable property is a capital asset. (K) Counsel   for   the   assessee   relied   on   the Circular   No.359   dated   10.05.1983   issued   by   the C.B.D.T. clarifying, in the context of deduction u/s.54E   of   the   Act,   that   strict   interpretation may   go   against   the   purpose   of   the   Section   and that if the assessee invests the earnest money or the advance received in specified assets before the   date   of   transfer   of   the   asset,   then   the amount   so   invested   will   qualify   for   exemption u/s.54E   of   the   Act.   While   agreeing   that   this clarification may not have direct application to the   facts   of   our   case,   counsel   submitted   that this   would   demonstrate   that   even   in   taxing statutes, purposive construction theory is not to be discarded. For the same proposition, reliance was also placed on the decision of Supreme Court in   case   of  CIT­III   v.   Calcutta   Knitwears, Ludhiana reported in 2014 (362) ITR 673. 9. On the other hand, learned counsel Shri M.R. Bhatt   for   the   Department   opposed   the   appeal contending that the facts are not in dispute. The construction of the assessee’s residential house was completed on 23.10.2008. The flats which were sold   after   such   date   would   not   fulfill   the conditions laid down in Section 54F of the Act for claiming deduction. He would, however, agree that   in   case   of   sale   of   flat   to   Kankuben Mansingbhai   Patel,   the   sale   deed   which   was executed on 10.09.2008, fell before the date of grant   of   Building   Use   Permission.   For   the remaining three flats, he would, however, argue that the Tribunal’s view is in consonance with the   statutory   requirements   and   calls   for   no interference.

Counsel contended that mere agreement to sale cannot   be   equated   with   sale   of   any   immovable property.   Even   though   under   agreement   to   sale certain important rights are created, it cannot be stated that upon execution of the agreement to sale, capital asset would stand transferred.

In support of his contentions, counsel relied on the following judgments; (A) In case of CIT­VIII v. Atam Prakash and Sons reported in  [2008] 175 Taxman 499 (Delhi), the Division Bench of Delhi High Court observed that mere grant of permissive right by the assessee to construct building on a plot of land would not amount to transfer of capital asset. (B) In   an   unreported   decision   dated   12.01.2012 rendered by the learned single Judge of Punjab and Haryana High Court in case of Sukhwinder Kaur v.   Amarjit   Singh   and   others   in   Civil   Revision No.2616   of   2011,   it   was   observed   that   an agreement   to   sell   a   property   itself   does   not create   any   right   or   title   in   the   property   and that it is the sale deed, which, when executed, will   create   right,   title   and   interest   in   the property.   These   observations   were   made   in   the context of requirement of compulsory registration of agreement to sale and whether failure to do so would make the document inadmissible in evidence in a suit for specific performance. (C) In   case   of  Smt.   Shail   Moti   Lal   v.   CIT, Chandigarh  reported   in  [2013]   218   Taxman   298 (P&H), the Division Bench of Punjab and Haryana High Court, in the context of transfer of capital asset, held that the transfer would take place only on the execution of the sale deed and the date of agreement to sell cannot be treated as the date of transfer of immovable property. (D) In case of  Ratna Trayi Reality Service (P) Ltd. v. Income tax Officer reported in 2013 (356) ITR 493, this Court observed that an agreement to sale, without there being anything more, cannot be equated with transfer of property. (E) Reliance   was   placed   on   the   decision   of Supreme Court in case of Suraj Lamp & Industries Pvt.   Ltd.   v.   State   of   Haryana   and   another reported in 2012(1) SCC 656, in which, the Court made certain important observations with respect to   transfer   of   immovable   properties   under agreement   to   sale   and   under   Wills.   The   Court frowned upon the practice of virtual transfer of immovable properties under agreement to sale with delivery   of   possession   on   payment   of   full consideration   but,   without   registration   of   the document and payment of necessary stamp duty and transfer fees. In this context, it was observed that any contract of sale (agreement to sale), which   is   not   a   registered   deed   of   conveyance (deed   of   sale),   would   fall   short   of   the requirements of Sections­54 & 55 of the Transfer of Property Act and will not confer any title nor transfer any interest in an immovable property, except to the limited right granted u/s.53A of the   Transfer   of   Property   Act.   An   agreement   to sale, whether with or without possession, is not a conveyance and under the Transfer of Property Act, sale of immovable property can be made only by a registered instrument and an agreement to sale does not create any interest or charge on its subject matter. (F) In case of CIT, Delhi (Central) v. J. Dalmia reported in  1984 (149) ITR 215, it was observed as under; “11. Under   Section   5   of   the   Transfer   of Property Act, transfer of “property” means an act   by   which   a   person   conveys   property   to another   and   “to   transfer   property”   is   to perform such act. A mere right to sue may or may not be property but it certainly cannot be transferred. There cannot be any dispute with   the   proposition   that   in   order   that   a receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a “transfer” within the meaning of S.45 r/w. S.2(47) of the Act. Since there could   not   be   any   transfer   in   the   instant case, it has to be held that the amount of Rs.1,02,500 received by the assessee was not assessable as capital gains.”

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

Section   54F   of   the   Act   carries   the   title “capital   gain   on   transfer   of   certain   capital assets not to be charged in case of investment in residential   house”.   Sub­section   (1)   of   Section 54F   of   the   Act   provides   for   deduction   in computation   of   capital   gain   arising   out   of transfer   of   long   term   capital   asset   if   the assessee, within a period of 01 year or before 02 years after the date on which the transfer took place purchased or within a period of 03 years after   such   date   constructed   one   residential house. If the cost of new asset is not less than the net consideration in respect of the original asset, the whole of the capital gain would not be charged.   Otherwise,   the   deduction   would   be proportionate.

In   the   context   of   these   provisions,   the assessee’s case and the rival contentions have to be examined. We may recall that with respect to 03 out of the 04 flats sold by the assessee, the sale deeds were executed after the date of grant of   Building   Use   permission.   In   plain   terms, therefore,   after   the   sale   of   these   flats,   no construction was carried out. Therefore, if the date of the sale deeds is considered the crucial date   for   transfer   of   the   capital   asset,   the construction   preceded   the   transfer.   What   sub­ section (1) of Section 54 of the Act requires is that the assessee, after the date of transfer, purchases or within three years after such date, constructs   a   residential   unit,   only   then   the benefit   of   deduction   would   be   granted.   This provision, therefore, provides that construction of the residential unit should be done after the date   of   transfer   but,   within   three   years   from such date. Under the circumstances, if the sale deeds   are   considered   on   the   date   on   which   the transfer of capital asset took place, the case of the assessee would not fall within the parameters of the said provision.

It is, in this context, that both the sides had strenuously argued the case. Learned counsel for   the   assessee   obviously   contended   that   the capital asset, i.e. in the present case, the land of the assesee, should be treated to have been transferred on the date on which the agreement to sale   took   place.   Counsel   for   the   Revenue,   for obvious   reasons,   opposed   this   proposition. Section 5 of the Transfer of Property Act, 1882 defines   the   term   “transfer   of   property”   as   to mean   an   act   by   which   a   living   person   conveys property in present or in future to one or more other living persons or to himself or to himself and one or more other living persons. Section 54 of the Transfer of Property Act defines “sale” as a transfer of ownership in exchange for a price paid or promised or part­paid or part­promised. It further provides that transfer in case of a tangible immovable property of a value of Rs.100 and above or reversion of other intangible thing can be made only by a registered instrument. It is undisputable that an agreement to sale does not convey a property from one person to another, either in present or even in future. An agreement to   sale   an   immovable   property   is   a   bilateral contract under which the two parties, i.e. the buyer and the seller, agree to certain terms and conditions,   subject   to   which   the   property   in question would be transferred by the seller to the buyer for a decided sale consideration. The terms and conditions of the agreement to sale are bound to be different in each case. However, the common   thread   would   be   the   commitment   of   the owner of the property to convey to the purchaser the right, title and interest in such property upon the purchaser paying the   agreed consideration in agreed manner. It is only after such   bilateral   obligations   are   discharged   that the execution of the sale deed would take place and it is this sale deed, which is compulsorily registrable under Section 17 of the Registration Act, 1908, upon being registered, would transfer the right, title and interest in the property in question into the purchaser. It is only upon the execution of the sale deed that the title in the property would vest in the purchaser.

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 ?

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.

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

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.

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   appellant­assessee   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.

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.

We may recall, the Supreme Court in case of Suraj   Lamp   &   Industries   (P)   Ltd.  (supra)   had occasion to extensively deal with the nature of agreement to sale of immovable properties and the requirement   of   compulsory   registration   of   sale deeds   in   order   to   transfer   right,   title   and interest   in   immovable   properties.   In   this judgment, of course, the Supreme Court was not concerned   with   the   provisions   of   the   Act. Nevertheless,   some   of   the   observations   of   the Supreme   Court   in   the   said   judgment   would   be apposite.   The   Court,   after   referring   to   the provisions of the Transfer of Property Act and Registration   Act,   noted   with   approval   the observations of the judgment in case of Narandas Karsondas v. S.A. Kamtam and another reported in 1977 (3) SCC 247  that a contract of sale itself does   not   create   any   interest   or   charge   in   the property, which is expressly declared u/s.54 of the Transfer of Property Act. The Court, in this context, concluded as under; “12. Any contract of sale (agreement to sell) which is not a registered deed of conveyance (deed   of   sale)   would   fall   short   of   the requirements of sections 54 and 55 of the TP Act   and   will   not   confer   any   title   nor transfer   any   interest   in   an   immovable property (except to the limited right granted u/s.53A of TP Act). According to TP Act, an agreement of sale, whether with possession or without   possession,   is   not   a   conveyance. Section 54 of the TP Act enacts that sale of movable   property   can   be   made   only   by   a registered   instrument   and   an   agreement   of sale does not create any interest or charge no its subject matter.”

The   Delhi   High   Court   in   case   of  Kuldeep Singh  (supra) relied on the observations of the Supreme Court in case of Sanjeev Lal (supra) in a situation   where,   the   assessee,   having   sold   his residential   property,   had   entered   into   an agreement   with   a   builder   within   the   prescribed period of 02 years from such sale for purchase of flat,   the   payment   of   which   was   linked   to   the stage   of   construction.   In   this   background,   the Court held that the assessee had satisfied the requirements of Section 54 of the Act.

Like­wise, the Allahabad High Court in case of Shimbhu Mehra (supra) applied the observations of   the   Supreme   Court   in   case   of  Sanjeev   Lal (supra) in a slightly different context. It was a case in which the assessee had entered into an agreement to sale his land on 04.07.2001 with a prospective   buyer   and   had   received   part consideration with the aid of which the assesee discharged   the   liabilities   of   a   lending   bank, which   had   a   charge   over   the   property.   The mortgage was released on 21.11.2001 and the sale was executed in April 2003. The Assessing Officer was of the opinion that since the sale deed was executed in April 2003, the provisions of Section 50C   of   the   Act,   which   came   into   effect   from 01.04.2003, would apply. The Court, however, held that   the   transfer   of   property   took   place   on 04.07.2001 and therefore, Section 50C of the Act would not apply. Both these judgments arise in substantially   different   backgrounds   as   compared to the facts of the present case.

The Bombay High Court in case of  Chaturbhuj Dwarkadas   Kapadia (supra)   was   dealing   with different set of facts. The assessee therein had entered into an agreement dated 18.08.1994 under which he agreed to sell his share in an immovable property to one Floreat Investments Ltd. for a total   consideration   of   Rs.1.85   Crores   (rounded off). Under such agreement, Floreat Investments Ltd. was given the right to develop the property in   accordance   with   the   rules   and   regulations framed   under   the  Maharashtra   Housing   and   Area Development Act. For such purpose, the assessee agreed   to   execute   limited   Power   of   Attorney authorizing Floreat Investments Ltd. to deal with the   property   and   to   obtain   permissions   and approvals from the Urban Land Ceiling Authority, Bombay   Municipal   Corporation,   etc.   It   was   also agreed   that   upon   Floreat   Investments   Ltd. obtaining   all   necessary   permissions,   approvals and   NOC   under   Chapter   20­C   of   the   Act,   the assessee   would   grant   an   irrevocable   licence   to demolish   the   building.   Till   then,   the   assessee would   receive   proportionate   rent   from   the tenants. Clause­20 of the agreement provided that the   sale   shall   be   completed   by   execution   of conveyance.   However,   no   such   conveyance   was executed. In the background of such facts, the question that arose was during which Assessment Year, i.e. A.Y. 1996­97 or 1999­00, the liability of the assessee for capital gain arose. There was no dispute between the assessee and the Revenue that the liability did arose. The only question was   when   such   liability   can   be   said   to   have arisen. In this background, the Court noted that what   the   assessee   had   entered   into   was   a development   agreement,   which   would   enable   the builder to make profits by building and selling the flats at a profit. It was precisely for this reason   that   the   Legislature   had   introduced clause­(v) to Section 2(47) r/w. Section 45 of the   Act,   which   indicates   that   capital   gain   is taxable in the year in which such transaction is entered into even if the transfer of immovable property is not effective or complete under the general   law.   The   facts   of   the   case   and   the question which arose before the Court were, thus, very different.

Interestingly,  in case of  Vania Silk Mills (supra), the brief facts were that the assessee Company was engaged in the business of manufature and sale of art­silk cloth. A fire broke out in the   premises   of   the   Company   causing   extensive damage to the machinery. By way of settlement of insurance claim, the assessee received a sum of Rs.6.32   Lakhs   (rounded   off).   The   difference between the actual cost of machinery and written down value was Rs.2.62 Lakhs. The AO treated the additional sum received by the assessee out of the insurance settlement claim as capital gain. In this background, the Supreme Court considered the   question   whether   money   received   towards accident   claim   on   account   of   destruction   of capital asset can be said to have been received on   account   of   transfer   of   asset   within   the meaning   of   Section   45   of   the   Act.   In   this context, the Supreme Court observed as under; “6. It   is   true   that   the   definition   of “transfer” in S­2(47) of the Act is inclusive and   therefore,   extends   to   events   and transactions   which   may   not   otherwise   be “transfer” according to its ordinary, popular and natural sense. It is this aspect of the definition  which   has  weighed   with  the  High Court   and   therefore,   the   High   Court   has argued that if the words “extinguishment of any rights therein” are substituted for the word   “transfer”   in   S.45,   the   claim   or compensation   received   from   the   insurance company   would   be   attracted   by   the   said section. The High Court has, however, missed the  fact   that  the  definition   also  mentions such transactions as sale, exchange etc. to which   the   work   “transfer”   would   properly apply   in   its   popular   and   natural   import. Since those associated words and expressions imply the existence of the asset and on the transferee, according to the rule of noscitur a sociis, the expression “extinguishment of any rights therein” would take color from the said   associated   words   and   expressions,   and will   have   to   be   restricted   to   the   same analogous   to   them.   If   the   legislature intended   to   extend   the   definition   to   any extinguishment  of  right,   it would  not  have included the obvious instances of transfer, viz.   Sale,   exchange,   etc.   Hence,   the expression   “extinguishment   of   any   rights therein”   will   have   to   be   confined   to   the extinguishment   of   rights   on   account   of transfer and cannot be extended to mean any extinguishment   of   right   independent   of   or otherwise than on account of transfer.”

The Court, thus, made a distinction between the extinguishment of rights arising on account of transfer and independently thereof.

The judgment of Bombay High Court in case of Tata   Services   Ltd.  (supra)   is   also   of   some interest   to   us.   It   was   a   case   in   which   the assessee   had   entered   into   an   agreement   to purchase   a   residential   plot   at   Malabar   Hill, Bombay and had paid Rs.90,000/­ as earnest money. The agreement was in respect of 5000 square yards out of a larger plot of land and the price was fixed at Rs.175/­ per square yard. The balance purchase price was to be paid on completion of construction,   which   will   be   done   within   six months   from   the   date   of   agreement.   This transaction,

The Circular issued by the CBDT No.359 dated 10.05.1983 relied upon by the appellant was in different   context   and   would   not,   in   any   case, further   the   case   of   the   assessee   that   upon execution of any agreement to sale, the immovable property itself stands transferred.

The assessee’s claim for deduction u/s.54F of the Act cannot succeed except in relation to the transfer   of   a   flat   in   favour   of   Kankuben Mansingbhai Patel, which had happened before the completion of construction. In such a case, since construction can be stated to have been carried out after the transfer of the original capital asset, the claim of deduction u/s.54F of the Act cannot   be   denied.   To   this   limited   extent,   the appeal   succeeds.   The   Assessing   Officer   to   re­ compute the deduction accordingly. Subject to the above, the Tax Appeal stands disposed of. (AKIL KURESHI, J) (B.N. KARIA, J) PRAVIN KARUNAN