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S. Radhakrishna v. Commissioner Of Income-Tax, Tamil Nadu.
Structured Summary of the Opinion (SethuRaman, J.)
Factual and Procedural Background
The Appellate Tribunal referred the following question under s. 256(1) of the Income-tax Act, 1961: “Whether, on the facts and in the circumstances of the case, the assessee is entitled, in each one of the three years in question, to the exemption claimed under section 54 of the Income-tax Act?”
The assessee, S. Sambu Prasad, owned a property on Charmers Road, Adayar, Madras, of an extent of 112 grounds with a bungalow and other erections. On various occasions portions of the land amounting to 58 grounds had been sold; in 1966 he retained 53 grounds and 550 sq. ft. with the bungalow. On 13 August 1966 he entered into an agreement with M/s. Raghava and Veera for sale of 53 grounds and 550 sq. ft. with the building for Rs. 4,20,000 (Rs. 20,000 paid immediately, balance by instalments). Vacant possession was handed over on the date of the agreement.
The purchasers nominated parties from time to time and 52 grounds and 1,021 sq. ft. were subsequently sold between 23 April 1967 and 9 July 1969 for a total consideration of Rs. 4,82,009.50; the assessee received Rs. 4,20,000. The assessee vacated the bungalow on 1 August 1967. A portion containing the dwelling house was sold on 12 December 1968. The assessee purchased a property in Banjara Hills, Hyderabad on 14 February 1969.
The assessee filed returns for assessment years 1968–69 to 1970–71 claiming exemption from capital gains under s. 54 on the basis that the capital asset sold was a building with appurtenant lands used as a residence and that he had purchased a new house within one year before the sale. The ITO rejected the claim, the AAC confirmed the rejection, and the Tribunal also held that the assessee was not entitled to exemption under s. 54. The question was referred to the High Court under s. 256(1).
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the assessee is entitled, in each one of the three years in question, to the exemption claimed under section 54 of the Income-tax Act?
Arguments of the Parties
Assessee's Arguments (as presented in the opinion)
- The assessee contended that he effected a single transfer of the entire property to M/s. Raghava and Veera for Rs. 4,20,000, and that the transaction was finalised only on 9 July 1969 when the last item of property was sold; therefore the relevant date for computing the two-year occupation period should be counted from that date.
- The assessee's counsel also argued that the property had been merely kept "under lock and key" and that actual possession was handed over only on 12 December 1968 when the house was sold; accordingly the assessee maintained occupation within the two years preceding the transfer.
- It was asserted that the purchase of the Hyderabad house on 14 February 1969 fell within one year before the completion date (as argued by the assessee) and therefore should satisfy s. 54's purchase requirement.
Revenue / ITO's Position (as presented in the opinion)
- The ITO's view was that the assessee effected multiple sales between 24 March 1967 and 9 July 1969; the building stood on one plot and, if relief under s. 54 could apply at all, it would apply only to that item (the building and its appurtenant land) and not to the vacant plots.
- The ITO found that the assessee had vacated the building on 1 August 1967 and was residing in a rented building thereafter; therefore the property was not "being used" as a dwelling house during the two years immediately preceding the transfer.
- Regarding the Hyderabad purchase, the ITO noted that although the document was dated 14 February 1969, the assessee had not occupied the property until December 1969 because a tenant did not vacate earlier; on this basis the ITO refused to allow exemption under s. 54.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| N. Viswanathan v. CIT, [1979] 117 ITR 244 (Mad) | Supports the interpretation that the expression "in the two years immediately preceding the date on which the transfer took place" requires occupation during the entire two-year period preceding the transfer. | The Court stated that its interpretation of s. 54 — that the assessee must have occupied the property during the entire two years immediately preceding the date of transfer — is consistent with N. Viswanathan v. CIT and relied on that consistency in denying exemption where the assessee had vacated prior to the two-year period ending on the date of transfer. |
Court's Reasoning and Analysis
The court first set out the material text of s. 54 and distilled four conditions that must be satisfied for the exemption:
- There must be income arising from the transfer of a capital asset.
- The income from the capital asset must be chargeable under the head "Income from house property".
- In the two years immediately preceding the date of transfer the property must have been used by the assessee (or a parent) mainly for residence.
- The assessee must have purchased, within one year before or after the date of transfer, a house property for his own residence.
Applying these conditions to the facts, the court reasoned as follows:
- Condition (1) is satisfied: the assessee derived income on transfer of a capital asset.
- Condition (2): the court examined whether the lands sold were "lands appurtenant" to the bungalow. The property was large (112 grounds — described in the opinion as "more than 51 acres") and earlier sales had been made of portions of the land. The court treated the earlier-sold vacant plots as not appurtenant to the bungalow, noting separate sale deeds and the requirement for the purchaser to obtain municipal layout/sub-division sanctions. Consequently, s. 54 could apply only with respect to the portion sold on 12 December 1968 that contained the dwelling house and its appurtenant land.
- Condition (3): the court interpreted the statutory phrase "in the two years immediately preceding the date on which the transfer took place" to mean occupation during the entire two-year period immediately preceding the date of transfer. The court relied on consistency with the decision in N. Viswanathan v. CIT for this interpretation.
- On the facts the assessee had vacated the bungalow on 1 August 1967. Because the relevant transfer for the dwelling house portion occurred on 12 December 1968, the court found that the assessee had not occupied the property during the entire two-year period preceding that transfer and therefore failed the occupation requirement of s. 54.
- The court rejected the assessee's contention that the property had been merely "under lock and key" until 12 December 1968 because the Tribunal found no evidence to support that assertion; the Tribunal's conclusion was reinforced by the fact that the assessee had taken a rented house from 1 August 1967.
- The court also considered the alternative argument that the entire transaction was only finalised on 9 July 1969. Even if that were accepted, the court held that, given its interpretation of the two-year occupation requirement and the finding that the assessee vacated on 1 August 1967, the occupaton requirement would still not be satisfied for the two-year period preceding 9 July 1969.
On these bases the court concluded that the assessee was not entitled to exemption under s. 54 for any of the years in question.
Holding and Implications
Holding: The referred question is answered in the negative — the assessee is not entitled to the exemption claimed under s. 54 for any of the three years in question.
Implications:
- Direct effect: The exemption under s. 54 was denied; the revenue's assessment disallowing the exemption is upheld. The Commissioner is entitled to costs and a counsel fee of Rs. 500 was awarded (as stated in the opinion).
- Broader precedent: The court applied an interpretation of s. 54 consistent with an existing decision (N. Viswanathan v. CIT). The opinion contains no statement that it sets a new precedent beyond applying the established interpretation that the two-year occupation requirement must be satisfied for the entire two-year period immediately preceding the transfer.
This summary is confined to the material and conclusions expressly contained in the provided opinion and does not add or infer information beyond that text.
Sethuraman, J.:— The Appellate Tribunal has referred the following question under s. 256(1) of the I.T Act, 1961:
“Whether, on the facts and in the circumstances of the case, the assessee is entitled, in each one of the three years in question, to the exemption claimed under section 54 of the Income-tax Act?”
2. The assessee, S. Sambu Prasad, was the owner of a property situated in Charmers Road, Adayar, Madras. The property was of an extent of 112 grounds with a bungalow, out-houses, garage, sheds and other erections. On different occasions, portions of the land adjacent to the bungalow to the extent of 58 grounds were sold to various persons, and in 1966, he was in possession and enjoyment of the bungalow with the remaining extent of land of 53 grounds and 550 sq. ft. On August 13, 1966, the owner entered into an agreement with the firm known as M/s. Raghava and Veera, who were real estate dealers and contractors, for the sale of 53 grounds and 550 sq. ft. with the building for a consideration of Rs. 4,20,000. Rs. 20,000 was paid by the purchaser to the assessee immediatedly, i.e, on August 13, 1966, and the balance of consideration was agreed to be paid in four equal instalments of rupees one lakh on or before April 15, 1967, April 15, 1968, October 15, 1968, and April 15, 1969. Under the terms of the agreement, the assessee agreed to execute sale deeds either in favour of M/s. Raghava and Veera or their nominee or nominees either by plots or in one lot as desired by them. While doing so, the purchasers, viz., M/s. Raghava and Veera, were to be responsible for the preparation of the layout and sub-division of the plots to the satisfaction of the Corporation of Madras and the charges for amenities, etc. Notwithstanding the fact that the vendors had to execute and register sale deeds in favour of the purchasers, the vendors would not be entitled to anything more than at the late of Rs. 8,000 per ground. Vacant possession of the land was handed over to M/s. Raghava and Veera on the date of the agreement.
3. M/s. Raghava and Veera nominated parties from time to time in whose favour the sale deeds were to be executed. 52 grounds and 1,021 sq. ft. were sold in this manner between April 23, 1967, and July 9, 1969, for a total consideration amounting to Rs. 4,82,009.50. The assessee, however, received only Rs. 4,20,000. The assessee vacated the building on August 1, 1967. On December 12, 1968, a portion of the property in which the dwelling house was situated was sold. On February 14, 1969, he purchased a property in Bhanjara Hills, Hyderabad, and on July 9, 1969, the entire property was covered by the sale deeds in favour of the nominees of M/s. Raghava and Veera.
4. The assessee filed a return for the assessment years 1968-69 to 1970-71. He attached a note claiming exemption from tax on capital gains on the basis of s. 54 of the Act. His case was that the capital asset sold by him was an item of property comprising a building and lands appurtenant thereto, the income of which is chargeable under the head “Income from house property” and that so far as he was concerned, he had effected a single transfer of the entire property to M/s. Raghava and Veera for Rs. 4,20,000, the transaction having been finalised only on July 9, 1969, when the last item of property was sold. For a period of two years immediately preceding that day, viz., July 9, 1969, the assessee claimed to have been occupying the house for the purpose of his residence. It was also claimed that he purchased a house property in Hyderabad on February 14, 1969, and that the said purchase being within a period of one year before July 9, 1969, it was liable to be taken into account in applying s. 54.
5. The ITO rejected this claim. According to him, the assessee effected a number of sales between March 24, 1967, and July 9, 1969, that the building was situated in one of the plots of the land, and, if at all, the relief under s. 54 could be claimed only in respect of that item and not others. As the assessee had vacated the building on August 1, 1967, and he was thereafter residing in a rented building, according to the ITO, he could not claim that the property was “being used” as a dwelling house during the relevant period. As regards the purchase of the property in Hyderabad, the ITO's view was that though the document was dated February 14, 1969, the assessee had not occupied the property till December, 1969, as the tenant in the said property did not vacate it till that time. The ITO, therefore, computed the capital gains without giving any exemption under s. 54 of the Act.
6. The assessee appealed to the AAC, who confirmed the rejection of the claim under s. 54 for the three years. The assessee appealed to the Tribunal for all the years. The Tribunal also came to the conclusion that the assessee was not entitled to exemption under s. 54. The assessee having lost the appeal before the Tribunal has now brought the matter on reference on the question extracted already.
7. Section 54 of the I.T Act, 1961, in so far as it is material, runs as follows;
“Where a capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, being buildings or lands appurtenant thereto the income of which is chargeable under the head ‘Income from house property’, which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and the assessee has within a period of one year before or after that date purchased………………a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year;……….
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45………”
8. If the section is analysed, it would be clear that the following four conditions are to be satisfied: (1) the assessee must have income arising from the transfer of a capital asset, (2) the income from the capital assets must have been charged under the head “Income from house property”, (3) in the two years immediately preceding the date on which the transfer took place, it must have been used by the assessee or a parent of his mainly for his own or the parent's own residence, and (4) the assessee must have purchased within a period of one year before or after the date of purchase, a house property for the purposes of his own residence.
9. In the present case, the first condition is satisfied because the assessee has derived income on the transfer of a capital asset. As far as the second condition is concerned, the property is very large in extent measuring 112 grounds (more than 51 acres) with a building in a portion of it. The assessee himself sold part of the lands even before 1966. This would go to show that the lands to that extent were not appurtenant to the bungalow; otherwise he could not have continued to reside in the building after the sale of those plots. Even after the earlier sale, the assessee was left with 53 grounds and 550 sq. ft. and a bungalow. This is nearly three acres. The fact that various sale deeds were executed with reference to each of the plots and the further circumstances that the real estate agent was required to obtain sanction from the Corporation of Madras for the sale of the vacant land in plots by making a layout, go to show clearly that those lands are not also appurtenant to the house property. The building and the appurtenant land was sold on December 12, 1968, and it is only with reference to that sale deed that the provisions of s. 54 would have to be applied. Thus, with reference to vacant plots other than the portion of the property sold on December 12, 1968, s. 54 could not have any application.
10. With reference to the property sold on December 12, 1968, the question as to whether the assessee is eligible for exemption under s. 54 would have to be examined. The assessee must have been using this property as a residence “in the two years preceding the sale”. The assessee would not be eligible for the exemption under s. 54 in this case, because the requirement is that the assessee must have been occupying the property in the two years immediately preceding the date on which the transfer took place, i.e, during the entire period of two years preceding the date of transfer. As the assessee had vacated the house on August 1, 1967, the property was not in the occupation of the assessee as a dwelling house during the period of two years preceding the transfer. This interpretation that the assessee must have used the property during the entire period of two years is consistent with the decision in N. Viswanathan v. CIT, [1979] 117 ITR 244 (Mad). The learned counsel for the assessee contended that the property was only under lock and key and that the actual possession was handed over only on December 12, 1968, when the house was sold. With reference to this aspect, the Tribunal has pointed out that there is no evidence and, therefore, this contention cannot be accepted. The conclusion of the Tribunal is fortified by the circumstance that the assessee had taken another rented house from August 1, 1967. If he had not vacated, there was no need to take a rented house.
11. The learned counsel for the assessee next contended that we must take the entire transaction as having become finalised only on July 9, 1969, and that the period of two years would have to be computed from that date. Even assuming that the learned counsel for the assessee is right in his submission that the transaction was completed on July 9, 1969, still in view of the interpretation placed by us on the expression “in the two years immediately preceding the date on which the transfer took place” as meaning only “during the entire period of two years preceding the date of sale” and in the face of the finding that the assessee had vacated the dwelling house on August 1, 1967, this submission cannot be accepted. Therefore, with reference to none of these years that we are concerned with, the assessee is eligible for exemption under s. 54. The result is that the question referred to us is answered in the negative and in favour of the Revenue. The Commissioner will be entitled to his costs. Counsel fee Rs. 500 one set.
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