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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL Nos.5899-5900  OF 2014 (Arising out of SLP (c) Nos.16958-59 of 2013)

Sh. Sanjeev Lal Etc. Etc.  Appellants

Versus

Commissioner of Income Tax, Chandigarh & Anr. Respondents

JUDGMENT

ANIL R. DAVE, J.

1. Leave granted.

2. As facts of both the appeals are similar, at the request of the  

learned counsel appearing for the parties, both the appeals had been  

heard together.

3. Being  aggrieved  by  the  judgments  delivered  by  the  High  

Court of Punjab and Haryana in ITA Nos. 153 & 154 of 2012 dated  

29th January,  2013,  these  appeals  have  been  preferred  by  the  

assessees.

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4. The facts giving rise to the present litigation, in a nutshell,  

are as under:

A residential house, being House No. 267 situated in Sector  

9-C, Chandigarh, was a self acquired property of  Shri Amrit Lal,  

who had executed a Will  whereby life interest  in the aforestated  

house had been given to his wife  and upon death of his wife, the  

house was to be given in favour of two sons of his pre-deceased son  

- late Shri Moti Lal and his widow. One of the above stated grand  

children  and  the  daughter-in-law  of  Shri  Amrit  Lal  are  the  

appellants  in  these  appeals.   Upon  death  of  Shri  Amrit  Lal,  

possession of the house was given to his widow.  His widow, Smt.  

Shakuntla Devi expired on 29th August, 1993.  Upon death of Smt.  

Shakuntla Devi,  as  per  the Will,  the ownership in respect  of  the  

house in question came to be vested in the present appellants and  

another grandchild of late Shri Amrit Lal.  

The appellants  had decided to  sell  the  house  and with  that  

intention they had entered into an agreement to sell the house with  

Shri Sandeep Talwar on 27th December, 2002 for a consideration of  

Rs. 1.32 crores.  Out of the said amount, a sum of Rs.15 lakhs had  

been received by the appellants by way of earnest money.  As the  

appellants had decided to sell the house in question, they had also  

decided to  purchase  another  residential  house  bearing house  No.

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528 in Sector  8,  Chandigarh so that  the sale  proceeds,  including  

capital gain, can be used for purchase of the aforestated House No.  

528.  The said house was purchased on 30th April, 2003 i.e. well  

within one year from the date on which the agreement to sell had  

been entered into by the appellants.

The validity of the Will had been questioned by Shri Ranjeet  

Lal, who was another son of the deceased testator Shri Amrit Lal,  

by filing a civil suit, wherein the trial court, by an interim order had  

restrained  the  appellants  from  dealing  with  the  house  property.  

During the pendency of the suit,  Shri Ranjeet  Lal expired on 2nd  

December, 2000 leaving behind him no legal heirs.  The suit filed  

by  him  had  been  dismissed  in  May,  2004  as  there  was  no  

representation on his behalf in the suit.    

5. Due to the interim relief granted in the above stated suit, the  

appellants could not execute the sale deed till the suit came to be  

dismissed  and  the  validity  of  the  Will  was  upheld.   Thus,  the  

appellants  executed  the  sale  deed  in  2004  and  the  same  was  

registered on 24th September, 2004.

6. Upon transfer of the house property, long term capital gain  

had arisen, but as the appellants had purchased a new residential  

house and the amount of the capital gain had been used for purchase  

of the said new asset, believing that the long term capital gain was

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not chargeable to income tax as per the provisions of Section 54 of  

the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), the  

appellants did not disclose the said long term capital gain in their  

return of income filed for the Assessment Year 2005-2006.

7.  In  the  assessment  proceedings  for  the  Assessment   Year  

2005-2006  under the Act, the Assessing Officer was of the view  

that the appellants were not entitled to any benefit under Section 54  

of the Act for the reason that the transfer of the original asset, i.e.  

the residential  house,  had been effected on 24th September,  2004  

whereas the appellants had purchased another residential house on  

30th April, 2003 i.e. more than one year prior to the purchase of the  

new asset  and therefore,  the  appellants  were  made liable  to  pay  

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

8. Relevant portion of Section 54 of the Act reads as under:

“54. PROFIT ON SALE OF PROPERTY USED  FOR RESIDENCE. (1)    Subject  to  the  provisions  of  sub-section  (2),  where in the case of an assessee being an individual or  a Hindu undivided family, the capital gain arises from  the  transfer  of  a  long-term  capital  asset,  being  buildings  or  lands  appurtenant  thereto,  and  being  a  residential house, the income of which is chargeable  under  the  head  “Income  from  house  property”  (hereafter  in  this section  referred  to  as  the  original  asset),  and the assessee  has  within a  period of  one  year before or two years after the date on which the  transfer took place purchased, or has within a period  of three years after that date constructed, a residential  house, then, instead of the capital gain being charged

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to income-tax as income of the previous year in which  the  transfer  took  place,  it  shall  be  dealt  with  in  accordance  with  the  following  provisions  of  this  section, that is to say, –  

(i) If the amount of the capital gain is greater than the  cost  of  the  residential  house  so  purchased  or  constructed  (hereafter  in  this  section  referred  to  as  the new asset), the difference between the amount of  the capital gain and the cost of the new asset shall be  charged  under  section  45  as  the  income  of  the  previous year;  and for  the purpose of  computing in  respect of the new asset any capital gain arising from  its  transfer  within  a  period  of  three  years  of  its  purchase or construction, as the case may be, the cost  shall be nil; or

(ii) If the amount of the capital gain is equal to or less  than the cost of the new asset, the capital gain shall  not be charged under section 45; and for the purpose  of computing in respect of the new asset any capital  gain arising from its transfer within a period of three  years of its purchase or construction, as the case may  be,  the  cost  shall  be reduced by the amount  of  the  capital gain.”

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

relief under Section 54 of the Act in respect of the long term capital  

gain can be availed only if  a residential house i.e.  a new asset  is  

purchased within one year before or within two years after the date  

on which the transfer  of  the residential  house/original  asset  takes  

place.  In the instant case, the residential house had been transferred  

by the appellants-assessees on 24th September, 2004 whereas they  

had purchased another house on 30th April,  2003.  Thus, the new

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asset was purchased more than one year prior to the date on which  

the transfer in respect of the residential house had been effected.

10. For  the aforestated reasons,  the Assessing Officer  did not  

grant  benefit  under  Section  54  of  the  Act  and  therefore,  the  

assessment order had been challenged by the appellants before the  

Commissioner of Income Tax (Appeals).  The appeal, so far as it  

pertained to the benefit under Section 54 of the Act was concerned,  

had been dismissed and therefore, the appellants had approached the  

Income  Tax  Appellate  Tribunal.   The  Tribunal  also  upheld  the  

orders passed by the Commissioner and therefore, the appellants had  

approached the High Court by filing appeals under Section 260 A of  

the Act, which were dismissed by virtue of the impugned judgments.  

Thus, the appellants are in appeal before this Court.

11. The learned counsel appearing for the appellants had mainly  

submitted  that  the  authorities  below  and  the  High  Court  had  

committed  an  error  in  interpretation  of  Section  54  of  the  Act.  

According  to  him,  though  the  property  in  question  had  been  

apparently transferred on 24th September, 2004 and the new asset i.e.  

new residential house had been purchased on 30th April, 2003 i.e.  

more than one year prior to the date on which the property had been  

sold, the authorities ought to have considered the date on which the  

agreement to sell had been effected by the appellants for transfer of

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the property in question as the date of transfer of the house/original  

asset.  The said agreement had been signed on 27th December, 2002  

i.e. which was well within the period prescribed under Section 54 of  

the Act.  If one considers 27th December, 2002 as the date on which  

the property had been transferred or that a right in the property had  

been transferred, the appellants would become entitled to the benefit  

under Section 54 of the Act.

12. So as to substantiate his submissions, learned counsel for the  

appellants had submitted that the appellants wanted to transfer the  

property  in  question  and  therefore,  they  had  entered  into  an  

agreement to sell on 27th December, 2002,  but unfortunately they  

could not execute the sale deed on account of the litigation which  

was pending in respect  of the property in question and due to an  

order restraining the appellants from dealing with the property.  In  

view of the order passed by the civil court, the appellants could not  

execute the sale deed and the delay was only on account of a factor  

which was beyond the control of the appellants.

13. According  to  the  learned  counsel  appearing  for  the  

appellants,  the  date  on  which  the  agreement  to  sell  had  been  

executed ought to have been treated as the date of transfer.  He had  

referred to the provisions of Section 2(47) of the Act which defines  

the term “transfer”.  The term “transfer” has been given an inclusive

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definition and according to the said definition, whenever there is an  

extinction  of  any  right  in  respect  of  a  capital  asset,  such  an  

extinction would mean transfer of the property.  He had, therefore,  

submitted that by virtue of the agreement to sell, a right had been  

created in favour of the buyer of the property and certain right in  

respect of the residential house, which the appellants had, had been  

extinguished and therefore,  27th December, 2002 ought to have been  

considered as the date of transfer.   

14. The learned counsel had also relied upon certain judgments  

delivered by different High Courts to support his submissions.  

15. On the  other  hand,  the  learned  counsel  appearing  for  the  

Revenue  Authorities  had  vehemently  submitted  that  by  mere  

execution of an agreement to sell, right of the vendor/transferor in  

respect of the property cannot be extinguished.  According to him,  

no  sale  of  the  property  in  question  had  been  effected,  when  the  

agreement  to  sell  had  been  executed  on  27th December,  2002.  

According to him, the appellants had sold the original asset on 24th  

September, 2004 and had purchased a new house/new asset on 30th  

April,  2003  i.e.  one  year  before  sale  of  the  original  asset  and  

therefore, the benefit  under Section 54 of the Act could not have  

been  availed  by  the  appellants  and  therefore,  the  Revenue

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Authorities as well as the High Court were absolutely correct by not  

granting the benefit claimed by the appellants.

16. We had heard the learned counsel at length and have also  

considered  the  relevant  provisions  of  the  Act  and  the  judgments  

cited by the learned counsel.

17. Upon plain reading of Section 54 of the Act, it is very clear  

that so as to avail the benefit under Section 54 of the Act, one must  

purchase a residential house/new asset within one year prior or two  

years  after  the date  on which transfer  of  the residential  house  in  

respect  of which the long term capital  gain had arisen,  has taken  

place.   

18. In  the  instant  case,  the  following  three  dates  are  not  in  

dispute.  The residential house was transferred by the appellants and  

the sale deed had been registered on 24th September, 2004.  The sale  

deed had been executed in pursuance of an agreement to sell which  

had  been  executed  on  27th December,  2002  and  out  of  the  total  

consideration of Rs.1.32 crores, Rs. 15 lakhs had been received by  

the appellants by way of earnest money when the agreement to sell  

had been executed and a new residential house/new asset had been  

purchased by the appellants on 30th April, 2003.  It is also not in  

dispute that there was a litigation wherein the Will of late Shri Amrit  

Lal  had been challenged by his  son and the  appellants  had been

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restrained from dealing with the house in question by a judicial order  

and the said judicial order had been vacated only in the month of  

May, 2004 and therefore, the sale deed could not be executed before  

the said order was vacated though the agreement to sell had  been  

executed on 27th September, 2002.

19. If one considers the date on which it was decided to sell the  

property, i.e. 27th December, 2002 as the date of transfer or sale, it  

cannot  be  disputed  that  the  appellants  would  be  entitled  to  the  

benefit under the provisions of Section 54 of the Act because long  

term  capital  gain  earned  by  the  appellants  had  been  used  for  

purchase of  a  new asset/residential  house on 30th April,  2003 i.e.  

well within one year from the date of transfer of the house which  

resulted into long term capital gain.

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 immoveable 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

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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

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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

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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

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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. Commissioner of Income  

Tax  [(2001) 3 SCC 359] this Court has observed that a purposive  

interpretation  of  the provisions  of  the Act  should  be given while  

considering a claim for exemption from tax.  It has also been said  

that harmonious construction of the provisions which subserve the  

object and purpose should also be made while construing any of the  

provisions of the Act and more particularly when one is concerned  

with exemption from payment of tax.  Considering the aforestated  

observations and the principles with regard to the interpretation of  

Statute pertaining to the tax laws, one can very well interpret the  

provisions of Section 54 read with Section 2(47) of the Act,   i.e.  

definition of “transfer”, which would enable the appellants to get the  

benefit under Section 54 of the Act.  

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

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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

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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 fulfilment of  

other conditions.

     …………………….J.       (ANIL R. DAVE)

     ……………………..J.                 (SHIVA KIRTI SINGH)

NEW DELHI JULY 01, 2014.