Commissioner of Income Tax vs Jayalakshmi Rajendran

Fakkir Mohammed, J.—Reference has been made on the following questions at the instance of the Revenue :

(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the capital gains arising out of the

sale of agricultural lands would not be leviable to tax in terms of section 54B(ii) of the Income Tax Act, 1961 ?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that u/s 2(47) of the Income Tax Act,

1961, ''transfer'' included extinguishment of any rights in the property and the agreement of sale of agricultural lands brought about extinguishment

of some rights of the assessee in the property and as the transfer had preceded the purchase of the agricultural lands by the assessee, section

54B(ii) was attracted and, therefore, there was no liability to capital gains ?

The assessee had entered into an agreement of sales dated July 29, 1971, on four-rupee stamp paper, agreeing to sell 3.68 acres of agricultural

lands in Krishnanarayanapuram in favour of one Shri M.H.M. Yacob. Accordingly, the assessee executed a sale deed covering an extent of 34

cents and 38 square feet for a consideration of Rs. 67,650 to the nominees of Shri Yacob. On the strength of the above said sale, capital gains

were computed at Rs. 32,500. It appears that the assessee had purchased agricultural lands for a sum of Rs. 1,87,600 by means of a registered

sale deed dated September 2, 1971. During the course of the assessment proceedings, it was contended on behalf of the assessee that under s.

54B(ii) of the I.T. Act, the assessee is entitled to claim exemption with respect to the amount for which she has purchased agricultural lands. The

assessing officer did not accept the said contention and levied tax on the capital gains as calculated by him. The appeal preferred by the assessee

to the Assistant Commissioner met with success and, hence, the Revenue took up the matter, on appeal, to the Tribunal. The Tribunal in its order

dated March 31, 1977, accepted the contention of the assessee taking the view that even though the purchase of the agricultural lands by the

assessee on September 2, 1971, was long prior to the sales effected by the assessee, the agreement of sale amounted to transfer of interest, in the

sense that it amounted to a restriction on the right of the assessee to dispose of her lands in view of the agreement of sale. On the said view, the

Tribunal upheld the claim of the assessee to exemption under s. 54B(ii) of the I.T. Act. Hence, the Revenue has sought the reference.

On the side of the Revenue, it is contended that the agreement of sale will not tantamount to a sale itself and even assuming for argument''s sake,

that some interest restricting the power of alienation of the assessee has been conferred under the agreement of sale, the said conferment of the

interest will not tantamount to sale of identical agricultural lands by the agreement of sale and, hence, the claim of the assessee for exemption under

s. 54B(ii) of the I.T. Act cannot be sustained. We are entirely in agreement with the contention advanced on the side of the Revenue.

In the first place, the agreement of sale does not amount to a transfer of interest in agricultural lands. In the second place, as rightly contended on

the side of the Revenue, even the conferment of the interest restricting the power of alienation of the assessee, will not tantamount to the transfer of

absolute interest in agricultural lands and s. 54B(ii) contemplates transfer of agricultural lands and substitution of agricultural land by purchase in the

place of agricultural lands sold by the assessee. But the Tribunal has taken that view that the agreement of sale, which purports to impose a

restriction on the power of alienation, will be sufficient for claiming such exemption. That view is obviously erroneous, since it contravenes the

substitution prescribed by s. 54B(ii) of the Act. Therefore, any purchase of agricultural lands subsequent to the agreement of sale will not avail the

assessee, as s. 54B of the I.T. Act contemplates purchase of agricultural lands within the period of two years subsequent to the date of the transfer

of agricultural lands by the assessee.

On the side of the assessee, the same argument as advanced before the Tribunal has been advanced here also, and the argument does not

deserve any merit. The decision in Tangella Narasimhaswami, Dharmakartha of Sri Kodanda Ramachandra Moorthy Vs. Iamidi Venkatalingam

and Others, , has been cited on the side of the assessee. The Full Bench has dealt with the creation of a trust under an agreement and it is with

reference to the creation of a trust it was held that there was no need for registering the agreement by which a public trust has been created. But

we are not concerned with the creation of a trust, but we are concerned with the sale and purchase of agricultural lands for claiming the benefit

under s. 54B(ii) of I.T. Act Even though it appears pitiable in the case of the assessee, who appears to have purchased agricultural lands even

before executing the sale deed with the advance consideration received under the agreement of sale, law does not permit the grant of exemption,

since exemption under s. 54B(ii is prefixed with specific and definite conditions and obligations.

Section 54B reads as follows :

(1) where the capital gain arises from the transfer of a capital asset being land 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 for agricultural purposes, and the assessee has, within a period of two year

after that date, purchased any other land for being used for agricultural purposes, 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 land so purchased (hereinafter 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 u/s 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, 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 u/s 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, the cost

shall be reduced by the amount of the capital gain.

The words ""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

for agricultural purposes, and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural

purposes"", clearly implies the transfer of agricultural land before the purchase of some other agricultural land by way of substitution and the above

words do not at all contemplate a restriction of the right to alienate agricultural land by the assessee as a transfer. What is intended is outright sale

of agricultural land for the purpose of claiming exemption under s. 54B.

Section 5 of the Transfer of Property Act, 1882, defines ""transfer"" as follows :

In the following sections ''transfer of property'' means an act by which a living person conveys property, in present or in future, to one or more

other living persons, or to himself and one or more other living persons; and ''to transfer property'' is to perform such act.

The agreement of sale will give only a right to sue for transfer of property and that itself will not amount to a transfer. The plain construction of s.

54B contemplates sale of agricultural land in the first instance and subsequent to such sale, purchase of similar agricultural land with the aid of the

consideration received thereunder to enable the assessee to claim exemption for the purpose of computing the Income Tax on capital gains. Since

the assessee has not complied with the above mandatory provisions of the section, the assessee is not entitled to the exemption sought for which

has been erroneously accepted by the Tribunal.

In the above circumstances, we answer the two questions in the negative and against the assessee. The Revenue will have its costs from the

assessee and the costs are fixed at Rs. 500.