S. Radhakrishna vs Commissioner of Income Tax, Tamil Nadu

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 u/s 54 of the Income Tax Act ?

The assessee, S. Sambu Prasad, was the owner of a property situated in Chamiers Road, Adayar, Madras. The property was of an extent of

112 grounds with a bungalow, out-house, 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 declares 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 immediately, 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 rate 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.

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.

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 proceeding 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.

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.

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.

Section 54 of the I.T. Act, 1961, in so far as it is material, runs as follows :

Where a capital gains arises form 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 form 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 manly 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 u/s 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 u/s 45 .....

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.

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 5.1 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.

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 in consistent with the decision in M. Viswanathan Vs. Commissioner of Income Tax, .

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.

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.