In Dr. (Mrs) Mrudula A. Talwar Vs. Income Tax Officer, ITAT- Hyderabad has rendered the following judgment:

1. Where the assessee purchased carpet area of the flats having no interest in the land over which the flats were built and the ownership of the flat would vest in the assessee only after taking over possession, this was a case of purchase and not construction.

2. If the construction of house only started within two years of the sale of old house but completed beyond two years exemption under s. 54 would not be available.

 Here is a complete order of the copy:

DR. (MRS) MRUDULA A. TALWAR vs. INCOME TAX OFFICER

ITAT, HYDERABAD ‘A’ BENCH

S. Rajaratnam, A.M. & T.V. Rajagopala Rao, J.M.

IT Appeal No. 1134/Hyd/1983;Asst. yr. 1980-81

27th July, 1984

(1984) 03 CCH 0588 HydTrib

(1984) 10 ITD 0928

Legislation Referred to

S 54

Case pertains to

Assessment year 1980-81

ORDER

T.V. RAJAGOPALA RAO, J.M.: :

ORDER

This is an appeal filed against the order of the CIT(A), dt. 22nd June, 1983, and it relates to the asst. yr. 1980-81. The only point involved in this appeal is whether the assessee is entitled to the exemption under s. 54 of the IT Act, 1961 (‘the Act’).

2. The facts leading to the present appeal are as follows : The assessee is an individual. The assessment year involved is 1980-81, for which the previous year ended on 31st March, 1980. During this year, the assessee was an owner of a flat bearing No. 4 on the third floor in Kalpataru at 39, Dr. Deshmukh Marg, Bombay 26. It appears she had obtained the flat by becoming a member of a co-operative society engaged in the construction of complexes for human living. The assessee sold her flat mentioned above to one Smt. Murli Indru Advani and Shri Indru Govindram Advani for Rs. 3,34,050, even at a time that she had to pay an amount of Rs. 8,700 to the co-operative society to perfect her title to the flat. In part III of her return for this assessment year, the assessee noted that she is entitled to exemption under s. 54 on the ground that she had ordered construction of flat Nos. 10 and 16 in Rameshwar Apartments, Thane, Bombay, for self-occupation and the construction was completed to a great extent. However, admittedly, the said construction was not completed within two years from the date of sale of the old house property.

The ITO found that the assessee was not entitled to the exemption claimed under s. 54 and the entire capital gains are liable to be added to the income returned. As the proposed addition sought to be made to the returned income is more than Rs. 1 lakh, the draft order was forwarded to the assessee, which was received by the mother and the power of attorney of the assessee, viz., Smt. Ahiliya Bai Kirloskar on 24th Nov., 1982. Smt. Ahiliya Bai Kirloskar, by her application dt. 26/27th Nov., 1982, requested time till 31st Dec., 1982 for filing objections for the draft assessment order. However, the maximum time for which extension can be granted under s. 144B of the Act is only up to 16th Dec., 1982. The ITO did not grant extension and no objections were also received by the ITO on or before 16th Dec., 1982. The draft order is referred to the IAC by the ITO in his office reference dt. 13th Jan., 1983 and the learned IAC, by his office reference dt. 6th Feb., 1983, intimated the ITO that under the circumstances, the ITO ought to have completed the assessment on his own treating the objections as belated. He also intimated that reference under s. 144B is incompetent as there are no valid objections within 22 days after the service of the assessment order. Therefore, he wished the ITO to consider the release of the assessment order within the statutory time limit. Thereupon, the ITO computed the capital gains at Rs. 2,45,300 by taking the sale value of the old house property, which the assessee had got in Bombay and which was sold in April 1979 at Rs. 3,29,000 instead of its correct value at Rs. 3,34,050. The ITO completed the assessment under s. 143(3), r/w s. 144B of the Act, and the capital gains were determined as under :

Long-term capital gains

3. Aggrieved, inter alia, against capital gains computed in the hands of the assessee under the assessment orders dt. 16th Feb., 1983, the assessee went in appeal before the CIT(A). It was argued before the learned CIT(A) that within two years from the date of the sale transaction, the assessee had entered into two agreements dt. 1st April, 1981 with Somnath Builders for the purchase of two flats in the building named ‘Rameshwar Apartments’ at Panch Pakhadi Thane, i.e., flat No. 10, on the first floor in the name of the assessee for Rs. 99,540 and flat No. 16 on the second floor to be purchased for Rs. 1,28,800 in the name of her minor son, Master Devendra Talwalker. it was admitted that the construction of the two flats are not completed within two years from the date of sale of the flat in Kalpataru Building, Bombay. However, it was submitted that there was delay in completion of construction of the flats owing to certain factors beyond the control of the assessee. It is stated that the construction work was held up owing to the non-availability of cement in the wake of Maharashtra cement scandal. It was stated that the assessee actually entered into the possession of the flats 10 and 16 at Rameshwar Apartments at Thane, in 1982. It was submitted that denial of exemption under s. 54 was not just or fair especially when the assessee was not at all responsible for the delay caused in the construction of the flats or the buildings and it was delayed owing to certain unforeseen circumstances. The assessee sought to rely upon the decisions reported in CIT vs. Tikyomal Jasanmal (1971) 82 ITR 95 (Guj), CIT vs. Natu Hansraj (1976 CTR (Guj) 365 : (1976) 105 ITR 43 (Guj), Smt. Shantaben P. Gandhi vs. CIT (1981) 129 ITR 218 (Guj) and Addl. CIT vs. Vidya Prakash Talwar (1981) 25 CTR (Del) 220 : (1981) 132 ITR 661 (Del). The learned CIT(A) held that the decisions cited on behalf of the assessee cannot be of any help to her. The learned CIT(A) went on considering the meaning of the words ‘has constructed’ in s. 54. He stated that the true meaning of those words is that the construction of the new house property should be completed within a period of two years from the date of sale of the old residential house. Thus, according to him, the actual construction of the house within two years from the date of sale of the old house is a mandatory requirement to get exemption under s. 54. However, in this case, the agreements with Somnath Builders were extended on 1st April, 1981 just before the expiry of the two years’ time limit from 24th April, 1979. Clause 5 of the agreement shows that possession of the flats should be handed over on or before May 1982 unless postponed for certain specified reasons. Thus, the CIT(A) held that the main ingredient under s. 54 has not been satisfied. Since correct figure of sale price was not given before the ITO, the learned CIT(A) felt that he should ascertain the correct figure of net capital gains in the hands of the assessee and as per the working given in the impugned order, he had determined the net capital gains at Rs. 1,84,000 as against Rs. 1,80,225 adopted in the ITO’s order. Further, aggrieved against the impugned order dt. 22nd June, 1983, the assessee came up in second appeal before this Tribunal.

4. We have heard Shri P.M. Venkatesan, the learned counsel for the assessee, and Shri N. Santhanam, the learned Departmental Representative. It is submitted before us that except plastering, all other construction of the flats was complete within two years from the date of sale of the old flat under the agreement of sale dt. 24th April, 1979. Only plastering could not be done because the cement was not released in the Bombay State as freely as it used to be after the great cement scandal took place in the Bombay State. According to the assessee, the words ‘constructed a residential house’ should not be taken on its face value but as it is a beneficial provision, it may be construed liberally and it should be held enough for claiming exemption under s. 54 even if construction of the residential house started within two years after the date of sale of the old residential house. In support of this contention, the assessee relied upon the decision of the Supreme Court in the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC). There it is held as follows :

” A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction. ”

As against this argument, the learned Departmental Representative, in the first instance, states that the copies of the agreement now filed in a paper compilation on behalf of the assessee would reveal that the assessee intended to purchase two flats after they have completed construction and she is obliged to make certain payments to the builders of Rameshwar Apartments. The provisions of the agreements dt. 1st April, 1981 which the assessee had entered into with Somnath Builders, would clearly reveal that the assessee intended to purchase one flat in her favour for Rs. 99,540 and another flat in favour of her minor son for Rs. 1,28,800. Therefore, he contends that we should understand the case of the assessee as one of purchase of the residential flat and if that is so, as per the requirements of s. 54, it should be done within one year after the sale of the old residential house. That means, according to the learned Departmental Representative, as the old residential flat of the assessee was sold under the agreement dt. 24th April, 1979, the purchase of the new flats for residential purposes should have been complete by 24th April, 1980. However, he argues that the agreement to purchase was entered into on 1st April, 1981 with Somnath Builders, which is quite beyond one year and as such the assessee is not entitled to the exemption under s. 54. Secondly, he argued even assuming that the case of the assessee is not of a purchaser but of a person who constructed another residential building, the construction should be complete within two years from the date of sale of the old residential house. That means, according to him, the construction should be complete within 24th April, 1981. However, even according to the assessee, the construction was not complete and the possession of the flats was taken over only in 1982. So, by the completion of two years, viz., by 24th April, 1981, there was only an incomplete construction of the two flats under consideration. Further, even according to the specific term of the contract dt. 1st April, 1981, viz., cl. 5 of the agreement entered into by the assessee with Somnath Builders, the possession of the flats 10 and 16 in Rameshwar Apartments was agreed to be delivered only in May 1982 and not before that date. So it is very clear that on 24th April, 1981, the apartments were not even agreed to be delivered and if that is so, it cannot be argued that by 24th April, 1981, flats 10 and 16 in Rameshwar Apartments can even be said to be flats of completed construction. It is argued that an incomplete construction cannot be called a house and the learned Departmental Representative very much relied on the decision of the Orissa High Court in CWT vs. K.B. Pradhan (1981) 130 ITR 393 (Ori). In that case for giving exemption for the value of the house under s. 5(1)(iv) of the WT Act, 1957, what is meant by the term ‘house’ fell for consideration before the Orissa High Court. The Hon’ble Orissa High Court had held that if a house was once habitable and became uninhabitable on account of want of repairs, the exemption provided by the proviso to s. 5(1)(iv) may operate. Where, however, the house is in the process of construction and, on account of the fact that it is not complete, has not reached a habitable stage, the concept of a ‘house’ cannot be extended to cover such an incomplete construction. Thus, according to him, unless the house constructed is such which is habitable, it cannot be called a house and as a matter of fact a house whose construction was not complete cannot be called a house. In this case as to whether it is an outright purchase or construction by the assessee herself, the flats which she, subsequently, occupied in 1982 were new constructions and there was no scope for any repairs being undertaken to them and, hence, the category of house, which fell under the proviso to s. 5(1)(iv), should not be considered for our purposes.

5. Thus, we considered the arguments on both sides. We are of the opinion that the submissions made on behalf of the Department should be accepted. Our reasons are as follows.

Sec. 54(1) is as follows :

” Where a capital gain arises from the transfer of a capital asset to which the provisions of s. 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 (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, 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,… ”

Firstly, flat No. 4 in the third floor in Kalpataru building at 39, Dr. Deshmukh Marg, Bombay 26, was purchased by the assessee in 1970. It was not disputed by the Department that the assessee herself lived in the said flat till it was sold under the agreement dt. 24th April, 1979 and thus she utilised the flat for her residential purposes. Thus, the first requirement that the house sold should have been used by the assessee or her parent for residential purposes for the two preceding assessment years before sale was fulfilled in this case. Next we have to see whether the assessee actually purchased the two flats, flat Nos. 10 and 16 from Somnath Builders under the two agreements entered into by her dt. 1st April, 1981 or whether she got those flats constructed by employing Somnath Builders as contractors. Photostat copies of the agreements are filed in the paper compilation before this Tribunal. Clause 3(a) of the agreement is similarly worded in both the agreements, so we felt it enough to extract one of the clauses from one of the agreements :

” 3.(a) The second party hereby agrees to purchase flat No. 10 on the first floor in the said building, admeasuring about 711.00 sq. ft. (carpet area) approximately, as shown on the plan, seen and approved by the second party for a price of Rs. 99,540.00 (Rupees nintynine thousand five hundred forty only). This price shall include the amenities listed in exhibit ‘B’. ”

There is a preamble to the agreement and para (e) of the preamble is important which states that the second party (the assessee) has approached the first party (builders) and offered to purchase a flat 10 on the first floor in the said building on the said property. The various stages at which the sale price was to be paid were given at cl. 4 of the agreement. Clause 5 speaks of the probable date before which the flat should be completed and handed over possession to the second party (the assessee). It says as follows :

” 5. The first party agrees to hand over the possession of the said flat to the second party on or before May 1982 subject to the realization of the cheque, if any, paid by the second party to the first party in payment of the balance payment as aforesaid and subject, however, to the grant of completion certificate by the Thane Municipal Council and subject to the acts of God, such as earthquake, floods or other natural calamities, act of enemy war, and subject to the availability of cement, steel or any other cause beyond the control of the first party.”

Clause 7 of the agreement discloses the actual interest, which the assessee had purchased from the builders and it is as follows :

” 7. The second party shall have no claim save and except in respect of the particular flat hereby agreed to be purchased, i.e., open space, parking spaces, lifts, staircases, terraces, etc., which will remain the property of the first party until the whole property is transferred to the proposed Co-operative Housing Society or other incorporated body, as hereinabove mentioned, subject to the rights of the first party hereinafter stated. ”

The format as well as the terms of the two agreements dt. 1st April, 1981, one of which is obtained in the name of the assessee and another in the name of her minor son, was one and the same. Similar clauses are present in the two agreements. Therefore, it can be seen that what was purchased under the agreements is only the flats and the open space, parking spaces, lift, staircases, terraces, etc., would remain the property of the builders themselves until a co-operative society is formed and the whole property is transferred to the said society. Therefore, to our minds, it appears to be that except a right of lateral support to the flat area purchased by the assessee in her name and in the name of her minor son and the carpet area of the flat, she had no interest in the land over which those flats were built. The question of getting a building constructed would arise in a case where the land on which the building or a complex is sought to be raised belongs to the assessee herself. However, on a reading of the agreement, we feel that until the construction of the flats purchased by the assessee is completed, the ownership of those flats does not automatically vest in the assessee. To our minds, it appears the ownership of the flats would vest only in the assessee after taking over the possession of the said flats from the builders which is stated to be ordinarily in May 1982. If the ownership of the flats remains with the builder till possession is taken of the flats on the payment of full amount of consideration, to our minds, it appears, that it is a case of an outright sale of a flat on the date of taking over possession, which would also be the date on which the complete consideration would be paid to the builders. Therefore, we find it difficult to comprehend the argument advanced on behalf of the assessee that they got the flats constructed for them by employing the builders or taking only their services. In our opinion, the assessee did not construct but only purchased a flat which was already constructed in 1982. Therefore, only one year’s time from the date of sale of the old residential house was available to the assessee. Thus, exemption under s. 54 would be available to the assessee only if the consideration of Rs. 3,34,050 was spent towards purchase of another residential house within 24th April, 1980. Therefore, once it is admitted that the sale itself was complete in 1982, it is obvious that the assessee cannot claim exemption under s. 54. Further assuming, without admitting, that it is a case of constructing a building, even then, in our opinion, the building must be completed construction and the building must become habitable within two years time available under s. 54. The words employed in s. 54 relevant for the assessment year under consideration, viz., ” has within a period of two years after that date constructed, a house property for the purposes of his own residence, then “, would only admit of the construction which is stated above by us. In our opinion, s. 54 exemption would not be available if simply construction of a house started within two years’ time from the date of the sale of the old house and the construction is not completed within two years and the house is fit for habitation within two years. We fully agree with the submission of the learned Departmental Representative that an incomplete house cannot be stated to be a house either for the purposes of wealth-tax or for the purposes of s. 54. We humbly follow the Orissa High Court judgment reported in K.B. Pradhan’s case (supra) in this regard. No other authority taking an opposite view is filed before us. All the four authorities, viz., Tikyomal Jasanmal’s case (supra), Natu Hansraj’s case (supra), Smt. Shantaben P. Gandhi’s case (supra) and Vidya Prakash Talwar’s case (supra) do not come to the aid of the assessee in any way. We also hold that the ratio of the decision of the Hon’ble Supreme Court in K.P. Varghese’s case (supra) cannot apply to the facts of the case. Firstly, we are of the opinion that the power of doing violence to the language used by the legislature in the section can be exercised only by the Courts conferred with powers of extraordinary jurisdiction when they felt on a reading of a legal provision that the literal interpretation of it produces a manifestly absurd and unjust result and also when they felt that the said absurd result could not have been intended by the legislature. We are of the opinion that such power is not available to the lower Tribunals. We feel that if such powers are also being enjoyed by the lower Tribunals, there is every likelihood of misinterpreting the intention of the legislature and subverting the letter of the law in the garb of correcting an unjust result which would again be subjective. We are of the opinion, a person would be entitled to the benefits conferred by a provision if only he fulfils all the conditions laid down therein. The literal interpretation of s. 54 does not, to our minds, present any manifestly absurd or unjust result, which is not in the contemplation of the legislature. Hence, there is no question of doing violence to the language of the section in order to carry out the intention of the legislature.

In the result, the appeal of the assessee bears no merits and, hence, it is dismissed.