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Capital Gain exemption admissible if the taxpayers acquired substantial domain over the house property and has paid the entire cost.
Here is a landmark order by Bombay HC wherein it has been held that Capital Gain exemption admissible if the taxpayers acquired substantial domain over the house property and has paid the entire cost.
Bombay High Court
Commissioner Of Income Tax vs Mrs. Hilla J.B. Wadia on 2 March, 1993
Equivalent citations: 1995 216 ITR 376 Bom
Author: S S Manohar
Bench: S V Manohar, U Shah
JUDGMENT Smt. Sujata Manohar, J.
- The assessee was the owner of 50% share in an immovable property known as Casa Da Vinc at Worli which was being used by the assessee and her husband for residential purposes. Her husband was the owner of the other 50% share. Under an agreement of sale dt. 2nd October, 1972, the two co-owners of the property agreed to sell it to the proposed Andromeda Co-operative Housing Society Ltd. was formed and registered on 3rd November, 1972 with the object, inter alia, of purchasing this property and constructing tenements on the said property for the use of its members. The total number of members of the Society was not to exceed the total number of tenements or flats available for allotment to the members. Each of the members was required to hold atleast 5 shares of the Society. The assessee was one of the signatories to the Memorandum of Objects of the Society and its regulations and had agreed to take a flat in the said society subject to the regulations of the Society.
- Pursuant to the above agreement of sale, by conveyance dt. 8th December, 1972, the property was conveyed by the assessee and her husband to the Society. The assessee has received under this conveyance a total amount of Rs. 4 lacs on or before 31st March, 1973.
- On 25th October, 1973, an agreement was entered into between the Society and the assessee under which it is, inter alia, stated that the assessee has agreed to hand over possession of the property to the Society on or before 30th June, 1973. It is further recited that the plan for construction of building on the said property are approved by the Municipal Corporation of Bombay on 21st February, 1973 and a commencement certificate is issued on 3rd Oct. 1973. It is further recited that a contract for construction of the building is already given to the firm of M/s. L. T. Construction by a Resolution in a special general meeting of the members of the Society held on 20th November, 1972. It is further recited that the assessee has agreed to become a member of the Society and to take a flat in the proposed building. Under this agreement of 28th October, 1973, the Society agreed to allot to the assessee flat No. 7A and B admeasuring 2,590 sq.ft. on the 7th floor of the building being constructed and the assessee agreed to pay a sum of Rs. 2,59,360 to the Society. Of this amount, a sum of Rs. 30,000 was to be paid towards the purchase of shares of the Society. The balance of Rs. 2,29,360 was to be treated as a loan to the Society.
- The construction, therefore, was carried out by the Society through the construction firm for the benefit of its members. That is the reason why the balance amount was to be treated as a loan to the Society. One of the conditions of the agreement was that the assessee had to use the flat for self or members of her family for the purpose of her residence and for no other purpose. It was also stipulated that the Society will try to complete the construction of the building within a reasonable time but in any case the assessee was not entitled to cancel the agreement or claim any damage.
- Under the terms of the agreement, the said amount was to be paid by the assessee in instalments. Accordingly, the assessee has made the following payment to the society :
18.9.1972 Rs. 1,000
27.11.1972 Rs. 10,000
6.12.1972 Rs. 19,000
6.12.1972 Rs. 10,000
6.1.1973 Rs. 40,000
6.1.1973 Rs. 40,000
30.6.1973 Rs. 6,238
1.7.1973 Rs. 65,000
1.7.1974 Rs. 20,000
1.11.1974 Rs. 80,000
7.3.1975 Rs. 8,000
Total Rs. 2,59,238
- From the above facts, it is clear that under the agreement of 25th October, 1973 the flat bearing No. 7A & B on the 7th floor of the proposed building was to be constructed for the benefit of the assessee and the assessee was required to pay and, in fact, paid various payment as set out above to the Society for this purpose. The assessee has thus paid a total sum of Rs. 2,59,36 towards the cost of construction of this flat. Out of this amount, a sum of Rs. 2,51,238 is paid by the assessee by 1st November, 1974, that is to say within a period of 2 years from the date when the said property was conveyed to the society. Thus substantially the entire cost of construction barring a very small amount of Rs. 8,000 has been paid by the assessee within a period of 2 years.
- Under the terms of the agreement of the assessee with the Society, the assessee obtained a right to take possession of a specific flat bearing No. 7A & B on the 7th floor of the said Society. The assessee under the terms of the agreement had no right to cancel the agreement or claim any damage. Thus, the assessee acquired a substantial domain or control over the above flat by virtue of making almost the entire payment relating to the cost of construction of this flat to the society, within a period of two years from the date when the assessee and her husband conveyed the original property to the assessee.
- In these circumstances, we have to see whether the assessee has complied with the requirements of s. 54 of the IT Act, 1961 as then in force. The material part of s. 54 at the relevant time was as follows :
- “Sec. 54. Profit on sale of property used for residence – Where a capital gain arises from the transfer of a capital asset ….. being building or lads 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 …… mainly for the purposes of his own …… residence, 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 ……
- In the present case, the assessee had transferred the property in which she had a half share and which was being used for the purpose of her residence to the Society. The question is whether she can be said to have constructed a house property for the purpose of her residence within a period of 2 years from that date. This provision will have to be constructed in the context of the manner in which such residential properties are now being constructed in a city like Bombay where, looking to the cost of the land, Co-operative Housing Societies are being formed for constructing a building in which flats are allotted to members. This must also be viewed as a method of constructing residential tenements. What we have to see is whether the assessee has acquired a right to a specific flat in such a building which is being constructed by the Society and whether she has made a substantial investment within the prescribed period which will entitle her to obtain possession of the flat so constructed and in which she intends to reside. The material test in this connection is domain over the flat and investment in it. The assessee satisfies both these conditions. She has acquired such a domain and has invested almost the entire requisite amount in it within a period of 2 years prescribed under s. 54.
- In this connection our attention was drawn to a circular of the CBDT bearing No. 471 dt. 15th October, 1986 which dealt with the investment in flats under the Self Financing Scheme of the Delhi Development Authority. The Board has stated in the circular that when an allotment letter is issued to an allottee under this scheme on payment of the first instalment of the cost of construction, the allotment is final unless it is cancelled. The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow up action and taking delivery of possession is only a formality. The Board has directed that such an allotment of flat under this scheme should be treated as cost of construction for the purpose of capital gains. The present case is on a much stronger footing because there is not merely an allotment of the flat but even almost the entire cost of construction is paid by the assessee within a period of 2 years.
- Our attention in this connection was also drawn to a decision of the Andhra Pradesh High Court in the case of CIT vs. Mrs. Shahzada Begum . In the case before the Andhra Pradesh High Court, the assessee had paid a substantial purchase instalment and secured possession of the property within one year of the sale of her residential property, but the sale deed in respect of the property so purchased by her was executed and registered after the expiry of one year. The Andhra Pradesh High Court said that the assessee was entitled to the benefit of s. 54(1) because the house property purchased by the assessee had come into full domain and control of the assessee within a period of one year.
- In the case of Kesho Ram Passey vs. Reserve Bank of India reported in (1984) 146 ITR 16 (P&H), the Punjab and Haryana High Court considered the provisions of s. 54E of the IT Act which were then in force. It had to consider whether the capital gains arising from the transfer of the capital asset were invested in a new asset within a period of 6 months. The petitioner who sold a plot of land deposited the consideration amount in National Rural Development Bonds by sending a bank draft for the amount alongwith his application in the prescribed form within a period of 6 months. However, on account of certain technical problems, the bonds were not issued to the assessee until after the expiry of 6 months. The Court held that by depositing the amount with the agent of the Reserve Bank of India within 6 months, the assessee had substantially complied with the provisions of s. 54E and he should be given the benefit of that section.
- Dr. Balasubramanium drew our attention to a decision of the Gujarat High Court in the case of Smt. Shantaben P. Gandhi vs. CIT reported in (1981) 129 ITR 218 (Guj). In that case, the assessee’s property was divided into two portions one of which was larger than the other. A building was constructed on the larger portion which was partly occupied by the assessee. The assessee constructed a house on the smaller plot and the construction was completed in March, 1968. The larger plot with the building standing thereon was, thereafter, sold and the conveyance was executed in March, 1974. In respect of capital gains arising from the sale of the larger property, the assessee claimed the benefit of s. 54 on the ground that the house on the smaller plot had been constructed for the purpose of residence. The Court held that the assessee was not entitled to the exemption because the assessee could not be said to have constructed a new house on the smaller plot, within a period of two years after the transfer of the larger plot. We do not see how this decision is of assessment year assistance to the Revenue because it turned entirely on the facts of that case. Similarly, the decision of the Karnataka High Court in the case of CIT vs. J. R. Subramanya Bhat reported in (1987) 165 ITR 571 (Kar) also does not assist the Revenue. In the case before the Karnataka High Court, the assessee sold a building on the ground floor of which the assessee was residing, in February, 1977. In March, 1976, the assessee had commenced construction of the new house which was completed in March, 1977. The assessee claimed exemption from tax on capital gains under s. 54 of the IT Act, 1961. The Court said that the assessee had resided in a major portion of the building which the assessee had sold and had completed the construction of a new residential house in March, 1977. Hence, the assessee was entitled to the benefit of s. 54 even though the construction of a new house started prior to the sale of the old building. This decision once again has turned on its own facts and it does not assist us in any manner because the circumstances of the present case are very different.
- For the reasons which we have set out above, in our view, the present case falls within the provisions of s. 54 in view of the fact that the assessee had acquired substantial domain over the flat in question under the agreement with the Society coupled with the payment of almost the entire cost of construction within a period of two years.
- The following question, therefore, referred to us under s. 256(1) of the IT Act, 1961, namely :
- “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to relief under s. 54 of the Act ?”
is answered in the affirmative and in favour of the assessee.
- We may observe here that the situation of the kind which is before us is likely to arise frequently in a city like Bombay. It is desirable, in order to avoid litigation on this topic, that the CBDT issues a circular similar to the circular which is issued in respect of the construction work done by the Delhi Development Authority on 15th October, 1986 for the proper guidance of the IT Department and in order to carry out the letter and spirit of s. 54. No order as to costs.