Vildirect: IncomeTax-caselaws-1980-VIL-733-GUJ-DT

1980-VIL-733-GUJ-DT

Equivalent Citation: [1981] 129 ITR 218, 6 TAXMANN 356

GUJARAT HIGH COURT

Date: 23.06.1980

SMT. SHANTABEN P. GANDHI

COMMISSIONER OF INCOME-TAX, GUJARAT III

BENCH

Judge(s) : P. D. DESAI., B. J. DIVAN

JUDGMENT

The judgment of the court was delivered by

P. D. DESAI J.-The assessee was the owner of an immovable property situate on the Juhu Road, Santa Cruz, Bombay. The immovable property consisted of a piece or parcel of land admeasuring in the aggregate 2,084 sq. yards. The immovable property was divided into two parts, one part consisting of an open piece of land admeasuring 544 sq. yards (hereinafter referred to as the " smaller plot ") and the other consisting of 1,540 sq. yards of land (hereinafter referred to as the " larger plot "). Out of the larger plot, which was situated in the front, 100 sq. yards of land was acquired by the Municipal Corporation of Bombay. Ultimately, therefore, the assessee was left with 1,440 sq. yards of land out of the larger plot. There was a building constructed on the said portion of land which was partly let out and partly occupied by the assessee herself.

It appears that on June 5, 1967, the assessee entered into an agreement with one K. K. Vora and two others to sell to them the larger plot with the building standing thereon. A few days before the said agreement was executed, the assessee had entered into an agreement on May 25, 1967, with a firm of contractors carrying on its business in the name and style of M/s. Madhani Construction Co. for the construction of building on the smaller plot. The agreement, amongst other things, provided that the cost of construction was to be paid out of the said proceeds of the larger plot payable to the assessee by K. K. Vora and others. It further appears that ultimately the agreement to sell the larger plot to K. K. Vora and two others was not acted upon and that no conveyance was executed in favour of those persons. Instead, the assessee sold the larger plot to the Juhu Garden Co-operative Housing Society Ltd. under a deed of conveyance dated March 20, 1970, for a total consideration of Rs. 2,88,000. Meanwhile, M/s. Madhani Construction Company had proceeded with the work of constructing a building on the smaller plot and the construction was, in fact, completed on March 31, 1968. M/s. Madhani Construction Company were paid their dues in two parts, Rs. 30,000 was paid on or about November 9, 1969, and the balance of Rs. 99,556.93 was paid on March 20, 1970, that is to say, on the day on which the conveyance was executed in favour of the Juhu Garden Co-operative Housing Society Ltd. in respect of the larger plot. The assessee was put in actual possession of the newly constructed building on the smaller plot also on the same day.

In the course of proceedings for assessment to income-tax for the assessment year 1970-71, the previous year being the financial year ended on March 31, 1970, the assessee claimed before the ITO that having regard to the provisions of s. 54 of the I.T. Act, 1961 (hereinafter referred to as " the Act "), the cost of construction of the new building erected on the smaller plot should be deducted from the sale proceeds realised on conveyance of the larger plot with the building standing thereon and that only the difference between the capital gain arising on the transfer of the larger plot and the cost of construction of the new building should be charged under s. 45 as the income of the previous year. The ITO found that the assessee's claim could not be accepted inasmuch as the two conditions laid down in s. 54 were not satisfied, namely, (1) that the building standing on the larger plot, which was partly let to tenants, could not be said to have been used in the two years immediately preceding the date on which the transfer took place by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and (2) that within a period of two years after the date of transfer of the larger plot the assessee had not constructed a house property for the purposes of her own residence. Consequently, the capital gains was assessed in the assessee's hands without giving the benefit of the provisions of s. 54.

On appeal, the AAC confirmed the order of the ITO on the ground that in order to avail of the benefit of s. 54, it was necessary to show that the new house property was constructed exclusively for the purpose of the assessee's own residence and that since, in the instant case, the new building was admittedly constructed partly for the assessee's own residence and partly for letting, the benefit of the provisions of s. 54 was not available.

On further appeal, the Income-tax Appellate Tribunal held that the first condition for earning the exemption under s. 54, namely, that the building standing on the larger plot should have been used by the assessee or parent of his mainly for the purposes of his own or the parent's own residence during the period of two years immediately preceding the date of transfer, was satisfied in the instant case. However, the second condition, namely, that the assessee should have purchased, within a period of one year before or after the date of transfer, a house property for the purposes of his own residence or he should have, within a period of two years after that date, constructed a house property for a similar purpose, was not satisfied in the instant case. The Tribunal held that since the new house property was constructed on the smaller plot belonging to the assessee and there was nothing on the record to show that the superstructure constructed thereon was purchased by the assessee from the contractors, M/s. Madhani Construction Co., who owned it, it could not be said that the assessee had purchased, within a period of one year before or after the date of transfer of the larger plot, a house property for the purposes of her own residence. The Tribunal further found that since the work of construction of the new building was completed on March 31, 1968, the said property was obviously constructed before the transfer of the larger plot in favour of the Juhu Garden Co-operative Housing Society Ltd. took place. Under such circumstances, it could not also be held that the new building was constructed within a period of two years after the date of the transfer of the larger plot and, therefore, the assessee's claim for exemption under s. 54 could not be sustained. The Tribunal observed that in that view of the matter, it did not consider it necessary to decide whether or not the assessee satisfied the further condition, namely, whether the new house property was constructed for the purposes of her own residence.

The matter has now come up before us on a reference at the instance of the assessee and the question, which has been referred for our opinion, is in the following terms:

"Whether, on the facts and in the circumstances of the case, the assessee could be said to have constructed the house property within period of two years after the date of transfer of the capital asset within the meaning of section 54 of the Income-tax Act, 1961 ? "

Under s. 45, any profits or gains arising from the transfer of a capital asset effected in the previous year are, save as otherwise provided, inter alia, in s. 54, chargeable to income-tax under the head " Capital gains " and they are deemed to be the income of the previous year in which the transfer took place. Section 54 enacts an exemption to the provision of s. 45 and it provides that upon the satisfaction of the conditions therein prescribed, instead of the capital gain being charged to income-tax as provided in s. 45, it shall be dealt with in accordance with the provisions of the said section. Two relevant conditions prescribed in the opening part of the said section for its applicability are:

(1) that the capital gain must arise from the transfer of a building or land appurtenant thereto, which in the two years immediately preceding the date on which the transfer took place, must have been used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and

(2) (a) that the assessee must have, within a period of one year before or after that date, purchased, or

(b) within a period of two years after that date, constructed, a house property,

Now, the Tribunal has found that the first condition is satisfied and we need not, therefore, dilate upon that aspect of the matter. So far as the second condition is concerned, the Tribunal has found that both the alternative limbs of the first part of the said condition, that is to say, the conditions set out at (a) and (b) above, are not satisfied and that it was, therefore, not necessary to consider whether the second part (condition (c)) is satisfied. Having regard to the frame of the question which is referred for our opinion, the only point which survives for consideration relates to the satisfaction of condition (b), namely, whether the assessee has within a period of two years after the date of transfer of the larger plot with the building standing thereon constructed a house property.

The facts, as found by the Tribunal, are specific and clear. The construction of the house property on the smaller plot was completed on March 31, 1968. The conveyance in respect of the larger plot with the superstructure standing thereon was executed on March 20, 1970. In view of those findings of fact, it cannot possibly be disputed that the new house property was constructed long before the transfer of the larger plot took place and not within a period of two years after the date of such transfer. It is true that the assessee paid a substantial portion of the cost of construction to M/s. Madhani Construction Company and obtained possession of the new house property on March 20, 1970, that is to say, the day on which the conveyance in respect of the larger plot was executed. That, however, is a matter of no consequence, so far as the satisfaction of the relevant condition is concerned. For the satisfaction of the relevant condition, what has to be seen is an objective fact, namely, whether the new house property was constructed within a period of two years after the date of the transfer of the property on the sale of which the capital gains arises. Merely because the payment of a substantial portion of the agreed charges of the contractor was made and possession of the newly constructed property was obtained on the same day on which the conveyance was executed, it cannot necessarily follow in all cases that the new building was not constructed up to that time. The determination of such question will depend on the facts of each case and, in the instant case, no such inference can possibly be raised, in view of the clear finding of fact that the construction of the new building was completed on March 31, 1968.

It was contended on behalf of the assessee that the word " constructed " occurring in s. 54 must be construed so as to mean constructed with view to enabling the assessee to occupy the new house property and that since the possession of the newly constructed property was not handed over to the assessee by the contractors, it cannot be held that the new house property was " constructed " within the meaning of the said section. We are unable to agree with this submission in view of the facts found, even if it is assumed that the word " constructed " is capable of the meaning for which the assessee contends. This is not one of those cases where for one reason or the other not within the control of the assessee, the new house property which the assessee intended to put up had not been completely constructed so as to be fit for occupation. There is nothing on the record to show that the property constructed on the smaller plot was not fully constructed and that it was not fit for occupation. The finding, in fact, is that the construction was completed on March 31, 1968, but for some reason (presumably because the contractors were not paid their full charges) possession was not taken till March 20, 1970. Under such circumstances, in our opinion, it is not possible to hold that the house property could not be said to have been constructed within the meaning of s. 54 on the date on which it is found to have been actually constructed.

It was also contended on behalf of the assessee that upon taking an integrated view of the various features of the transaction, namely, (a) that the assessee entered into an aggreement with M/s. Madhani Construction Co. to construct the new building just a few days prior to the agreement to sell the larger plot was executed in favour of K. K. Vora and others, (b) that substantial portion of the cost of construction was agreed to be paid and was, in fact, paid out of the sale proceeds of the larger plot, and (c) that possession of the new house property was handed over to the assessee on the same day on which the conveyance in respect of the larger plot was executed, it must be held that the new house property was constructed within the meaning of s. 54 on March 20, 1970, and not on March 31, 1968. We are unable to uphold this contention on a true and proper construction of s. 54 as indicated above.

It might be mentioned that the assessee relied upon the decision of this court in CIT v. Natu Hansraj [1976] 105 ITR 43. The said decision, however, is of no assistance to the assessee on the point in controversy herein. It deals with an altogether different point which does not arise for our consideration herein.

In view of the foregoing discussion, we are of the view that the Tribunal was right in law in holding that the provisions of s. 54 were not attracted in the instant case inasmuch as the assessee could not be said to have constructed the new house property within a period of two years after the date of the transfer of the capital asset which has resulted in the capital gains. The question referred to us is, therefore, answered in the negative, that is to say, in favour of the revenue and against the assessee. The assessee will pay the costs of this reference to the revenue.

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