1990-VIL-85-ITAT-

Equivalent Citation: ITD 036, 130,

Income Tax Appellate Tribunal BOMBAY

Date: 01.10.1990

VM DUJODWALA

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : U. T. SHAH., G. E. VEERABHADRAPPA.

JUDGMENT

Per G.E. Veerabhadrappa, AM --- The assessee's appeal for the assessment year 1981-82 is on a solitary ground that the learned Commissioner of Income-tax(Appeals) erred in not allowing exemption under section 54 in respect of long-term capital gain on sale of residential flat.

2. The assessee is an individual and for the assessment year 1981-82, the relevant previous year ends on Diwali 1980. The assessee was the joint owner of Flat No. 26 in Meghdoot, Marine Drive, Bombay, purchased in 1952 for Rs. 38,000. He sold the said flat for Rs. 4,50,000 as per agreement dated 12-5-80. Possession was given on 15-5-80 to the buyer. The Income-tax Officer computed capital gains for the whole transaction at Rs. 4,12,800 and arrived assessee's share therein at Rs. 2,06,000 which was treated as the income under the head 'Long Term Capital gains' and allowed deduction under section 80-TT of the IT Act, 1961. The assessee submitted that he has purchased another house property being Flat No. 62, 'Rambha' at Petit Hall, Bombay, vide agreement dated 22-10-77 for Rs. 2,80,000. In this property, the assessee's share was 70% or Rs. 2,01,950. The assessee submitted his transactions in relation to purchase of new flat No. 62 in a serialised manner as under :--

24-7-72 Agreement of original purchaser K.K. Gopaldas booking flat from Malabar Inds. P. Ltd.

22-10-77 Agreement to purchase from K.K. Gopaldas.

24-10-77 Date of payment of Rs. 42,780

7-12-77 Date of payment of Rs. 2,15,941

29-12-77 Letter from Builder agreeing to transfer from name of K.K. Gopaldas to the name of the assessee.

24-3-79 Date of payment of Rs. 20,780.

23-4-79 Date of payment of last instalment.

16-5-79 Municipal conditional letter of NOC for occupation.

24-11-79 Date of offer for possession.

9-4-80 Letter from Builder for readiness for completion certificate.

13-5-80 Date of possession.

3. Before the ITO, the assessee contended that though agreement for purchase of a flat was entered on 22-10-77 and payment was also made earlier, only the date when the new flat is ready for occupation should be taken as date of purchase by the assessee. The ITO rejected the above contention with the following observation in para 5 of his order :--

" I have considered the assessee's contention the agreement for purchase of a new flat was entered into in 1977, payments were made in 1977, and even the last instalment was made on 3-4-79 while the old flat was sold on 15-5-80 i.e. more than one year after that. The assessee has already acquired a right in the new flat more than 12 months before the date of sale of the old flat though he might have taken possession of the same much late on and this amounts to purchase of a flat, since this was done more than 12 months before the sale of the old flat section 54 exemption is not available to the assessee. His claim is therefore rejected. "

The Commissioner of Income-tax(Appeals) also confirmed the order of the ITO.

4. We have heard the counsels on both side. The Departmental Representative vehemently argued that the exemption under section 54 is not applicable to the assessee as he failed to buy any residential house property within a period of one year before/after the date of sale of the first house property. He submitted the reasons given by the ITO and the CIT(A) in their orders in support of his plea. He relied on the Supreme Court decision in CIT v. T.N. Aravinda Reddy [1979] 120 ITR 46, and the decision of the Tribunal in Sri Rajaram v. ITO [1986] 119 ITR 141 (Hyd.).

5. The learned representative for the assessee submitted that the agreement for purchase of property on 22-10-1977 on which the reliance is placed by the Department as the relevant date of purchase was in respect of property under construction. The flat intended to be purchased by the assessee was not at all constructed on that date. He placed reliance in support of his contention, to the source of Articles of Agreement dated 22-10-77 which clearly spells out in the recital that the agreement was one in respect of a building still under construction. So he claimed that the Revenue's interpretation that the building was purchased on 22-10-77 is not a reasonable finding, what the assessee must have purchased is just a right for purchase of a flat in a proposed construction. He submitted that the builder being out of fund and for such other reason, went on delaying the construction. Just to help the builder to fasten the construction, the payments were made in instalments much earlier to the actual possession of the property. This is very common in transaction in flats. The construction was completed at a later date and on 24-11-79, the builder expressed his desire to offer the possession of the flat. That is the first date when the property, at best, can be said to be a purchase of residential property. He stressed that even after construction of the building, the flat is not immediately available for residence to the assessee unless it is cleared by the municipal/corporation authorities. Therefore, he submitted that only when the flat construction was completed and available for residence and was actually allotted by the builder to the buyer in compliance with the agreement of sale entered upon by the builder earlier, it could be taken as ready for occupation and that was the date material for the purpose of counting period of one year within the meaning of section 54 of the IT Act, 1961. He finally submitted that 9-4-1980, on which date the builder agreed to give possession of the flat would be taken as the date on which the assessee has purchased the property for the purpose of residence within the meaning of section 54 of the IT Act, 1961. Till such time, he had only the right to purchase house property, he added. He relied on the following decisions :--

(1) CWT v. K.B. Pradhan [1981] 130 ITR 393 (Ori.)

(2) K.P. Varghese v. ITO [1981] 131 ITR 597 (SC)

(3) CIT v. Mrs. Shahzada Begum [1988] 173 ITR 397/38 Taxman 31 (AP)

(4) Purushottam Govind Bhat v. First ITO [1985] 13 ITD 939 (Bom.)

(5) Damodar Raheja v. Eighth ITO [1984] 10 ITD 75 (Mad.).

6. We have carefully gone through the facts of the case and the rival contentions. The question before us, though it is simple, raises problems of importance in metropolitan cities where there exists lot of problems for meeting basis human needs 'house'. Just to encourage assessee, section 54 is enacted to give relief of exemption from capital gains in the case of assessees selling existing residential units and acquiring any other residential unit. This has to be done within a period of one year either before or after the date of sale of the first house property. If that is done so, capital gains arising on transfer of the first house property will be exempt to the extent of investment in the second house property as stipulated in section 54. The flat in cities is the most common and a peculiar feature. The builder has to take plans of construction in his own name and sometimes in the names of his vendors and start construction. He invites prospective customers, enters into agreement for sale of flats proposed to be constructed by him and at times, demands the payment of price in one or more instalment. He may sometimes to finance his own construction activity, gives discounts and accepts lesser payment. The price paid before construction is complete, will be different from the price demanded by the vendors after the flat is constructed. The buyers even after having the agreement for purchase of the flat cannot exercise any right of ownership or their right cannot be traced to any part of the construction till such time the builder actually gives the possession of a particular flat to the buyer. After the completion of structure, it has to be inspected and cleared by the municipal authorities. Then the flat is ready for occupation which the builder normally intimates to the buyer. The buyer will then take possession and actually enjoy the house property to the exclusion of others. In this flat business, at times, the builder goes financially bad and delays the construction. Against this background of flat transaction, we are now faced with the provisions of section 54 for granting exemption to the assessee, who at one time, enters into purchase and at other times, takes possession and starts actual enjoyment of the flat. At what point of time he became owner of the house property will decide the fate of his exemption.

7. In identical issue in Purushottam Govind Bhat's case the Tribunal held as under : The right the assessee has got is a peculiar type of right which certainly cannot be classified as ownership. To say, therefore, that the assessee has purchased the property would in law be erroneous. On the contrary, that the assessee has an interest in this flat as much as that of a full owner cannot be denied. The purpose of the assessee getting the flat allotted was to have the benefit of residential accommodation entirely in his control as if he was the full owner. Except, therefore, for a few technical requirements, the assessee can be said to be the full owner of the property. As a matter of fact, if not in law, therefore, it would be correct to say that the assessee has purchased a residential property. If the meaning of the word 'purchase' is pushed to its technical sense, perhaps, the owner of a flat as above would not get the benefit of section 54. Even so, it would be against the very object and purpose of section 54 if such a flat owner is denied the benefit. Practically in every big town in this country, the ownership flats are in fashion. In applying the provisions of section 54 to such a contingency, it would not be, as claimed by the learned counsel for the department, proper to deny the assessee the benefit of section 54. With the increase in the cost of buildings, if the technical policy of denying the benefits of section 54 claimed by the learned departmental counsel is accepted, section 54 would almost be an unused section. Certainly that cannot be the purpose of the legislation especially when this covers a large number of assessees, in a peculiar transaction like flats. A reconciliation, therefore, between the provisions of section 54 and the peculiar law relating to the ownership flats in big cities where no ordinary person can purchase a house himself has to be made. In T.N. Aravinda Reddy's case, on which reliance has been placed by the Revenue, is in respect of division of the HUF property - Whether the release by the other coparceners could be taken as 'purchase' for the purpose of granting relief under section 54(1) of the Act to that coparcener in whose favour the release is effected. The Supreme Court answered this question in favour of the assessee in extending the benefit of section 54. In the case of Sri Rajaram, the question for determination was whether the payment of consideration is relevant for the purpose of section 54, which the Tribunal rightly held that it is not so, considering the provisions of section 54. Therefore, the two cases cited above are not clearly applicable to the facts in the present case.

8. Left with the relevant date to decide in the facts of the case, the decision of the Tribunal in Purushottam Govind Bhat's case really comes to favour the assessee. In the said case, the assessee joined the society in 1977. He was allotted a flat and occupied the same on 1-1-1980. The Tribunal held, joining the society and paying the amounts cannot really amount to purchase of a house. On the contrary, allotment of the flat would certainly give the assessee certain specific obligations and rights. The manner in which the amounts are paid and the period over which they are paid may not be of much relevance. Considering the peculiar circumstances of that case, it was held that the benefit of section 54 should be extended by taking the date of allotment and occupation as the relevant date of purchase. Following the said decision, we are inclined to hold that in this case also, the assessee has, though, entered into agreement for purchase of flat on 22-10-77, paid the money during 1977 to 1979, but the relevant date to be taken for the purpose of applying of section 54 should be the date on which the flat was ready for occupation by the assessee. Taking that date as the date of purchase, is within the period of one year and therefore the capital gains are clearly exempt from tax applying the provisions of section 54.

9. In view, of the above facts, we allow the assessee's appeal

 

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