HIGH COURT OF BOMBAY
For qualifying exemption under section 54F, assessee’s ownership and domain over the asset is a must right from the sale of original asset till the purchase and/or construction of the residential house i.e., the “new asset”
ITA NO. 15 of 2002
September 12, 2008
HIGH COURT OF BOMBAY
ITA NO. 15 of 2002
September 12, 2008
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8. The relevant portion of section 54-F of the IT Act is as under:-
“Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.
54F.(1) [Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a.8 Hindu undivided family] the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereinafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereinafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say-
Provided that nothing contained in this sub-section shall apply where-
(a) the assessee,-
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the one residential house owned on the date of transfer of the.9 original asset, is chargeable under the head ieIncome from house propertyls.]
Explanation,- For the purpose of this section,-
[***] “net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.”
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its consideration, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head ”Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.]”
9. The term “Assessee” is defined in Section 2(7) of the Income Tax Act, which is as under:-
“assessee” means a person by whom [any tax] or any other sum of money is payable under this Act, and includes-
(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income [or assessment of fringe benefits] or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act;”
10. Section 54 refers to the assessee being an individual or a Hindu undivided family. Importantly, both are different legal entities. As per the scheme of these sections of the IT Act, the assessee, who is the owner of the original asset, need to, within a period of one year before or two years after the date on which the transfer took place, purchased or within a period of three years after that date construct a residential house (new asset). The capital gain shall be dealt with in accordance with the other parts of the section.
11. The concepts of the “assessee”, “own”, “owned” “owner”, “ownership”, “co-owner”, “owner of house property” or “ownership of property” as elaborated in Sections 22 to 27 and 32 of the IT Act, are very much inter-linked and connected for granting the benefit under the IT Act. The word and phrase “owner” in the context of section 22 of the Income Tax Act has been elaborated in CIT...vs...Podar Cement Pvt. Ltd.,  226 ITR 625; and Mysore Minerals Ltd. v. CIT  239 ITR 775. An assessee must have valid title legally conveyed to him after complying with the requirement of law or at least entitled to receive income from the property in his own right and have control and domain over the said property for all the legal purposes, which basically excluding a third person of any right over the said property. Therefore, all these concepts are inter-linked. The scheme and purpose of Section 54F, which was inserted by the Finance Act, 1982 with effect from 01.04.1983 i.e. from the Assessment Year 1983-84 is with a view to encourage house construction. The object, therefore, is to give all benefits under this Section to the assessee on conditions as elaborated in the section. No such benefit is available to a person other than the assessee. It also means the assessee must comply with the conditions strictly as per this provision in all respects. As noted, this exemption will not be available in case where the assessee owns, on the date of transfer of the original asset, any residential house or purchased within the period of one year, after such date or constructs within a period of three years after such date any other residential house. Where an assessee purchases or constructs any other residential house within the period of the aforesaid exemption under the proposed provision, if allowed, shall stand forfeited. The amount of capital gain arising from the transfer of the original asset which was not charged to taxes shall be allowed to be income chargeable under the head “capital gain” relating to long term capital assets of the previous year in which such residential house is so purchased or constructed. Furthermore, if an assessee transfers newly acquired residential house within three years of its purchase or construction, then the amount of capital gain arising from the transfer of original asset, which was not charged to tax, shall be deemed to be the income of the year in which the new asset is transferred and the said income shall be charged to tax under the head of capital gains relating to the long term capital assets. [(1982) 138 ITR S. 10] (Departmental Circular No. 346 dated June 30, 1982)
12. It is, therefore, clear that the purpose is to give this benefit on the ownership of one residential house only by the assessee and to encourage to have one residential house of the assessee. Therefore, right from the sale of original asset till the purchase and/or construction of the residential house i.e. the “new asset”, the ownership and domain over the new asset is a must. The new property must be owned by the assessee and/or having legal title over the same. The others may use and occupy the same along with the assessee but the ownership should be of the assessee of the residential house so purchased from the net consideration/sale proceeds of the sale of original asset by the assessee.
13. Having observed above and in view of the undisputed position on the record that the deceased assessee, admittedly, though sold the property owned by him yet purchased the new property in the name of adopted son and paid consideration out of the sale proceeds in question, with clear intention to transfer the property to the adopted son. He, therefore, utilised the sale proceeds to construct a house by transferring the property and submitting plan in the name of the son only. The intention was very clear from the day one to transfer the property even before the construction of residential house to the adopted son. He transferred the property before the prescribed period, as per the scheme of Section, and the son becomes the owner of the property for all the purposes. The deceased/assessee, admittedly, had no domain and/or right whatsoever on the said property. This fact itself, therefore, disentitled him to claim any exemption as there were various non compliances of the conditions as per the scheme of Section 54 and 54F of the IT Act as mentioned above.
15. The deceased assessee admittedly sold and purchased the property from the realisation but in the name of the adopted son, who in the scheme of the Act and Section 54F is not an assessee, who after selling the old asset purchased and constructed the new property. He was not the owner of the new purchased property. In M/s. Ponds India Ltd. (Merged with H.L. Ltd.) v. Commissioner of Trade Tax, Lucknow; JT 2008 (9) SC 94, the Apex Court's following declaration supports the view we have taken based upon the principle of interpretation of revenue/taxation status.
“39. When a case of obvious intent on the part of the Legislature is made out, a meaning which subserves the legislative intent must be given effect to. It is however also well known that when a word is defined by the legislature itself, the same meaning may be attributed even in the changed situation.”
17. In light of above, the reasoning given by the Tribunal by maintaining the order passed by the Assessing Officer, need no interference. The reasonings, as given, are as under:-
“8. .....A plain reading of section 54F would show that it is the assessee who has to invest the capital gain in the new construction of a residential house in his name. The expression that the assessee has purchased or constructed a new asset in sub-section (1) would only mean that the new asset has to be in the name of the assessee. The proviso to sub section (1) makes the position very clear in as much as it says that the assessee shall not own any residential house on the date of transfer or purchase a residential house within 1 year of the transfer or construct residential within a period of 3 years, other than the new asset. Thus, reading of sub-section (1) together with the proviso would show that the investment in the new asset by the assessee has to be in his own name and not in the name of any other person. The legal consequences of purchase of the new asset by assessee in the name of his son is to constitute his son as the beneficial owner of the new asset. The assessee has, therefore, not made the investment in this name. Therefore, he has rendered himself liable to pay tax on capital gains arising out of the transfer of a capital asset.
10. In all the above case, it will be significant to note that the issue was never regarding purchase of the new asset in the name of other person. Death during the period within which the new asset had to be acquired was an intervening event in some cases. The distinction between a legal heir and an heir apparent in law is very significant. An heir apparent succeeding to the estate of a prepesitus is dependent on the fact of his surviving the prepositus. Death is a certain event but who will die first is not a certain event. This is the reason why law regards transfer by a heir apparent of his chance of succession as non transferable under section 6 of the Transfer of Property Act.
11. .....In the present case, the assessee has not made any such claim. In the affidavit filed before the Assessing Officer he had admitted that his son is the beneficial owner of the property and the investment was made in his name in view of the fact that he is 86 years old and that he was counseled to do so. Thus, on facts and circumstances of this case, we are of the view that the decision of the Madras Tribunal is also distinguishable.”
18. In view of the above reasons, we answer the substantial questions of law framed by this Court in the appeal as under:-
Question No. 1 .....YES:-
We hold that the appeal filed before the Income Tax Appellate Tribunal on 01.05.1988 is competent. It was arising out of the Assessment Year 1983-84. The Department had issued notice under Section 139 (2) of the Act calling upon the assessee (Timaji Dhanjode) who had filed his return; who was alive at the relevant time. The Assessing Officer held that the investment by the deceased assessee in the name of his adopted son not calling for an exemption and, therefore, demanded capital tax. Against the order, the appeal filed by the deceased was allowed on 25.01.1989 and after remand, CIT-A reversed the order of Assessing Officer on 11.02.1998, therefore, the department appeal dated 01.05.1998 against the same, even after the death of the assessee on 09.05.1991, against the appellant being the only legal heirs, is maintainable.
Question No. 2 ...NO :-
The appellant does not qualify for the exemption under Section 54F of the Income Tax Act.
Question No.3 ...YES :-
For qualifying the exemption it is necessary and applicable to have the investments made in residential house in the name of the assessee only. The appeal is dismissed accordingly