Sale Agreement Date Can Determine Property Transfer For Capital Gains Exemption: Karnataka High Court

The Karnataka High Court, on 15 October, held that the date of an agreement to sell can be considered the date of transfer of immovable property for determining eligibility for capital gains exemption under Section 54 of the Income Tax Act, 1961, where possession is delivered to the purchasers pursuant to the agreement.

A Bench comprising Justices S.G. Pandit and Dr. Chillakur Sumalatha dismissed an appeal filed by the Principal Commissioner of Income Tax and the Assistant Commissioner of Income Tax against an order of the Income Tax Appellate Tribunal (ITAT), Bengaluru, granting relief to C.A. Badrinath (HUF) for Assessment Year 2015-16. It held:

“Be that as it may, this Court in Shri Lahar Singh Siroya supra has made it clear that providing for short term and long-term capital gains is a beneficial piece of legislation, whereby certain benefits in taxation is given to the Assessee on fulfilment of certain conditions. Further, it observed that every such legislation is to be construed liberally in favour of the Assessee, as it is for the benefit of the Assessee...”

The dispute concerned the HUF's claim for exemption under Section 54 of the Act on capital gains arising from the sale of immovable property.

The HUF had entered into agreements for the sale of 23 flats between January and October 2014. It handed over possession of the flats to the purchasers between April and November 2014, while executing the corresponding sale deeds subsequently, between July 2014 and July 2015.

It had purchased a new property on 10 January 2014 and claimed exemption under Section 54. However, the Assessing Officer disallowed the claim by an order dated 29 December 2017.

The Commissioner of Income Tax (Appeals) allowed the HUF's appeal and directed the Assessing Officer to assess the capital gains and examine the applicability of the exemption for Assessment Years 2014-15 and 2015-16.

The Revenue challenged the appellate order before the ITAT. Relying on the Supreme Court's decision in Sanjeev Lal v. Commissioner of Income Tax, Chandigarh, the Tribunal held that the date of the agreement to sell could be considered the date of transfer and dismissed the Revenue's appeal.

Before the High Court, the Revenue argued that the Tribunal had wrongly relied on Sanjeev Lal, contending that the Supreme Court had decided that case in the peculiar circumstances involving pending litigation. It further argued that the benefit of Section 54 was available only upon strict compliance with the statutory conditions.

The HUF submitted that the agreements for sale had been followed by delivery of possession to the purchasers. It relied on Section 2(47) of the Act, which includes within the definition of transfer transactions involving the allowing of possession of immovable property to be taken or retained in part performance of a contract.

It also relied on the Karnataka High Court's decision in Shri Lahar Singh Siroya v. Assistant Commissioner of Income Tax and the Gujarat High Court's decision in Kishorbhai Harjibhai Patel v. Income Tax Officer, which had recognised the applicability of capital gains exemption in similar circumstances.

Accepting the HUF's contentions, it noted that the agreements for sale were executed between January and October 2014, possession was delivered to the purchasers between April and November 2014, and the corresponding sale deeds were executed subsequently.

The Bench observed that the Revenue had accepted the capital gains offered by the HUF for Assessment Year 2015-16. Having accepted the taxability of the capital gains in that assessment year, the Revenue could not deny the corresponding benefit under Section 54 of the Act.

Further, relying on Sanjeev Lal, it held that the date of the agreement to sell could be taken into consideration, particularly when possession had been delivered to the purchasers pursuant to those agreements.

Accordingly, the High Court answered both substantial questions of law against the Revenue and in favour of the HUF and dismissed the Revenue's appeal.

For Appellant: E.I. Sanmathi, Advocate

For Respondent: A. Shankar, Senior Counsel for Anamalai S., Advocate