Transfer on registration, not agreement to sell, governs section 54E exemption and bond investment requirement

An agreement to sell did not by itself transfer title or extinguish rights where it remained conditional and contemplated refund and damages if the sale deed was not executed. Applying section 47 of the Registration Act and section 2(47) of the Income-tax Act, the transfer occurred only on execution and registration of the sale deed. As that date fell after 28-2-1979, the amended section 54E regime applied and required investment in National Rural Development Bonds. Deposit in a nationalised bank did not meet that statutory condition, so exemption under section 54E was unavailable and the capital gains were taxable.

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Issues: Whether the surplus arising from the sale of immovable property qualified for exemption under section 54E of the Income-tax Act, 1961, and whether the transfer of the property took place on the date of the agreement to sell or only on the date of execution and registration of the sale deed.

Analysis: The agreement dated 25-1-1979 was held to be only an agreement to sell and not a completed sale deed. The document remained conditional, contemplated refund and damages if the sale deed was not executed, and therefore did not effect a transfer of title or extinguishment of rights in the property. Applying section 47 of the Indian Registration Act, 1908, and the law governing transfer under section 2(47) of the Income-tax Act, 1961, the transfer was held to occur only when the sale deed was executed and registered on 29-3-1979. Since that date fell after 28-2-1979, the amended regime in section 54E(1), Explanation 1(b) applied, requiring investment in National Rural Development Bonds. Investment in a nationalised bank deposit did not satisfy that requirement. The circular relied upon by the assessee was held inapplicable because it addressed a different factual situation.

Conclusion: The assessee was not entitled to exemption under section 54E, and the surplus was rightly subjected to capital gains tax.

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