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Issues: (i) whether the assessee was entitled to exemption under section 54 on the basis that the transfer of the West Patel Nagar property took place on the date of the agreement to sell; (ii) whether the gain on transfer of the West Patel Nagar property was long-term capital gain or short-term capital gain.
Issue (i): whether the assessee was entitled to exemption under section 54 on the basis that the transfer of the West Patel Nagar property took place on the date of the agreement to sell.
Analysis: Section 54 applies only where the capital gain arises from the transfer of a capital asset and the new residential house is purchased within the statutory period. The agreement to sell did not itself convey title or interest in the immovable property. The agreement contemplated future execution and registration of the sale deed, receipt of the balance consideration, and transfer of possession only at that stage. Mere payment of earnest money, part payment of price, or delivery of possession under the agreement did not amount to a completed transfer within section 2(47). Nor was there any relinquishment or extinguishment of the assessee's rights on the date of the agreement.
Conclusion: The assessee was not entitled to claim exemption under section 54 on the footing that the transfer occurred on the date of the agreement to sell.
Issue (ii): whether the gain on transfer of the West Patel Nagar property was long-term capital gain or short-term capital gain.
Analysis: For the purpose of section 2(42A), the period for which the asset was "held" includes possession and ownership in the relevant sense, and the holding period is to be computed from the date on which the assessee acquired and continued to hold the property. The assessee had obtained possession and substantive rights in the property under the earlier purchase arrangement and held the property for more than the prescribed period before the transfer by registered sale deed. On that basis, the asset could not be treated as short-term merely because the registered conveyance was executed later.
Conclusion: The gain on transfer of the West Patel Nagar property was long-term capital gain, not short-term capital gain, and the assessee succeeded on this aspect.
Final Conclusion: The transfer for section 54 purposes was not complete on the date of the agreement to sell, but the property had been held for the requisite period so that the resultant gain was assessable as long-term capital gain. The appeal was allowed only to that extent.
Ratio Decidendi: An agreement to sell an immovable property, without a registered conveyance effecting transfer of title or extinguishment of rights, does not constitute a transfer for section 54 or section 2(47); however, for section 2(42A), the holding period may be computed with reference to the assessee's substantive possession and ownership in the asset.
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