Property buyer gets Section 54F tax relief despite incomplete registration after paying full amount

ITAT Surat held that deduction u/s 54F cannot be disallowed merely because property registration was incomplete. The assessee paid entire sale consideration of Rs. 2,65,30,000 through banking channels and received vacant possession under agreement of sale. Following Gujarat HC decision in Kishorbhai Harjibhai Patel and SC precedent in Sanjeev Lal, the tribunal ruled that agreement to sell constitutes "transfer" under Section 2(47) of Income Tax Act, making the assessee eligible for Section 54F relief despite incomplete registration formalities.

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1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this appeal is whether the assessee is entitled to claim deduction under Section 54F of the Income-tax Act, 1961, in respect of investment made by way of an "Agreement of Sale with Possession" for purchase of a residential property, where the sale deed has not been executed and registered within the prescribed time period. The issue involves interpretation of the terms "purchase" and "transfer" under Section 54F and related provisions, and whether an agreement of sale with possession suffices to claim the deduction despite the absence of a registered sale deed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Eligibility for deduction under Section 54F based on Agreement of Sale with Possession without registered sale deed

Relevant legal framework and precedents: Section 54F of the Income-tax Act mandates that an assessee who transfers a long-term capital asset (other than a residential house) and invests the net sale consideration in the purchase or construction of a residential house within the prescribed time limits is eligible for deduction of capital gains. The Act specifies that the residential house must be "purchased" either one year before or two years after the date of transfer, or constructed within three years after the date of transfer.

The term "transfer" is defined under Section 2(47) of the Act, which includes sale, exchange, or relinquishment of rights in the property. The question arises whether an agreement to sell, particularly one with possession, amounts to a "transfer" for the purpose of Section 54F and whether "purchase" by agreement suffices without registration of the sale deed.

Several judicial precedents were cited by the parties. The assessee relied on decisions including CIT vs. Sardarmal Kothari, CIT vs. Shahajada Begam, Kristina Nathabhai Krichchan vs. DCIT, CIT vs. Dr. Laxmichand Narpal Nagda, and Sanjeev Lal vs. CIT, which broadly support the proposition that investment by way of agreement of sale with possession may qualify for deduction under Section 54F, provided the payment is made and possession is obtained. The Revenue, however, relied on coordinate bench decisions such as Hiteshbhai Mansukhbhai Bagadi vs. ACIT, Shri Ram Narayan vs. ITO, and Shri Navghanbhai Laxman Rabari vs. ITO, which emphasize that a registered sale deed is essential to claim the deduction, distinguishing the facts of the assessee's case from those precedents relied upon by the assessee.

Court's interpretation and reasoning: The Tribunal examined the statutory language of Section 54F, which requires "purchase" or "construction" of a residential house within specified time frames. It noted that the sale deed is the instrument that legally transfers ownership and title, but possession and payment under an agreement of sale may also confer substantial rights akin to ownership.

The Tribunal observed that in the instant case, the assessee had entered into an Agreement of Sale with Possession for the residential property within the prescribed time limit. The entire sale consideration was paid through banking channels, and TDS was deducted as per Section 194IA, evidencing the genuineness of the transaction. The agreement conveyed possession and ownership rights to the assessee to the same extent as the seller had.

Importantly, the Tribunal relied on the decision of the jurisdictional High Court in Kishorbhai Harjibhai Patel vs. ITO, which held that where the assessee executed an agreement to sell and purchased a new residential property within one year from the date of the agreement, relief under Section 54F was available even if the sale deed was not executed within the prescribed time. This decision followed the Supreme Court ruling in Sanjeev Lal vs. CIT that an agreement to sell extinguishes rights and amounts to a "transfer" within the meaning of Section 2(47) for Income-tax purposes.

The Tribunal distinguished the Revenue's reliance on decisions where the sale deed was not registered and no possession or payment was made or where the facts were materially different. It noted that amendments to Section 53A of the Transfer of Property Act, 1882, by the Registration and Other Related Laws (Amendment) Act, 2001, altered the legal landscape, making earlier precedents less applicable.

Key evidence and findings: The assessee produced the sale agreement dated 21.07.2017, bank statements showing payment of Rs. 2,65,30,000/-, and Form 26AS evidencing TDS deduction under Section 194IA. The assessee also demonstrated possession and enjoyment of ownership rights over the property. The Revenue failed to produce evidence negating these facts.

Application of law to facts: Applying the legal principles and precedents, the Tribunal found that the assessee fulfilled the conditions of Section 54F by investing the sale proceeds in the new residential property through an agreement of sale with possession, supported by payment and TDS deduction, within the prescribed time. The absence of a registered sale deed did not disentitle the assessee from claiming deduction.

Treatment of competing arguments: The Tribunal considered the Revenue's argument that "purchase" means execution and registration of sale deed and that the agreement of sale is only a promise for future transfer. However, it found these arguments unpersuasive in light of the statutory definition of "transfer" under the Income-tax Act and the binding judicial precedents. The Tribunal also noted that the Revenue's reliance on older decisions was undermined by subsequent legislative amendments and factual distinctions.

Conclusions: The Tribunal concluded that the assessee is entitled to claim deduction under Section 54F in respect of the investment made by way of agreement of sale with possession, despite non-registration of the sale deed within the prescribed time. The appeal was allowed accordingly.

3. SIGNIFICANT HOLDINGS

"The requirement of Section 54F is that the assessee should purchase any residential house within a period of one year before or two years after the date of transfer of the property or construct a new residential house within a period of three years after the date of transfer. ... In the present case, there is no dispute that the appellant has entered into an 'Agreement of Sale with Possession' of the residential house ... within time allowed in the Act. ... The Hon'ble jurisdictional High Court ... has held that where assessee had executed an agreement to sell in respect of a house property and purchased a new residential property within one year from date of agreement to sell, even though sale deed could not be executed within time, section 54F relief was to be granted to assessee in respect of purchase of new residential property. ... The Income-tax Act gives precise definition to the term 'transfer'. ... an agreement to sell would extinguish the rights and the same would amount to transfer within the meaning of Section 2(47) of the Act. This definition of transfer given in the Act is only for the purpose of Income-tax."

Core principles established include that for the purpose of Section 54F, an agreement to sell with possession and payment may be treated as purchase and transfer, entitling the assessee to claim deduction, even if the sale deed is not registered within the prescribed time frame, provided the transaction is genuine and supported by evidence.

Final determination: The Tribunal allowed the appeal and set aside the disallowance of the deduction claimed under Section 54F, holding that the assessee satisfied the conditions for claiming the deduction through investment made by agreement of sale with possession.

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