2026 (1) TMI 78 - HC - Income Tax

Capital gains exemption for JDA-linked property sale: s.54 transfer date and deposit rules clarified; relief granted.

Exemption under s.54 was denied on the premise that a Joint Development Agreement (JDA) and demolition negated 'residential house' status and that failure ... Exemption u/s 54 - Profit on sale of property used for residence - exemption was not available to the assessee, by virtue of the Joint Development Agreement entered into by the assessee - As submitted sales of the property have been made over 4 financial years and hence, even assuming that the benefit of Section 54 was available, it would not be granted in the manner as claimed by the assessee - HELD THAT:- The transaction must be seen in a wholistic conspectus. The admitted sequence of the events is that, the JDA was executed on 15.12.1994, and enter-upon permission granted to the builders/developers. Demolition of the house was in early 1995. The appellant’s father passed away on 03.11.1996. It is true that development continued and the appellant and his mother executed deeds in March, 1999 for the sale of their shares of the property. Section 54 requires the satisfaction of the conditions that, firstly, that the property transferred is one, wherefrom the income would be assessable under the head ‘house property’ and second, the gain from the transfer must be invested in the manner stipulated under the provision. The assessee has been extended the option either to invest the capital gain in another residential house (i) within one year before the date on which the transfer of the original asset took place, (ii) two years after the date on which the transfer took place or (iii) construct a house within three years within the date of transfer. In the present case, the date of transfer is March, 1999. Hence, the purchase of asset in New Delhi on 30.01.2001 would fall within the period of one year after the date on which the transfer took place, per the stipulation under Section 54(1) of the Act. The Department has argued that as the property has been demolished in 1995 itself, Section 54 would be inapplicable in the year 1999. We do not agree as, in our view, the transaction must be seen wholistically. JDA had been executed in 1994 and as a consequence, the house had been demolished in 1995 to pave the way for the developmental activity to take place. It is true that developmental activity took place from 1995 onwards. However, in our view, the execution of the JDA does not per se, give rise to the incident of transfer, and it has never been the case of the authorities that the transfer of the asset took place in 1994 on execution of the JDA. One of the reasons for the rejection of the claim under Section 54, by the Tribunal is that the assessee has not invested the gain in Capital gains in a Scheme under Section 54(2). Section 54(2) states that if the amount of capital gain has not been appropriated in a new asset, then it shall be deposited in the Bank or Institution as specified under the Capital Gains Scheme by the Central Government, as notified in the Official Gazette. In the present case, the circumstance adumbrated u/s 54(2) does not stand attracted, as the assessee has exercised the option of re-investment in residential property within the time stipulated u/s 54(1) of the Act. Section 54(2) cannot be insisted upon effacing the option available to an assessee to either invest the gain in a Scheme, or re-invest/construct a new property. The assessee in this case has availed the option of re-investment in property within the stipulated time, and that would suffice. The Tribunal negates the plea for relief under Section 54 also on the basis that no income has been offered from house property. There is no necessity to do so, as Section 54 only requires that income from the property in question, should be assessable under the head ‘house property’. This conclusion of the Tribunal is contrary to the statutory stipulation. Substantial questions of law answered in favour of the assessee and adverse to the revenue. Whether the appellant owns only one house property is not a matter of record, simply because Section 54F has not been the subject matter of consideration before any of the authorities? - Tribunal could certainly have considered the alternate claim if only such claim had, in fact, been put forth before it with all facts necessary to decide it. In the absence of a claim, the Tribunal had no choice but to reject the plea for relief under Section 54F. The decision in Ciba of India Ltd. [1993 (1) TMI 35 - BOMBAY HIGH COURT] does not advance the case of the assessee. In that case, the question related to whether certain expenditure must be treated as revenue or capital. The Bombay High Court held that if the claim for revenue expenditure is to be disallowed, then the capitalisation of that expenditure would have to be correspondingly considered by the authorities, as the two claims are only two sides of the same claim. In the present case, we are not concerned with such a situation. Sections 54 and 54F are not two sides of the same coin. They are stand-alone provisions requiring satisfaction of the conditions mentioned therein. Any claim for relief by an assessee can be considered and granted by the authorities only if a claim is made indicating compliance with those conditions. Likewise, the judgment in Gordhandas Bhanji [1951 (11) TMI 17 - SUPREME COURT] also not advance the case of the assessee for the same reasons. Undoubtedly, the Tribunal has wide powers enabling it to consider an alternate claim, though at its discretion. However, such power can be exercised only if the assessee performs its duty to put forth the claim in proper form and manner, disclosing clearly the compliance of all statutory pre-conditions for the claim. The Tribunal cannot be compelled to admit and adjudicate upon issues, in the absence of a claim along with necessary documents/pleadings to establish compliance with the statutory conditions under Section 54F. This has admittedly not been done, and hence we do not find anything untoward in the conclusion of the Tribunal in this regard. Accordingly, substantial question of law No.3 is answered against the assessee and in favour of the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether exemption under Section 54 was available where the original residential house had been demolished pursuant to a development arrangement long before the eventual sale deeds, but the transfer giving rise to capital gains occurred later. 2. Whether the 'date of transfer' for Section 54 relief was the date of the development agreement/permissions or the later date of execution of sale deeds, for purposes of testing the reinvestment timeline. 3. Whether compliance with Section 54(2) (deposit in the Capital Gains Scheme) was mandatory despite actual purchase of a new residential house within the time limits under Section 54(1). 4. Whether the Tribunal was justified in refusing to entertain an alternative claim under Section 54F when it was not pursued before the first appellate authority and was not placed before the Tribunal in a proper form with necessary supporting facts. ISSUE-WISE DETAILED ANALYSIS Issue 1-3 (Grouped): Entitlement to Section 54 exemption; relevance of demolition/JDA; date of transfer; necessity of Section 54(2) deposit Legal framework: The Court examined Section 54 as requiring (i) transfer of a long-term capital asset being a residential house (buildings or lands appurtenant thereto) whose income is assessable under the head 'house property', and (ii) purchase/construction of a residential house within the stipulated period. Section 54(2) applies where the capital gain is not appropriated/utilised for purchase/construction before the return-filing timeline, requiring deposit in the notified scheme. Interpretation and reasoning: The Court held the transaction had to be viewed in a wholistic and continuous sequence. Although the residential house was demolished earlier to enable development activity, the Court rejected the view that Section 54 became inapplicable merely because the house did not physically exist at the time of the later sale deeds. The property was not disputed to be a residential property, and demolition was a consequence of development permissions; the Department could not insist that the house remain standing until the eventual sale/transfer. The Court found the Tribunal erred in treating the date of transfer as 1994; the Court held the transfer for capital gains purposes occurred when the relevant sale deeds were executed (March 1999 in respect of the transfers under consideration). It further noted the Tribunal's assumption that the assessee had itself adopted 1994 as the transfer date was contrary to the admitted factual position that sale deeds were executed only in 1999. On timelines, the Court concluded that since the transfer was in March 1999, the purchase of the new residential property on 30.01.2001 fell within the statutorily permitted post-transfer period under Section 54(1), thereby satisfying the reinvestment condition. On Section 54(2), the Court held the deposit requirement was not attracted because the assessee had exercised the option of actual reinvestment in a residential house within the time stipulated in Section 54(1). Section 54(2) could not be insisted upon so as to negate the reinvestment option when the statutory conditions for direct purchase were met. The Court also rejected the Tribunal's rationale that exemption failed because no income had been 'offered' under 'house property'. Section 54 only requires that income from the original asset should be assessable under that head; actual offering of such income was not treated as a precondition. Conclusions: The Court held Section 54 exemption was available on the facts; demolition pursuant to development did not defeat eligibility; the relevant date of transfer was March 1999 (sale deeds), not the earlier development agreement; and deposit under Section 54(2) was unnecessary where the new house was purchased within the Section 54(1) timeframe. The Court decisively answered the first two issues in favour of the assessee and against the revenue. Issue 4: Refusal to entertain alternative claim under Section 54F Legal framework: The Court addressed the Tribunal's power to entertain additional grounds/claims and the requirement that necessary material facts be available to decide such a claim. It also treated Section 54F as a distinct provision with its own statutory preconditions, including conditions in the proviso (such as ownership constraints regarding residential houses). Interpretation and reasoning: The Court noted a factual error in the Tribunal's statement that the Section 54F contention had not been raised earlier, because it had been raised before the assessing authority but was not pursued before the first appellate authority; therefore, the assessing authority's rejection on Section 54F was not contested at that stage. The Court emphasised that Section 54F was not an automatic fallback upon failure under Section 54: the provisions were 'stand-alone' and require separate satisfaction of specific conditions. The Court held the Tribunal could consider an alternative claim only if the assessee properly put forward the claim with necessary pleadings/documents demonstrating compliance with all statutory preconditions. Here, the Court found the material facts essential to Section 54F-such as whether the assessee owned more than one residential house-were not on record because Section 54F had not been the subject of consideration before the authorities, and the assessee did not place the claim before the Tribunal in the required manner with supporting particulars. In such circumstances, the Tribunal could not be compelled to adjudicate the alternative Section 54F relief. Conclusions: The Court upheld the Tribunal's refusal to entertain the alternative Section 54F plea, holding that in the absence of a properly advanced claim with requisite facts and materials to prove statutory compliance, rejection was justified. The third issue was answered against the assessee and in favour of the revenue.