[1995] 216 ITR 376 (BOM.

HIGH COURT OF BOMBAY Commissioner of Income tax v. Mrs. Hilla J.B. Wadia
SMT. SUJATA MANOHAR AND U.T. SHAH, JJ. IT REFERENCE NO. 203 OF 1978 MARCH 2, 1993

Section 54 of the Income-tax Act, 1961 Capital gains Profit on sale of property used for residential house Assessees had transferred property to housing society which was being used for their residence Society agreed to allot to assessees flat in building to be constructed on said property and assessee made almost entire payment relating to cost of construction of flat within period of two years from date when she conveyed original property to society Whether on aforesaid facts, assessee was entitled to exemption under section 54 - Held, yes
FACTS

The assessee and her husband were co-owners of a property which was being used by them for residential purpose. Under an agreement of sale, they agreed to sell the property to a society, which was formed with the object of purchasing that property and constructing tenements on the said property for the use of its members. Pursuant to said agreement the property was conveyed by the assessee and consideration was received on 31-3-1973. The society agreed to allot to the assessee flats in the building being constructed and the assessee paid almost the entire cost of construction of the flat within a period of two years from date when the said property was conveyed to the society. The Tribunal held that the assessee was entitled to relief under section 54. On reference :
HELD

The assessee had transferred the property in which she had a half share and which was being used for the purpose of her residence to the society. The question was whether she could be said to have constructed a house property for the purpose of her residence within a period of two years from that date. This provision was to be construed in the context of the manner in which such residential properties were being constructed in a city like Bombay where, looking to the cost of the land, co-operative housing societies were being formed for constructing a building in which flats were allotted to the members. This must also be viewed as a method of constructing residential tenements. What was to be seen was whether the assessee had acquired a right to a specific flat in such a building which was being constructed by the society and whether she had made a substantial investment within the prescribed period which would entitle her to obtain possession of the flat so constructed and in which she intended to reside. The material test in this connection was domain over the flat and investment in it. The assessee satisfied both these conditions. She had acquired such a domain and had invested almost the entire requisite amount in it within a period of two years prescribed under section 54. In this connection, circular of the Central Board of Direct Taxes bearing No. 471, dated 15-10-1986 could be taken into consideration, which dealt with the investment in flats under the self-financing scheme of the Delhi Development Authority. The Board stated in the circular that when an allotment letter is issued to an allottee under this scheme on payment of the first instalment of the cost of construction, the allotment is final unless it is cancelled. The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking delivery of possession is only a formality. The Board directed that such an allotment of a flat under this scheme should be treated as a case of construction for the purpose of capital gains. The instant case was on a much stronger footing because there was not merely an allotment of the flat but even almost the entire cost of construction was paid by the assessee within a period of two years. In such circumstances, it could be concluded that the instant case fell within the provisions of section 54 in view of the fact that the assessee had acquired substantial domain over the flat in question under the agreement with the society coupled with the payment of almost the entire cost of construction within a period of two years. Note: The case was decided in favour of the assessee.
CASES REFERRED TO

CIT v. Mrs. Shahzada Begum [1988] 173 ITR 397 (AP), CIT v. J. R. Subramanya Bhat [1987] 165 ITR 571 (Kar), Kesho Ram Passey v. RBI [1984] 146 ITR 16 (Punj & Har.) and Smt. Shantaben P. Gandhi v. CIT [1981] 129 ITR 218 (Guj). Dr. V. Balasubramaniam and P.S. Jetley for the Applicant.

V.H. Patil, K.B. Bhujle and D.H. Nanavati for the Respondent.
JUDGMENT

Smt. Sujata Manohar, J.The assessee was the owner of a 50 per cent, share in an immovable property known as Casa Da Vinci at Worli, which was being used by the assessee and her husband for residential purposes. Her husband was the owner of the other 50 per cent, share. Under an agreement of sale dated October 2, 1972, the two co-owners of the property agreed to sell it to the proposed Andromeda Co-operative Housing Society Ltd. through the chief promoter for a total price of Rs. 8 lakhs. The share of the assessee in the said price was Rs. 4 lakhs. The Andromeda Co-operative Housing Society Limited was formed and registered on November 3, 1972, with the object, inter alia, of purchasing this property and constructing tenements on the said property for the use of its members. The total number of members of the society was not to exceed the total number of tenements or flats available for allotment to the members. Each of the members was required to hold at least five shares of the society. The assessee was one of the signatories to the memorandum of objects of the society and its regulations and had agreed to take a flat in the said society subject to the regulations of the society. Pursuant to the above agreement of sale, by conveyance dated December 8, 1972, the property was conveyed by the assessee and her husband to the society. The assessee has received under this conveyance a total amount of Rs. 4 lakhs on or before March 31, 1973. On October 25, 1973, an agreement was entered into between the society and the assessee under which it is, inter alia, stated that the assessee had agreed to hand over possession of the property to the society on or before June 30, 1973. It is further recited that the plans for construction of a building on the said property are approved by the Municipal Corporation of Bombay on February 21, 1973, and a commencement certificate is issued on August 3, 1973. It is further recited that a contract for construction of the building is already given to the firm of L.T. Construction by a resolution in a special general meeting of the members of the society held on November 20, 1972. It is further recited that the assessee has agreed to become a member of the society and to take a flat in the proposed building. Under this agreement of October 28, 1973, the society agreed to allot to the assessee flat No. 7-A and B admeasuring 2,590 sq. ft. on the seventh floor of the building being constructed and the assessee agreed to pay a sum of Rs. 2,59,360 to the society. Of this amount, a sum of Rs. 30,000 was to be paid towards the purchase of shares of the society. The balance of Rs. 2,29,360 was to be treated as a loan to the society. The construction, therefore, was carried out by the society through the construction firm for the benefit of its members. That is the reason why the balance amount was to be treated as a loan to the society. One of the conditions of the agreement was that the assessee had to use the flat for self or members of her family for the purpose of her residence and for no other purpose. It was also stipulated that the society will try to complete the construction of the building within a reasonable time but in any case the assessee was not entitled to cancel the agreement or claim any damages. Under the terms of the agreement, the said amount was to be paid by the assessee in instalments. Accordingly, the assessee has made the following payment to the society: Date 18-9-72 27-11-72 6-12-72 6-12-72 6-1-73 6-1-73 30-6-73 1-7-73 1-7-74 1-11-74 7-3-75 Amount Rs. 1,000 10,000 19,000 10,000 40,000 40,000 6,238 65,000 20,000 80,000 8,000 2,59,238 From the above facts, it is clear that under the agreement of October 25 1973, the flat bearing Nos. 7-A and B on the seventh floor of the proposed building was to be constructed for the benefit of the assessee and the assessee was required to pay and, in fact, paid various payments as set out above to the society for this purpose. The assessee has thus paid a total sum of Rs. 2,59,360 towards the cost of construction of this flat. Out of this amount, a sum of Rs. 2,51,238 is paid by the assessee by November 1, 1974, that is to say, within a

period of two years from the date when the said property was conveyed to the society. Thus, substantially, the entire cost of construction barring a very small amount of Rs. 8,000 has been paid by the assessee within a period of two years. Under the terms of the agreement of the assessee with the society, the assessee obtained a right to take possession of a specific flat bearing Nos. 7-A and B on the seventh floor of the said society. The assessee under the terms of the agreement had no right to cancel the agreement or claim any damages. Thus, the assessee acquired substantial domain or control over the above flat by virtue of making almost the entire payment relating to the cost of construction of this flat to the society within a period of two years from the date when the assessee and her husband conveyed the original property to the society. In these circumstances, we have to see whether the assessee has complied with the requirements of section 54 of the Income-tax Act, 1961, as then in force. The material part of section 54 at the relevant time was as follows: "Section 54. Profit on sale of property used for residence. Where a capital gain arises from the transfer of a capital asset.... being buildings or lands appurtenant thereto the income of which is chargeable under the head 'Income from house property', which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee .... mainly for the purposes of his own .... residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section. ..." In the present case, the assessee had transferred the property in which she had a half share and which was being used for the purpose of her residence to the society. The question is whether she can be said to have constructed a house property for the purpose of her residence within a period of two years from that date. This provision will have to be construed in the context of the manner in which such residential properties are now being constructed in a city like Bombay where, looking to the cost of the land, co-operative housing societies are being formed for constructing a building in which flats are allotted to the members. This must also be viewed as a method of constructing residential tenements. What we have to see is whether the assessee has acquired a right to a specific flat in such a building which is being constructed by the society and whether she has made a substantial investment within the prescribed period which will entitle her to obtain possession of the flat so constructed and in which she intends to reside. The material test in this connection is domain over the flat and investment in it. The assessee satisfies both these conditions. She has acquired such a domain and has invested almost the entire requisite amount in it within a period of two years prescribed under section 54. In this connection, our attention was drawn to a circular of the Central Board of Direct Taxes bearing No. 471 (see [1986] 162 ITR (St.) 41), dated October 15, 1986, which dealt with the investment in flats under the selffinancing scheme of the Delhi Development Authority. The Board has stated in the circular that when an allotment letter is issued to an allottee under this scheme on payment of the first instalment of the cost of construction, the allotment is final unless it is cancelled. The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking delivery of possession is only a formality. The Board has directed that such an allotment of a flat under this scheme should be treated as a case of construction for the purpose of capital gains. The present case is on a much stronger footing because there is not merely an allotment of the flat but even almost the entire cost of construction is paid by the assessee within a period of two years. Our attention in this connection was also drawn to a decision of the Andhra Pradesh High Court in the case of CIT v. Mrs. Shahzada Begum [1988] 173 ITR 397. In the case before the Andhra Pradesh High Court, the assessee had paid a substantial purchase instalment and secured possession of the property within one year of the sale of her residential property, but the sale deed in respect of the property so purchased by her was executed and registered after the expiry of one year. The Andhra Pradesh High Court said that the assessee was entitled to the benefit of section 54(1) because the house property purchased by the assessee had come into the full domain and control of the assessee within a period of one year. In the case of Kesho Ram Passey v. Reserve Bank of India [1984] 146 ITR 16, the Punjab and Haryana High Court considered the provisions of section 54E of the Income-tax Act which were then in force. It had to consider whether the capital gains arising from the transfer of the capital asset were invested in a new asset within a period of six months. The petitioner who sold a plot of land deposited the consideration amount in National Rural Development Bonds by sending a bank draft for the amount along with his application in the prescribed form within a period of six months. However, on account of certain technical problems, the bonds were not issued to the assessee until after the expiry of six months. The court held that by depositing the amount with the agent of the Reserve Bank of India within six months, the assessee had substantially complied with the provisions of section 54E and he should be given the benefit of that section. Dr. Balasubramaniam drew our attention to a decision of the Gujarat High Court in the case of Smt. Shantaben P. Gandhi v. CIT [1981] 129 ITR 218. In that case, the assessee's property was divided into two portions one of

which was larger than the other. A building was constructed on the larger portion which was partly occupied by the assessee. The assessee constructed a house on the smaller plot and the construction was completed in March, 1968. The larger plot with the building standing thereon was, thereafter, sold and the conveyance was executed in March, 1970. In respect of capital gains arising from the sale of the larger property, the assessee claimed the benefit of section 54 on the ground that the house on the smaller plot had been constructed for the purpose of residence. The court held that the assessee was not entitled to the exemption because the assessee could not be said to have constructed a new house on the smaller plot within a period of two years after the transfer of the larger plot. We do not see how this decision is of any assistance to the Revenue because it turned entirely on the facts of that case. Similarly, the decision of the Karnataka High Court in the case of CIT v. J.R. Subramanya Bhat [1987] 165 ITR 571 also does not assist the Revenue. In the case before the Karnataka High Court, the assessee sold a building on the ground floor of which the assessee was residing, in February, 1977. In March, 1976, the assessee had commenced construction of the new house which was completed in March, 1977. The assessee claimed exemption from tax on capital gains under section 54 of the. Income-tax Act, 1961. The, court said that the assessee had resided in a major portion of the building which the assessee had sold and had completed the construction of a new residential house in March, 1977. Hence, the assessee was entitled to the benefit of section 54 even though the construction of a new house started prior to the sale of the old building. This decision once again has turned on its own facts and it does not assist us in any manner because the circumstances of the present case are very different. For the reasons which we have set out above, in our view, the present case falls within the provisions of section 54 in view of the fact that the assessee had acquired substantial domain over the flat in question under the agreement with the society coupled with the payment of almost the entire cost of construction within a period of two years. The following question, therefore, referred to us under section 256(1) of the Income-tax Act, 1961, namely: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to relief under section 54 of the Act ?" is answered in the affirmative and in favour of the assessee. We may observe here that the situation of the kind which is before us is likely to arise frequently in a city like Bombay. It is desirable, in order to avoid litigation on this topic, that the Central Board of Direct Taxes issues a circular similar to the circular which it issued in respect of the construction work done by the Delhi Development Authority on October 15, 1986, for the proper guidance of the Income-tax Department and in order to carry out the letter and spirit of section 54. No order as to costs.