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High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE SETHURAMAN & THE HONOURABLE MR. JUSTICE BALASUBRAMANYAN
C. V. Ramanathan - Appellant
Versus
Commissioner of Income Tax - Respondent
Case No : T.C. No. 705 of 1975
Decided On : 17 December 1979
INCOME TAX - Section 54 - Applicability - Legal heir entitled to benefit of section 54 - Capital gains arising from sale of residential property by deceased father - Purchase of new residential property by legal heir within two years - Exemption under section 54 available to legal heir.
Fact of the Case:
The assessee's father, Venkateswaran, sold his residential property in Ernakulam on 9-9-1969 and purchased a vacant site in Madras on 10-11-1969. He died on 22-12-1969 before the sale deed could be executed. The sale deed was executed in favor of his son, Ramanathan, on 8-6-1970. Ramanathan constructed a residential house on the plot and resided therein. The Income-tax Officer rejected the assessee's claim for exemption under section 54 of the Income-tax Act, 1961, on the ground that the assessee had not purchased the property within two years from the date of the sale of the Ernakulam property. The Appellate Assistant Commissioner and the Tribunal confirmed the order of the Income-tax Officer.
Finding of the Court:
The court held that the assessee was entitled to the benefit of section 54 of the Income-tax Act, 1961. The court held that the conditions of section 54 were satisfied in the present case. The capital gain arose from the transfer of a capital asset, which was a residential property. The income from the Ernakulam house was chargeable under the head "Income from house property". The property was used by the assessee's father, Venkateswaran, mainly for the purpose of his own residence. The assessee, as the legal representative of Venkateswaran, constructed a new residential property within two years from the date of sale of the Ernakulam property.
Issues: Whether the assessee was entitled to the benefit of section 54 of the Income-tax Act, 1961.
Ratio Decidendi: The court held that section 54 of the Income-tax Act, 1961, is the only provision that needs to be considered in determining whether the assessee is entitled to the benefit of exemption from capital gains tax. The court held that the conditions of section 54 were satisfied in the present case. The capital gain arose from the transfer of a capital asset, which was a residential property. The income from the Ernakulam house was chargeable under the head "Income from house property". The property was used by the assessee's father, Venkateswaran, mainly for the purpose of his own residence. The assessee, as the legal representative of Venkateswaran, constructed a new residential property within two years from the date of sale of the Ernakulam property. The court held that the assessee was entitled to the benefit of section 54.
Final Decision: The court answered the question referred to it in the negative and in favor of the assessee.
Sethuraman, J.
In this reference under section 256(1) of the Income-tax Act, 1961, the following question has been referred at the instance of the assessee :
"Whether it has been rightly held by the Tribunal that the provisions of section 54 of the Income-tax Act, 1961, are not applicable to the assessment made on the applicant herein as a legal heir of his father for the assessment year 1970-71 ?" *
One C. V. Venkateswaran was employed as an engineer in Cochin. He owned a house situated at Mahatma Gandhi Road, Ernakulam and resided there. On 4-7-1966, he executed a will under which he appointed his only son as the executor. He made certain bequests to his wife and married daughters and the remainder was given to his son absolutely. On 9-9-1969, he sold the residential house in Ernakulam to Sri Isac for a sum of Rs. 1, 89, 000/- and he moved down to Madras. He purchased in Madras a vacant site for which he paid an advance of Rs. 3, 000/- on 10-11-10-969. A draft sale deed was also got prepared, but before the sale could be executed, he died on 22-12-1969. The sale deed was executed in favour of his son Ramanathan on 8-6-1970. The sale was for a sum of Rs. 30, 938/-. A building was put up on the plot. The cost of the building came to Rs. 1, 20, 000/- inclusive of the price of the site. The construction was completed on 2-9-1971 and Ramanathan and his family resided therein. The very purpose of the purchase of the vacant site, it is not in dispute, was only to provide themselves with residential accommodation in Madras after the property in Ernakulam was sold.
2. Assessment proceedings for 1970-71, which were started after the death of Venkateswaran, were commenced on C. V. Ramanathan, the legal heir of Sri. Venkateswaran. In the course of the said assessment, there was a claim that since Venkateswaran was residing in the Ernakulam property and that since there was a purchase of a plot and construction of a residential house thereon within two years from the date of the sale of the Ernakulam property, the entire gains arising from the said sale having been utilised in the construction of the residential house at Madras, there was no liability to capital gains tax under section 45 of the Income-tax Act, 1961. The claim for exemption was based on section 54 of the Act. The Income-tax Officer rejected this contention on the ground that the assessee had not purchased the property within two years from the date of the sale of the Ernakulam property and that section 54 of the Act was not applicable. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The assessee appealed to the Tribunal. The Tribunal held that the capital gains arising to an assessee by the sale of capital asset belonging to him could alone be brought to tax under section 45 of the Act and that the gains arising out of the sale which were brought to tax should have belonged to the assessee. After referring to a decision of the Madhya Pradesh High Court in CIT, Madhya Pradesh v. Hukumchand Mohanlal which was affirmed on appeal by the Supreme Court in CIT, Madhya Pradesh v. Hukumchand Mohanlal, the Tribunal considered that Ramanathan had not sold the capital asset in question and that he could not, therefore, be given the benefit of s. 54 of the Act. It is this order of the Tribunal that it is now challenged by the assessee in this reference.
3. Sec. 45 of the Income-tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head "capital gains" and shall be deemed to be the income of the previous year in which the transfer took place S. 54 provides :
"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 tra
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