A taxpayer sold his flat vide registered deed of conveyance dated December 27, 2011. The sale deed had been executed in pursuance of an agreement to sale, which has been executed on September 16, 2011. 

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Out of the total consideration of Rs 30 lakh, Rs 1 lakh had been received by the taxpayer by way of earnest money, when the agreement to sale was executed. The taxpayer had purchased a new residential flat on October 4, 2010. In his return of income, the taxpayer had claimed exemption u/s 54 of the Income Tax Act ('the Act') from Long-Term Capital Gains on account of his investment in the new flat, which was purchased within one year from the date of sale.

During the course of assessment, the tax officer recorded the date of registration (that is, December 27, 2011) of the new property as the date of sale. Since the new property was purchased on October 4, 2010, the tax officer rejected the taxpayer's claim for exemption u/s 54 of the Act. The tax officer held that the new property was not purchased within one year from the date of sale of the residential flat.

At the first level of appeal, the appellate authority rejected the taxpayer's appeal. At the next level, before the tax tribunal, the taxpayer argued that whenever there is extinction of any right, in respect of a capital asset, such an extinction would mean transfer of property. In view of this definition under the Act, by executing the agreement to sale, a right has been created in favour of the buyer of the property and certain rights in respect of the old house, which the taxpayer enjoyed had been extinguished. The taxpayer, thus, argued that the agreement dated September 16, 2011 should be considered as the date of transfer and not the registration date of December 27, 2011 as contemplated by the tax officer.

The tribunal observed that the agreement to sell for Rs 30 lakh was executed on September 16, 11 and the sum of Rs 1 lakh, received as advance consideration was encashed on November 21, 2011. The said cheque had not bounced or dishonoured. Relying on a previous judgement by the Supreme Court, the tribunal held that the agreement had created a right in favour of the buyer who had paid the advance money.

The tribunal also debated on the question whether such an unregistered document is admissible in evidence under the Registration Act. Previous judgements had held that an unregistered agreement to sell can always be the basis for a suit for specific performance under the Registration Act.

Keeping both the above aspects under consideration, the tribunal observed that basis the unregistered agreement to sell, the buyer gets the right to get the property transferred in his favour, by filing a suit for specific performance. It could, therefore, be concluded that when the agreement to sale was executed, some right in respect of the old residential property belonging to the taxpayer had extinguished and some rights were created in favour of the buyer. Consequently, the purchase of the new property on October 4, 2010 is well within the one year from the date of transfer and, thus, conditions laid down under section 54 of the Act for claiming capital gains exemption are satisfied.

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The tribunal accordingly allowed the taxpayer's claim and directed the tax officer to grant exemption u/s 54 of the Act.

BY: Arvind Rao

(The writer is Sebi registered investment adviser)

SOURCE: DNA Money