(2014) 365 ITR 389 (SC)
Meaning of transfer; exemption on profit from sale of residential house
The agreement to sell itself created a right in favour of the buyer and extinguished a corresponding right of the seller. That date can be treated as the date of transfer for applying the Section 54 time limit.
For the time limit under Section 54, does the clock run from the agreement to sell or from the later execution of the sale deed?
The assessee became entitled to a house under a will. An agreement to sell the property was executed on 27 December 2002 for ₹1.32 crore, and earnest money of ₹15 lakh was received. Before the sale could be completed, another person claiming under the will instituted a suit and obtained an injunction, which halted the transaction. The litigation was resolved and the sale deed was finally executed on 24 September 2004. In the meantime, the assessee had purchased a new residential house on 30 April 2003 — within one year of the agreement to sell, but more than one year before the sale deed. The Assessing Officer computed the period from the date of the sale deed and denied the exemption, holding the new purchase to be outside the permitted window.
The assessment was upheld in appeal, and the High Court also decided against the assessee, taking the date of the registered sale deed as the date of transfer. The assessee appealed to the Supreme Court.
For the assessee
Some right in the property passed to the intending buyer on the date of the agreement, when earnest money was paid; to that extent the assessee's own rights stood extinguished, which falls within the extended definition of transfer. The delay in executing the sale deed was caused entirely by litigation beyond the assessee's control, and Section 54 being a beneficial provision should not be read so as to defeat a bona fide reinvestment.
For the Revenue
Title to immovable property passes only on execution and registration of the conveyance. An agreement to sell creates no interest in the property. The date of transfer is therefore the date of the sale deed, and the new house having been bought more than a year earlier, the statutory condition was not met.
The Court accepted that, as a matter of general property law, an agreement to sell does not itself convey title. But it emphasised that the Income Tax Act defines transfer in extended terms which include the extinguishment of any rights in a capital asset. On execution of the agreement and receipt of earnest money, the intending buyer acquired an enforceable right to obtain a conveyance, and correspondingly the assessee's right to deal freely with the property was curtailed. That, the Court held, amounted to an extinguishment of rights sufficient to constitute a transfer on the statutory definition. The Court laid weight on the practical reality that the assessee could not have completed the sale earlier because of the injunction, and that he had done everything within his power to comply. It invoked the settled approach that a provision granting relief to a taxpayer, where two views are reasonably possible, should be construed in the manner that advances the relief. Reading the agreement date as the date of transfer, the purchase of the new house fell within time and the exemption was allowed.
Directly relevant to Section 82 under the IT Act 2025. Where a sale deed is delayed by litigation, regulatory clearance or buyer default, this remains the leading authority for computing the reinvestment window from the agreement date. It should be pleaded on its facts — the presence of earnest money and of an external impediment to completion were both material to the outcome.