Judgment:
1. This is an appeal filed by the Revenue against the order dated February 11, 1998, of the Commissioner of Income-tax (Appeals) I, Nagpur, in Appeal No. CIT(A)-I/558-A of 89-90 and it pertains to the assessment year 1983-84. The assessee has filed the cross-objection in support of the order of the Commissioner of Income-tax (Appeals) referred to above.
2. One Mr. Timaji Sakharam Dhanjode (hereinafter referred to as "the asses-see") owned agricultural lands at Mouja Dighori, Patwari Halka No. 34 which fell within 8 kms. range of the Municipal Corporation limit. He sold the said lands in two lots. The particulars of such sale are as follows : (ii) 16.58 acres of land were sold on August 31, 1982 for Rs. 2,90,000.
3. The Income-tax Officer, First Survey Circle, issued a notice under Section 139(2) calling upon the assessee to file his return of income.
In response to the same, the assessee filed his return of income declaring nil income. It was contended by the assessee that the land in question was used for agricultural purposes and therefore outside the purview of the definition of the term "capital asset" within the meaning of the Income-tax Act and, therefore, not liable to capital gains tax. The assessee also contended that he had invested the sale proceeds in the following manner : (a) By purchase of a vacant plot at Circle No. 4, Ward No. 11/20, Ganesh Nagar, Nagpur, on March 2, 1983, in the name of Shri Prakash, his only adopted son.
(b) By constructing a commercial and residential building of a value of Rs. 2,00,000 within the prescribed period. According to the valuation report, the construction of the building was commenced in 1983 and completed in 1985. The assessee filed an affidavit wherein he has affirmed the fact that the land was purchased in his son's name and the construction was being done on the said land after due sanction. It was also stated in the said affidavit that the investment is being done in his son's name in view of his old age and counselling by others not to invest in his name.
4. The Assessing Officer did not agree with the contention of the assessee that the sale of agricultural lands by the assessee did not constitute transfer of capital asset as the land in question were within 8 kms. of the municipal limits. With regard to the second contention of the assessee for exemption from payment of tax on the ground that the proceeds were invested in purchase and construction of residential house, the Assessing Officer held that the assessee had purchased the land in the name of his son, Mr. Prakash, and the construction of the house has also been done over the vacant land by treating Mr. Prakash as the owner of the superstructure also. The Assessing Officer held that the investment by the assessee in the name of his son, Mr. Prakash, does not qualify for exemption and, therefore, the assessee was liable to pay capital gains tax. According to the Assessing Officer, Section 54F, under which exemption was claimed, contemplates purchase or construction of a residential house by the assessee in his name and not in the name of any other person.
5. Aggrieved by the order of the Assessing Officer the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). The said appeal of the assessee, viz., the CIT(A)/248 of 1986-87 was allowed by the Commissioner of Income-tax (Appeals) by his order dated January 25, 1989, holding that the transaction did not involve transfer of any capital asset as the sale was of agricultural lands and hence the assessee is not liable to pay capital gains tax. The Revenue preferred an appeal to the Tribunal in I. T. A. No. 151/Nag of 1989.
The Tribunal, by its order dated October 7, 1992, allowed the appeal of the Revenue holding that there was a transfer of a capital asset and the assessee was liable to pay tax on capital gains arising out of the transfer but, however, remanded back the matter to the Commissioner of Income-tax (Appeals) with a direction to consider the claim of the assessee with regard to claim for exemption under Section 54F of the Income-tax Act, 1961.
6. After remand by the Tribunal, the Commissioner of Income-tax (Appeals) considered the issue of exemption claimed by the assessee under Section 54F of the Act. The Commissioner of Income-tax (Appeals) held that Section 54F contemplates only investment in residential property by the assessee and in the light of the principles laid down in Mir Gulam Ali Khan (Late) v. CIT [1987] 165 ITR 228 (AP), it is enough if the sale proceeds are invested in the construction of a residential house. It was further held by the Commissioner of Income-tax (Appeals) that it is not necessary that newly constructed house should be in the name of the assessee. He further held that in the eyes of law adopted son has the same rights as a natural son. He allowed the appeal of the assessee and directed the Assessing Officer to compute relief in accordance with the provisions of Section 54F of the Act.
7. The Revenue has preferred the present appeal against the said order of the Commissioner of Income-tax (Appeals). The only issue to be decided in the present appeal is as to whether the assessee is entitled to claim the relief under Section 54F of the Act despite the fact that the investments of the net consideration received by him on transfer of a capital asset is not invested in his name but in the name of his adopted son.
8. The learned departmental representative submitted that the provisions of Section 54F of the Income-tax Act, 1961, clearly contemplate investment of the capital gain received on transfer of the capital asset by the assessee in his name. He also submitted that the assessee and his adopted son are two distinct entities in the eye of law. He submitted that the affidavit filed by the assessee filed in the paper book filed by the Department clearly demonstrates that the investment in the land and building has been made by the assessee in the name of his adopted son and the reason for doing so was due to the old age of the assessee and counselling by others to make investment in the son's name. He submitted that in view of this admission by the assessee and in the light of the clear provisions of Section 54F, the Commissioner of Income-tax (Appeals) was not justified in allowing the deduction. He also distinguished the case relied upon by the Commissioner of Income-tax (Appeals), viz., Mir Gulam Ali Khan (Late) v. CIT [1987] 165 ITR 228 (AP), and pointed out that in the facts of the said case, the assessee, died after agreement to repurchase and the legal heir completed the sale in his name. According to the departmental representative, the death of the assessee during the period within which investment was to be made was a very vital and distinguishing feature which admittedly is not the facts in the present case. He also pointed out that subSection (3) of Section 45 clearly contemplates a situation where the new asset is transferred within a period of three years then capital gains shall be charged in the previous year in which such transfer of the new asset is made. This provision, according to the departmental representative, is also a clear indication of the intention of the Legislature that the investment has to be made only in the name of the assessee and not in any other name to claim exemption.
9. Counsel for the assessee, on the other hand, submitted that the requirement as per the provision of Section 54F is that the investment has to be made by the assessee of the capital gain in purchase or construction of a residential house, and not it has to be made in the name of the assessee. Even Sub-section 3 of Section 54F contemplates a situation where a sale is made of the new asset and does not talk anything about the new asset to be purchased or constructed in the name of the assessee. According to learned counsel, the provisions of Section 54F are intended to boost construction activity and it was never the intention of the Legislature to foist a second condition that the investment has to be made in the name of the assessee. He also relied on the ruling of the Andhra Pradesh High Court in Mir Gulam Ali Khan (Late) v. CIT [1987] 165 ITR 228, and that of the Bombay High Court in CIT v. Dr. Laxmichand Narpal Nagda [1995] 211 ITR 804 and that of the Supreme Court in CIT v. T.N. Aravinda Reddy [1979] 120 ITR 46 and submitted that the investment made by the assessee in the name of his adopted son has to be considered as sufficient compliance with the provisions of Section 54F to enable the assessee to claim the exemption. He also relied on the ruling of the Madras Bench of the Tribunal in the case of ITO (Third) v. Varadarajan (S.) [1989] 33 TTJ 466. He also submitted that the provisions of Section 54F being a beneficial provision and giving rise to two possible views, the view favourable to the assessee has to be adopted.
10. We have heard the rival contentions and have perused the records.
The facts are not in dispute. They are as follows. The assessee had made a transfer of a capital asset. That he had gained a sum of Rs. 1,83,852 on capital by reason of the transfer of a capital asset. That he had purchased a vacant land on March 2, 1983, and constructed a residential house thereon from 1983 to 1985, within the time frame contemplated by Section 54F. The investment in the new asset has however been made by the assessee not in his name but in the name of his adopted son. We are not concerned in this appeal about the reasons which prompted the assessee in doing so. The relevant portions of Section 54F reads as follows : "54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.--(1) Subject to the provisions of Subsection (4), where in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-- (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under Section 45 ; (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under Section 45 : Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house the income from which is chargeable under the head 'Income from house property', other than the new asset.
'net consideration', in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head 'Income from house property', other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under Section 45 on the basis of the cost of such new asset as provided in Clause (a), or, as the case may be, Clause (b), of Sub-section (1), shall be deemed to be income chargeable under the head 'Capital gains' relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under Section 45 on the basis of the cost of such new asset as provided in Clause (a) or, as the case may be, Clause (b), of Sub-section (1), shall be deemed to be income chargeable under the head 'Capital gains' relating to long-term capital assets of the previous year in which such new asset is transferred." 11. A plain reading of Section 54F would show that it is the assessee who has to invest the capital gain in the new asset or construction of a residential house in his name. The expression that the assessee has purchased or constructed a new asset in Sub-section (1) would only mean that the new asset has to be in the name of the assessee. The proviso to Sub-section (1) makes the position very clear inasmuch as it says that the assessee shall not own any residential house on the date of transfer or purchase a residential house within one year of the transfer or construct residential house within a period of three years, other than the new asset. Thus, a reading of Sub-section (1) together with the proviso Would show that the investment in the new asset by the assessee has to be in his own name and not in the name of any other person. The legal consequences of purchase of the new asset by the assessee in the name of his son is to constitute his son as the beneficial owner of the new asset. The assessee, has, therefore, not made the investment in his name. Therefore, he has rendered himself liable to pay tax on capital gains arising out of the transfer of a capital asset. The case laws relied on by learned counsel for the assessee also do not render any assistance to the case pleaded by the assessee. In Mir Gulam Ali Khan (Late) v. CIT [1987] 165 ITR 228 (AP), the facts were as follows : The assessee entered into an agreement for purchase of the new asset and paid earnest money. Before he could complete the sale, he had died and his legal representative completed the sale. In such circumstances the court held that the purchase of the new asset in the name of the legal representative would be enough compliance with provisions for exemptions. In CIT v. Dr. Laxmichand Narpal Nagda [1995] 211 ITR 804 (Bom), the facts of the case were that the assessee had bargained to purchase the new asset, had paid the entire sale consideration and was put in possession of the new asset.
The legal title in the form of a sale deed alone remained to be completed in the name of the assessee. Under such circumstances, the Bombay High Court had come to the conclusion that the object of Section 54F was not defeated and the assessee was entitled to the exemption. In CIT v. Aravinda Reddy (T. N.) [1979] 120 ITR 46 (SC), the assessee invested the capital gains in obtaining a deed of release from other co-owners of a property. The Revenue contended that Section 54 contemplates a purchase and not a release. Under those circumstances, the Supreme Court held that the release is also purchase of shares of co-owners and the nomenclature does not make any difference and allowed the deduction.
12. In all the above cases, it will be significant to note that the issue was never regarding purchase of the new asset in the name of other persons. Death during the period within which the new asset had to be acquired was an intervening event in some cases. The distinction between a legal heir and an heir apparent in law is very significant.
An heir apparent succeeding to the estate of a prepositus is dependent on the fact of his surviving the prepositus. Death is a certain event but who will die first is not a certain event. This is the reason why law regards transfer by a heir apparent of his chance of succession as non-transferable under Section 6 of the Transfer of Property Act, 1882.
13. One more case of the Madras Tribunal reported in ITO v. Varadarajan [1989] 33 TTJ 466 on which counsel for the assessee relied on remains to be considered. The facts in the said case are identical to the facts of the present case. The distinguishing feature in the said case was that the assessee in the said case had purchased the new asset in the name of his wife Benami for himself. The assessee in the said case had after purchase in the name of his wife declared income from the said property in his name. The assessee claimed that the purchase in the name of his wife was Benami and that he was the real owner of the property. In such circumstances, the Tribunal came to the conclusion that there was compliance with the requirement of Section 54 and allowed exemption. In the present case, the assessee has not made any such claim. In the affidavit filed before the Assessing Officer he had admitted that his son is the beneficial owner of the property and the investment was made in his name in view of the fact that he is 86 years old and that he was counselled to do so. Thus, on the facts and circumstances of this case, we are of the view that the decision of the Madras Tribunal is also distinguishable.
14. We are, therefore, of the view that the order of the Commissioner of Income-tax (Appeals) is not legally correct and we restore the order of the Assessing Officer. The appeal by the Revenue succeeds and is allowed.
15. The cross-objection is merely supportive of the order of the Commissioner of Income-tax (Appeals). In view of the fact that the appeal by the Revenue has been allowed, the cross-objection has no legs to stand and is accordingly dismissed.
16. In the result, the Revenue's appeal is allowed and the assessee's cross- objection is dismissed.