1. Issue for consideration:
1.1 Section 54 of the Income-tax Act grants an exemption from payment of tax on capital gains, arising on transfer of a residential house on fulfilment of the conditions specified therein. One of the conditions requires an assessee to re-invest the capital gains in purchasing or constructing a residential house within the prescribed period.
1.2 Section 54F of the Act grants a similar exemption from payment of tax on capital gains, arising on transfer of a capital asset other than a residential house on fulfilment of the conditions specified therein. This Section also amongst other conditions requires an assessee to re-invest the net consideration in purchasing or constructing a residential house within the prescribed period.
1.3 Both these provisions restrict the benefit of exemption to individuals and Hindu Undivided Families and grant exemption, irrespective of the residential status of the assessees. These provisions do not confer or deny the exemptions for tax on the basis of the location of the residential house.
1.4 In the advent of the globalisation, it is not uncommon, that the new residential house is acquired by an assesse at a place located outside India. Such overseas acquisitions have, in turn, triggered a controversy in taxation involving the eligibility of an assessee for exemption based on re-investment of capital gains outside India.
2. Leena J. Shah’s case:
2.1 The issue arose in the case of Smt. Leena J. Shah v. ACIT, 6 SOT 721 (Ahd.) where an assessee perhaps for the first time, contested the action of the CIT(A) in confirming the denial of exemption u/s.54F of the Income-tax Act, 1961 inter alia on the ground that the investment was made by the assessee in purchasing the residential house outside India.
2.2 The assessee, a non-resident sold some plots of land located in India for a total consideration of Rs.44,92,170 and earned the capital gains of Rs.43,80,454 after reducing the indexed cost of Rs.1,11,760. She claimed an exemption for investment in residential house and purchased a residential house in the USA, outside India. The AO denied the exemption by observing that the sale proceeds of the plot of land had not been utilised in acquiring the residential house in India and moreover, the residential house purchased/ constructed in the USA is not subject to tax in India within the meaning of section 54 of the Act. The AO therefore, did not allow the claim of deduction of Rs. 43,80,454 and brought the said amount to tax.
2.3 The CIT(A) confirmed the action of the AO by holding that section 54F was introduced in the Act by the Finance Bill, 1982 and the Memorandum explaining the provisions of the Finance Bill, 1982 explained that the exemption u/s.54F was granted with a view to encourage the construction of the house which naturally meant that the house was constructed in India and not outside India.
2.4 The assessee submitted before the Tribunal that; section 54F which was similar to section 54 did not make any distinction between a resident and a non-resident unlike several other sections in which the benefit was clearly and unambiguously denied to a non-resident; the benefit of section 54 and section 54F was intended to be available to both the categories of assessees without any discrimination; any interpretation which militated against the basic principle would not be a just and fair interpretation of the statute and would amount to doing injustice to all nonresidents in general and the appellant in particular who had invested the net consideration in a residential house, though outside India.
2.5 It was further explained that; there was no such stipulation u/s.54F that the new residential house must be located in India; wherever the Legislature found requirement of such stipulation, the same was provided in that section; the language of section was clear, the same was to be read accordingly. The decisions in the case of Padmasundra Rao v. State of Tamil Nadu, Kishore B. Setalvad v. CWT, and Orissa State Warehouseing Corpn. v. CIT were relied upon.
2.6 The honourable Tribunal concurred with the view that the legislative intent behind introduction of section 54F was to be gathered form the Notes, Memorandum and the Circular which in the Tribunal’s view provided that the investment was to be in the residential house located in India. The Tribunal cited several decisions in support of the view that the external aids like Notes, etc. were available for interpretation of the law and the meaning of the provision of section 54F could be gathered from such aids. In the light of the above settled rulings of interpretation of tax statutes, the Tribunal found appropriate that a residential house purchased/constructed must be in India and not outside India, in the USA. It noted that the interpretation put forth by it was strongly supported by the marginal note to section 54F.
3. Prema P. Shah’s case:
3.1 The issue again arose in the case of Prema P. Shah v. ITO, 100 ITD 60 (Mum.) where the question before the Tribunal was whether the exemption contemplated u/s.54(1) could be extended to the capital gains that was reinvested in a residential house purchased in a foreign country on selling the property that was situated in India.
3.2 In that case the brief facts available are that the assessee sold a jointly held residential property located in India for Rs.60 lakh on 4-4-1992 which was purchased for Rs.14 lakh on 29-3-1983. The capital gains was reinvested in purchasing residential house outside India, in London, the UK. The assessee claimed exemption u/s.54, showing long-term capital gains as Nil. The AO denied the exemption claimed on a few grounds including for the fact that the property was located outside India and in his opinion the same was required to be located in India for a valid claim of exemption from taxation.
3.3 The CIT(A) upheld the action of the AO and did not approve the view canvassed by the assessee. While disallowing the assessee’s claim, the CIT(A) observed:
(a) the assessee had taken loan from Barclays Bank and used the assessee’s foreign earning to purchase/lease the property. In other words, the receipts which gave rise to capital gains, were not utilised for the purchase of the property,
(b) the assessee had not purchased the property in India and the Income-tax Act extended to the ‘whole of India’ only,
(c) The lease for 150 years, though perpetual, the benefit of long-term lease obtained in the UK could not be treated as purchase under the Indian laws for the purpose of income taxation.
3.4 The assessee before the Tribunal contended that there was nothing in the statute to show that the property purchased should exist in India so as to claim the benefit contemplated under the Act; that the only stipulation for a valid claim of exemption was that the income should have arisen in India and it was not necessary that it should also be invested in India. For the above proposition, the assessee drew the attention to section 11 of the Income-tax Act, 1961 and it was further submitted that if the Legislature had such an intention, it would have been definitely and specifically mentioned, as it had been mentioned in section 11 which provided that any income from property held for charitable or religious purposes was exempt from tax u/s.11(1)(a) only to the extent it applied it to such purposes in India; if the Legislature wanted investment of the capital gains in India itself for exemption, the Legislature would have specifically stated so in the section itself.
3.5 The Tribunal on consideration of the submissions made by the parties was of the considered view that the assessee was entitled to the benefit of exemption form taxation under the Act which did not exclude the right of the assessee to claim the property purchased in a foreign country. The Tribunal held that if all other conditions laid down in the section were satisfied, merely because the property acquired was located in a foreign country, the exemption claimed would not be denied.
4. Girish M. Shah’s case:
4.1 The issue recently arose in the case of ITO v. Dr. Girish M. Shah, ITA No. 3582/M/ 2009 before ‘G’ Bench of ITAT, Mumbai. In that case, the assessee, non-resident Indian settled in Canada since 1994, sold his flat in Mumbai in 2003, for Rs.16 lakh, that was purchased in April, 1984, for Rs.1,31,401. The assessee claimed the benefit of indexation and reported a net capital gain of Rs.797,801. The entire sale consideration was repatriated to Montreal for a joint purchase of a house for Rs.64.75 lakh. The benefit of section 54 was claimed on the ground that sale proceeds were utilised for purchasing property.
4.2 The AO held that the provisions of the Act were applicable to India only. When a non-resident could not be taxed in India in respect of income received outside India, deduction could in the AO’s view could not be granted in respect of an activity outside India. He also noted that there was no undertaking that capital gains would be paid should the new property be disposed of. The AO, placing reliance on the decision of the Ahmedabad Tribunal in the case of Leena J. Shah v. ACIT in ITA No. 2467 (Ahm.) (supra), denied the benefit of section 54 to the assessee and recomputed the long-term capital gains at Rs.13,51,803.
4.3 On appeal the CIT(A) found that the entire sale proceeds had been utilised in the purchase of the new asset and hence capital gains was not chargeable u/s.54 of the Act. He also held that section 54F did not specify that the new as-set should be situated in India. As there was no specific restriction on location of new asset, the benefit of section 54F could not be denied to the assessee who had satisfied all other conditions, observed the CIT(A). The CIT(A) relied on the decision of the jurisdictional Tribunal in the case of Mrs. Prema P. Shah v. ITO (supra) for allowing the exemption that was claimed by the assessee.
4.4 The Tribunal vide order dated 17-2-2010 relying on the decision in the cases of Mrs. Prema P. Shah and Sanjiv P. Shah v. ITO (supra) upheld the action of the CIT(A) by holding as follows: “In short, we are of the considered view, for the reasons stated hereinabove, that the assessee is entitled to the benefit u/s.54 of the Act. It does not exclude the right of the assessee to claim the property purchased in a foreign country, if all other conditions laid down in the section are satisfied, merely because the property acquired is in a foreign country”. The Tribunal noted that the jurisdictional High Court had dismissed the Revenue’s appeal against the above order of the Tribunal in the case of Prema P. Shah and Sanjeev P. Shah on account of the tax effect being less than Rs.4 lakh.
4.5 The Tribunal noted that in Leena J. Shah’s case, the issue was for the claim u/s.54F, while in the case before them, it was section 54. It noted that the decision of the jurisdictional Tribunal had a greater binding effect.
4.6 Lastly, the Tribunal observed that it was the settled law that if there were two views, the Court had to adopt the interpretation that favoured the assessee.
5. Observations:
5.1 A bare reading of the provisions of sections 54 and 54F make it abundantly clear that there are no express conditions that require that the capital gains or the net consideration is reinvested in a residential house located in India. There are several provisions of the Income-tax Act which specifically require an investment to be made in India or for an act to be carried out in India. In the circumstances, for denying the claim of exemption, one will have to read the location-based condition in to these provisions, so as to insist on the new house being in India.
5.2 Section 54F was introduced by the Finance Act, 1982 for the purpose of conferring exemption from tax on capital gains in certain cases on investment of the consideration in residential premises. The said provision nowhere mandates that the exemption is conditional and is subjected to investment in residential premises located in India. The language of the law is very clear and does not leave any scope for ambiguity or misunderstanding.
5.3 It is the settled position in law that nothing is to be read in the provisions of the Act or added thereto where the language of the law is clear. In case of section 54 and section 54F the language in the context of location of the premises is clear and unambiguous leaving no scope for application of any external aids of interpretation like, FM’s speech or Notes to clauses or Memorandum explaining the provisions and the Circular explaining the same. It is significant to note that even the Circular, heavily relied upon by the learned AO, at no point or place requires that the construction of residential premises should be in India before an exemption u/s.54F is granted.
5.4 The main plank for denying the exemption is based on the Notes to Clauses, 134 ITR 106 (St.) Memorandum to the Finance Act, 1982, 134 ITR 128 (St) and the Circular of the CBDT bearing Circular No. 346, dated 30-6-1982 issued on introduction of section 54F by the Finance Act, 1982 The relevant paragraph of the Circular is reproduced as under:
“20.1 Under the existing provisions of the IT Act, any profits and gains arising from the transfer of a long-term capital asset are charged to tax on a concessional basis. For this purpose, a capital asset which is held by an assessee for a period of more than 36 months is treated as a ‘long-term’ capital asset.
20.2 With a view to encouraging house construction, the Finance Act, 1982, has inserted a new section 54F to provide that where any capital gain arises from the transfer of any long-term capital asset, other than a residential house, and the assessee purchases within one year before or after the date on which the transfer took place or constructs within a period of three years after the date of transfer, a residential house, the capital gains arising from the transfer will be treated in a concessional manner as under ……”
5.5 The Finance Minister’s speech on introduction of the Finance Act of 1982, 134 ITR (St.) 23, does not prescribe any such condition for exemption based on the location of the new asset-neither the speech suggest that the provision is introduced for promotion of the construction of houses, leave alone in India. The Circular No. 346 appears to have supplied the legislative intent without being authorised to do so.
5.6 Such an ‘Indian’ insistence by the authorities appears to be misplaced, more so when the language of these provisions is clear and leave no room for ambiguity. Even the Circular relied upon by the authorities does not mandate that the construction of houses sought to be promoted is India-specific. Significantly, even the analogy based on the said Circular is not available for rejecting the claim for exemption u/s.54 which provision surely is not handicapped by any Circular explain-ing the alleged intention behind its introduction.
5.7 The law undoubtedly overrides the Circular where the language of the law is clear. The unambiguous language of the law i.e., sections 54 and 54F does not restrict its scope based on the location of the asset. It is a sheer fallacy to read the condition of investment in India in the provisions and assume that exemption u/s.54F from capital gains is intended to give a boost to the construction of residential houses in the country and this objective will not be achieved if the property is acquired or constructed in a foreign country. It is clear that the Circular has presumed that section 54F is introduced for construction of house. Assuming that such presumption of the board is right, it nowhere requires that the house construction should be in India.
5.8 Section 54F is introduced mainly for facilitating purchase of house by the people on sale of other assets. Therefore the exemption at best can be said to be introduced to enable the purchase of house by an individual or HUF without payment of tax. Had it been for the promotion of construction industry, the exemption would have been conferred on all assessees and would not have been restricted to individual and HUF.
5.9 The decision in the case of Leena J. Shah, has been delivered without detailed reasons, in one paragraph, after citing several decisions of the courts to suggest that in interpretation of the law, it is permissible to rely on the external aids of interpretation including the Notes, Memorandum and the Circular. While there cannot be two opinions on this wisdom, what is perhaps overlooked, with full respect, is the established position in law which requires and permits the use of external aids only in cases where the language of the law is unclear and ambiguous and as noted the language here is clear. It is for this reason that the subsequent decisions of the Tribunal have chosen to not follow the ratio of the said decision in Leena J. Shah’s case and have proceeded to allow the exemption in cases of overseas investment. Moreover, the later decisions of the Mumbai Tribunal, being the latest shall prevail over Leena J. Shah’ decision, more so because the said decisions have not only considered the ratio of Leena J. Shah’s decision but have also analysed the law in detail in concluding that the benefit of exemption is available for overseas investment.
5.10 A resident assessee is entitled to and is not denied exemption u/s.54F on purchase of residential premises anywhere in the world. If that is so, in the absence of any specific or implied prohibition, such an investment any-where in the world by a non-resident cannot be denied.
5.11 Once the Income-tax Act, 1961 assumes the power to tax the Income of a non-resident, then the logical consequence of such a power is to confer upon such a person all the benefits that flow from the provisions of the Act unless specifically prohibited.
5.12 The Income-tax Act, wherever required has specifically stipulated in writing that the investment should be made in India, like in sections 10(20A) and 10(20B) 10(22) and 10(24), 10(26) and section 11(1)(a) which reads as under:
“11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income —
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property; ……”
5.13 Likewise even Chapter XIIA, vide section 115C(f), clearly provides that the investment should be in specified asset of Indian company or Central Government for a person to claim exemption u/s. 54F. Similarly, section 54E to 54ED requires investment in Indian assets for claiming exemption.
5.14 In American Hotel and Lodging Association Educational Institute, 301 ITR 86 (SC), the Court confirmed that the words ‘in India’ could not be read into section 10(23C)(vi). Again, the Supreme Court in the case of Oxford University Press, 247 ITR 658 (SC), wherein the Court was required to examine whether for claiming exemption, it was necessary to carry out any activity in India, in the context, held that it was impermissible to read in the Act, the words ‘in India’ into section 10(22) of the Income-tax Act.
5.15 Article 26 of the Model Convention provide for non-discrimination. According to the said Article, persons who are non-residents of India, residing in the other contracting state, shall not be subjected to taxation provisions that are different or more burdensome than the provisions applicable to residents of India. It is clear that a non-resident Indian being resident of other state should not be discriminated while being taxed in India and should be conferred with the same benefits including of sections 54 and 54F as are available to a resident while being taxed in India under the Income-tax Act, 1961.
5.16 In cases where two views are possible, the benefit of doubt should be given to the assessee. sections 54 and 54F, being a beneficial provision, the Court has to adopt the interpretation that favours the assessee importantly where these provisions are incentive provisions.
