Issue for Consideration
Sections 54, 54B,54EC, 54F, 54GA and 54GB of the Income Tax Act, 1961 provide for exemption of capital gains on an acquisition by an assessee, of a specified asset (purchase, construction, etc.) within the specified time period, subject to fulfilment of various other conditions. Section 54 exempts along term capital gains arising on transfer of a residential house and section 54F grants exemption to long term capital gains arising on transfer of any other capital asset. Section 54B provides for exemption for long term capital gains on transfer of a land used by for agricultural purposes. Similar provisions are contained in other sections for grant of exemption for capital gains on reinvestment by the assessee within the specified period, in specified assets.
All these sections require acquisition by the assessee. Section 54 reads – “the assessee has within a period of ………………purchased, or has ………..constructed a residential house”. The other sections use similar language. In view of the stipulation in the above mentioned provisions, that require the acquisition by an assessee, aquestion has arisen before the courts as to whether the acquisition (purchase, construction, etc.) by the assessee necessarily means that the new asset must be acquired in the name of the assesseeor that it would be sufficient where the funds belonging to the assessee are used for acquiring the specified asset to enable an assessee to claim the exemption from tax.
The courts do not find any difficulty in upholding the claim of the assessee for exemption in cases where the acquisition of the new asset is in the joint names of the assessee and another person, as in the courts opinion such acquisition in joint names would not hamper the claim for exemption, so long as the funds for acquisition of the new house have come from the assessee. The conflict of the judicial view however, has been in respect of acquisition of a new asset in the name of a family member, without the name of the assessee being included, though with the funds from the assessee. While the Madras, Andhra Pradesh and Delhi High Courts have taken the view that even in such a case, the assessee is entitled to the benefit of the exemption, the Punjab & Haryana, Bombay and Delhi High Courts have taken a contrary view.
Prakash’s case
The issue came up before the Nagpur bench of the Bombay High Court in the case of Prakash vs. ITO 312 ITR 40 in the context of section 54F. In that case,the assessee, an elderly person, sold certain plots of land, and acquired a plot of land in the name of his adopted son and constructed a residential building thereon by submitting plans for construction in the name of his son. He did not file his return of income voluntarily, but did so after receipt of a notice u/s. 139(2) from the Assessing Officer. The assessee besides claiming that the plots sold were agricultural land, which was not a capital asset, and that there was therefore no capital gains, also claimed an exemption u/s. 54F in respect of the purchase of a plot of land and the construction of the residential building thereon. It was claimed that the investment in the new asset was made in the son’s name, in view of the advanced age of the assessee.
The Assessing Officer rejected both the contentions of the assessee and subjected the capital gains to tax. He denied the claim for exemption on the ground that the reinvestment was in the son’s name. The Commissioner (Appeals) held that the transfer was of the agricultural land which was not a capital asset, and accordingly no taxable capital gains arose. The Tribunal held that the asset transferred was a capital asset and subject to eligibility of the assessee for an exemption u/s. 54F, a taxable capital gains arose. It however, remanded the matter back to the Commissioner (Appeals) to examine the assessee’s claim for exemption u/s. 54F.
On remand, the Commissioner (Appeals) held that section 54F contemplates only investment in a residentialproperty by the assessee; it was enough if the sale proceeds were invested in the construction of aresidential house. It was further held by the Commissioner (Appeals) that it was not necessary that the newly constructed house should be in the name of the assessee, and that an adopted son had the samerights as a natural son. The Commissioner (Appeals) allowed the appeal of the assessee granting relief u/s. 54F. The Tribunal quashed the order of the Commissioner (Appeals), denting the benefit of the exemption.
On appeal by the assessee, the Bombay High Court examined the provisions of section 54F and the definition of the term “assessee” contained in section 2(7). It noted that as per the scheme of section 54F, the assessee, who is the owner of the original asset, needs to, purchase or construct a residential house within the specified period. It noted that the concepts of “assessee”, “own”, “owner”, “ownership”, “co-owner”, “owner of house property”, and “ownership of property” contained in various sections were very much interlinked and connected for granting the benefits under the Income Tax Act. Referring to the Supreme Court decisions in the cases of Podar Cement (P) Ltd. 226 ITR 625 and Mysore Minerals Ltd 239 ITR 775, it expressed the view that an assessee must have valid title legally conveyed to him after complying with the requirements of law or should at least be entitled to receive income from the property in his own right and have control and domain over the property for legal purposes, while basically excluding a third person of any right over the said property. It was of the view that the object being to give a benefit to the assessee, it meant that the assessee must comply with the conditions strictly in all respects.
The Bombay High Court expressed the view that right from the sale of the original asset till the purchase and/ or construction of the new asset, the ownership and domain over the new asset was a must. According to the High Court, the new property must be owned by the assessee, or he should have legal title over the same. Though others might use and occupy the property along with the assessee, the ownership of the residential house should be of the assessee.
The Bombay High Court noted that by constructing the house in the name of his son, the assessee effectively transferred the new property to his son, who became the owner thereof, in spite of the prohibition on transfer of the new house for a period of 3 years from the date of transfer of the original asset. The High Court noted that the assessee had no domain and/or right on the property, which disentitled him to the claim for exemption, since there was non-compliance of the conditions as per the scheme of section 54F.
The Bombay High Court noted the decision of the Andhra Pradesh High Court cited before it in the case of Late Mir Gulam Ali Khan 228 ITR 165, where the court had taken the view that the term “assessee” must be given a wide and liberal interpretation, and that where the legal heirs had completed the purchase of the new house after the death of the assessee, the assessee was entitled to the benefit of the exemption. The Bombay High Court however expressed its disinclination to accept the liberal view given to the word “assessee” in Late Mir Gulam Ali Khan’s case, stating that the facts before it were different, since in the case before them, it was the son (who was not the assessee) who had purchased and constructed the new property. It also noted that the assessee had admitted that the son was the beneficial owner of the property.
The Bombay High Court therefore held that the as-sessee was not entitled to the benefit of exemption u/s. 54F.
A similar view has been taken in the context of sec-tion 54B by the Punjab & Haryana High Court in the case of Jai Narayan vs. ITO 306 ITR 335 , where the new land was purchased in the names of the son and the grandson of the assessee, by the Rajasthan High Court in the case of Kalya v CIT 251 CTR 174, where the new land was purchased in the names of the son and the daughter-in-law, and in the context of section 54F, by the Delhi High Court, in the case of Vipin Malik (HUF) vs. CIT 330 ITR 309, where the new house was purchased in the names of the karta and his mother.
Kamal Wahal’s case
The issue came up recently before the Delhi High Court in the case of CIT vs. Kamal Wahal 351 ITR 4.
In this case, the assessee, a retired employee, sold his share in an inherited property, and invested a part of the sale proceeds in purchase of a residential house in the name of his wife. He claimed exemption u/s. 54F for the investment in the residential house.
The assessing officer denied the benefit of the exemption, on the ground that the investment should have been made in the assessee’s name, and not in the name of his wife. The Commissioner(Appeals) allowed the assessee’s appeal, following the decisions of the Madras High Court in the case of CIT vs. V Natarajan 287 ITR 271 and of the Andhra Pradesh High Court in the case of Mir Gulam Ali Khan vs. CIT 165 ITR 228.The tribunal dismissed the appeal of the revenue, following the judgments of the Madras and Andhra Pradesh High Courts, and also of the Karnataka High Court in the case of DIT vs. Jennifer Bhide 349 ITR 80, where the property was purchased in the joint names of the assessee and her spouse. While noting the decision of the Bombay High Court in the case of Prakash(supra), the tribunal took the view that where a statutory provision was capable of more than one view, the view favouring the taxpayer should be preferred.
The Delhi High Court approved the decision of the tribunal, noting that besides the decisions referred to by the tribunal, the Delhi High Court itself in the case of CIT vs. Ravinder Kumar Arora 342 ITR 38 had also taken a similar view in the context of section 54F involving purchase of a new property in the joint names of the assessee and his spouse. The Delhi High Court also noted the decision of the Punjab and Haryana High Court in the case of CIT vs. Gurnam Singh 327 ITR 278, where a similar view had been taken in the context of section 54B involving purchase of the new land in the joint names of the assessee and his bachelor son.
According to the Delhi High Court, the predominant judicial view was that, for the purposes of section 54F, the new residential house need not be purchased by the assessee in his own name nor was it necessary that it should be purchased exclusively in his name. It noted that in the case before it, the property was not purchased in the name of a stranger, somebody unconnected with the assessee, but in the name of his wife, and that there was no dispute that the entire investment had come out of sale proceeds and that there was no contribution from the assessee’s wife.
Having regard to the rule of purposive construction and the object of section 54F, the Delhi High Court held that the assessee was entitled to the benefit of exemption u/s. 54F.
Observations
The Andhra Pradesh High Court, in Mir Gulam Ali’s case reiterated the acknowledged position in law, while deciding in favour of the assessee’s claim for exemption, that the exemption provisions should be liberally construed. None of the sections, under scanner, expressly require purchase or construction in the name of the assessee himself and a concerted effort is requfcired by the courts to read that requirement in the law so as to deny the benefit of exemption to the assessee. It is this highly debatable position, perhaps,that has led the courts to favour the assesses including the courts, which originally had taken a stand against the claim for exemption, but had later on, in other cases favoured the claim for exemption from tax. Further, the intention behind sections 54 and 54F and other provisions similarly placed is to encourage reinvestment in residential houses, which purpose is achieved by permitting reinvestment in the name of a close relative.
It is quite common to purchase properties in joint names of husband and wife, or jointly with close relatives and importantly there is no prohibition in law against it. In such an event, if the funds flow from the assessee, it is clear that the assessee cannot be denied the benefit of the exemption. Given this, should it make a difference if the assessee does not include his own name because of the circumstances of his old age or for convenience of simpler succession?
It may be noted that almost all the decisions favouring the assessee have been cases where the property has been purchased in the name of the spouse of the as-sessee and where funds have flown from the assessee. In all such cases, in any case, clubbing provisions would operate and the property would be regarded for both income tax and wealth tax purposes as the property of the assessee. The natural corollary is that the benefit of the exemption should also be given in such cases.
On the other hand, the decisions which have gone against the assessee have been cases where the prop-erty was purchased in the name of a son, daughter-in-law or grandson. In the case of a major son or grandson, clubbing provisions do not apply, and hence perhaps the adverse view was taken by the courts, though not highlighted in so many words .
The decisions involving section 54B which have gone against the assesseehave also been partly decided on account of the fact that section 54B requires use of the new land for agricultural purposes by the assessee unlike section 54F that merely requires acquisition of a residential house, and does not require the assessee to reside therein.
Mir Gulam Ali Khan’s case again was a case where the assessee initiated the process of purchase of the property, but passed away before he could complete the purchase, and the purchase was then completed by his legal heirs. Therefore, the subsequent purchase by the legal heirs was part of the same chain of events of sale of the old property and purchase of the new property initiated by the assessee himself.
Of course, one would need to take into account the provisions of the Benami Transactions (Prohibition) Act, 1988 in such a case. That Act excludes transac-tions entered into in the name of a wife or unmarried daughter. The Benami Transactions (Prohibition) Bill, 2011, seeks to exclude transactions in the name of spouse, brother or sister or any lineal ascendant or descendant. The law, therefore, seems to recognise that properties of a person can be purchased in the names of certain close relatives. Given this legal background, can the intention be to deny the benefit of an exemption, the conditions of which are otherwise fulfilled, on the mere ground that the property is pur-chased in the name of one such close relative?
In view of the fact that the issue involves interpretation of tax exemption provisions and that the said provisions do not in any case require that the investment has necessarily to be made in the name of the assessee, leading to a possibility of a debate, the better view seems to be that purchase of a property in the name of a spouse or close relative should qualify for the benefit of the exemption u/s. 54, 54B or 54F, as long as the funds belonging to the assessee are used and the assessee retains domain over the property. However, given the fact that while planning one’s affairs one should not plan in a manner so as to attract unnecessary litigation, it is advisable to purchase the property in the joint names of the assessee and such close relative, rather than in the name of the close relative alone.
