By Pradip Kapasi, Gautam Nayak, Chartered Accountants
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Issues for Consideration
Section
54(2) and a set of other similar provisions, provide for the deposit of Capital
Gains or the net consideration in a bank account in accordance with the Capital
Gains Account Schemes, 1988, in a case where such amount is not appropriated or
utilized by the assessee towards the purchase or construction of the new asset
before the date of furnishing return of income u/s. 139 of the Income Tax Act.
The amount so
deposited under this Scheme, is required to be utilized for investment in the
specified new asset, within the specified period by withdrawal from the same account
in accordance with the Scheme. The amount in the bank account remaining
unutilized, shall be charged as the Capital Gains for the year in which the
period of reinvestment expires and the assessee shall be entitled to withdraw
the same unutilized balance.
Instances happen
whereunder, an assessee utilizes the amount of the Capital Gains or the net
consideration in reinvesting the same in the specified new asset, within the
permissible time of 2 or 3 years, after filing the return of income u/s. 139,
without first depositing such amount in the designated account and routing the
investment through such account.
Issues arise in such
cases about the eligibility of the assessee, for claim of exemption from the
liability to tax on Capital Gains. The courts, in considering the issue, have
delivered conflicting decisions. The Karnataka High Court had held, that the assessee
should be eligible for the relief once the amount in question was utilized
within the permissible time. However, the Bombay High Court recently held, that
it was essential for an assessee to first deposit the unutilized amount in the
designated account and any failure to do so would result in denial of the
relief, even where he had utilized the amount of gains or consideration in
purchase or construction of a new asset with the overall permissible time
frame.
K Ramachandra Rao’s case
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The issue arose before the Karnataka High Court in the case of the CIT
v. K. Ramachandra Rao, 230 Taxman 334. In that case, the assessee sold
certain converted lands for a consideration of Rs.2.87 crore. The assessee
constructed the residential premises on another plot of land owned by him,
for which certain payments towards construction were made within a period of one
year of the transfer of the said lands, some payments were made within one
year before the transfer of the said lands and balance payments were made after
the transfer and after the due date of filing return of income u/s 139(1)
directly, without depositing the same in the designated bank account under
the Capital Gains Scheme. The construction of the premises was completed
within a period of three years of the transfer. The assessee claimed
exemption u/s 54F from taxation in respect of the capital gains arising on
the transfer of the said lands. The AO denied the claim for exemption on the
ground that a part was invested before the transfer of the said lands in
construction, and that the balance was invested directly without depositing
the same in the designated bank account.
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On appeal, the Commissioner(Appeals) held that the payments made within
one year before the date of transfer and also the payments made after
transfer were eligible for exemption in spite of the fact that the proceeds
were not deposited in the designated bank account. The tribunal, on appeal by
the revenue, confirmed the findings of the Commissioner(Appeals).
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In appeal to the High Court, the Revenue, besides another question, raised
the following substantial question of law:
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“When the assessee invests the entire sale consideration construction of
a residential house within three years from the date of transfer can he be
denied exemption under Section 54F on the ground that he did not deposit the
said amount in capital gains account scheme before the due date prescribed
under Section 139(1) of the IT Act?”
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The decision,
as reported, does not record the conflicting stands presented by the parties to
the appeal nor does it record the observations of the court that led to the
decision of the High Court rejecting the
appeal of the Revenue, which held as
under;
“As is clear from
Sub-section (4) in the event of the assessee not investing the capital gains
either in purchasing the residential house or in constructing a residential house
within the period stipulated in Section 54F(1), if the assessee wants the
benefit of Section 54F, then he should deposit the said capital gains in an
account which is duly notified by the Central Government. In other words if he
want of (sic) claim exemption from payment of income tax by retaining the cash,
then the said amount is to be invested in the said account. If the intention is
not to retain cash but to invest in construction or any purchase of the
property and if such investment is made within the period stipulated therein,
then Section 54F(4) is not at all attracted and therefore the contention that
the assessee has not deposited the amount in the Bank account as stipulated and
therefore, he is not entitled to the benefit even though he has invested the
money in construction is also not correct.”
Humayun Suleman Merchant’s case
The issue again
came up recently before the Bombay High Court in the case of Humayun Suleman
Merchant v CCIT, ITA No 545 of 2002 dated 18th August 2016.
In this case,
the assessee sold a plot of land for a consideration of Rs. 85.33 lakh on 29th
April 1995. The due date of filing of his return of income was 31st
October 1996. He entered into an agreement to purchase a flat for a
consideration of Rs. 69.60 lakh on 16th July 1996. Under this
agreement, 2 instalments of Rs. 10 lakh each were paid on 17th July
1996 and 23rd October 1996 to the developer/builder. A further
payment of Rs. 15 lakh was made on 1st November 1996 under the
agreement to purchase the flat. The possession of the new flat was obtained on
27th January 1997. No amount was deposited in the capital gains
account scheme.
The assessee
filed his return of income on 4th November 1996, after the due date
of filing of his return of income. In the return, exemption under section 54F
was claimed in respect of the entire cost of the new flat of Rs. 69.60 lakh.
The assessing
officer allowed exemption from capital gains under section 54F in respect of
the amount of Rs. 35 lakh paid till the date of the filing of the return, and
did not consider the balance amount of Rs 34.60 lakh paid subsequently for the
flat, on account of the assessee’s failure to deposit the unutilised consideration
for purchase on the flat in the specified bank account in accordance with the
capital gains account scheme. The Commissioner(Appeals) upheld the order of the
assessing officer. The tribunal also dismissed the appeal of the assessee.
Before the Bombay
High Court, on behalf of the assessee, it was argued that:
1. The issue was covered by the decision of the Bombay High Court in the case
of CIT v Hilla J B Wadia 261 ITR 376, read with CBDT circulars dated 15 October
1986 and 16 December 1993. Further, the decision of the Madhya Pradesh High
Court in the case of Smt Shashi Varma v CIT 224 ITR 106 also applied. Besides,
the decision of the Karnataka High Court in the case of K Ramachandra Rao
(supra) covered the issue.
2. Section 54F had been brought into the Act with the object of encouraging
the housing sector. Therefore, a liberal/beneficial interpretation/construction
should be given to section 54F(4). Reliance was placed upon the decision of the
Delhi High Court in the case of CIT v Ravinder Kumar Arora 342 ITR 38.
3. Section 54F(4) deliberately use the word “appropriation” while extending
the benefit, since it intended to expand the scope of the benefit. Since the
word “appropriation” meant setting apart, once an agreement to purchase the
flat was executed in July 1996, and the consideration was set aside, though not
paid, it should be considered to be appropriated towards the purchase of a
flat, and hence the benefit of section 54F was available.
4. Alternatively, the requirements of section 54F(4) had been satisfied, as
the entire amount had been paid to the developer before the last date
prescribed to file the return of income [the date prescribed under section 139
(4)], as held by the Gauhati High Court in the case of CIT v Rajesh Kumar Jalan
286 ITR 274.
On behalf of
the revenue, it was argued that:
1. on a plain reading of section 54F(4), the assessee had not utilised the
entire net consideration taxable under the head capital gains for purchase of
the flat, nor had he deposited the balance unutilised consideration in a
specified bank account as notified in terms of section 54F(4), and was
therefore not entitled to the benefit of exemption from capital gains under
section 54F to the extent the requirements of the section were not met.
2. The decision of the Bombay High Court in Hilla J B Wadia (supra), as well
as the circulars cited on behalf of the assessee had no application to the
facts of the case, as these were not in the context of section 54F(4), which
was not existing in the statute books at that point of time.
3. The word “appropriation” only covered cases where the flat had already been
purchased within one year before the date on which the capital gains arose on
the transfer of the asset. In the present case, there was no purchase of a flat
prior to the sale of the capital asset, but the purchase was post sale of the
capital asset, which required utilisation and deposit in the specified account
to the extent not utilised.
4. The decision of the Gauhati High Court in Rajesh Kumar Jalan had no
application to this case, as the amounts had not been utilised or deposited in
the specified bank account before the assessee filed his return of income on 4th
November 1996.
The Bombay High
Court analysed the provisions of section 54F. It noted that, while implementing
section 54F, it was noticed that at times assessments were completed prior to
the expiry of the period of 2 or 3 years from the date of sale of the capital
asset, and the assessee had not utilised the amount within the prescribed
period. This led to assessment orders being rectified by appropriate orders, to
withdraw the excess exemption allowed under section 54F. It was for this reason
that section 54F(4) was introduced. Further, the provisions of section 54F(1)
were made subject to the provisions of section 54F(4). Therefore, where the
consideration received on sale of the capital asset was not appropriated (where
purchase was earlier than sale) or utilised (where purchase was after the
sale), then the gains were subject to the charge of capital gains tax, unless
the unutilised amounts were deposited in the specified bank account as notified
under the capital gains account scheme. The exemption was available to the
unutilised amounts only if the mandate of section 54F(4) was complied with. A
further safeguard was provided to the revenue, where the assessee had not
invested the amounts in purchase/construction of a house property within the
specified time under section 54F(1), by providing that in such cases, capital
gains would be charged on the unutilised amount as income of the previous year
in which the period of 3 years from the date of the transfer of the capital
asset expired.
Applying this
analysis of the provisions to the facts before it, the Bombay High Court noted
that the entire net consideration which was to be utilised in purchase of the
new flat and which had not been utilised, had not been deposited in the
specified bank account before the due date of filing of the return under
section 139(1). The High Court noted that except Rs. 35 lakh, the balance of
the net consideration to be utilised, had not been utilised before the date of
furnishing of the return, 4th November 1996. Therefore, according to
the High Court, the order of the tribunal was correct.
The Bombay High
Court noted that the ratio of the cases of Hilla J B Wadia (supra) and Smt.
Shashi Varma did not apply, as in those cases, at the relevant point of time,
there was no requirement of depositing any unutilised amount in a specified
bank account under the capital gains account scheme. Further, the Bombay High
Court noted that the 2 CBDT circulars relied upon on behalf of the assessee did
not do away with and/or relax the statutory mandate of depositing the
unutilised amount in the specified bank account as required by section 54F(4).
Referring to
the decision of the Karnataka High Court in K Ramachandra Rao (supra), the
Bombay High Court expressed its inability to accept the reasoning adopted by
the Karnataka High Court. According to the Bombay High Court, the mandate of
section 54F(4) was clear, that an amount which had not been utilised in
construction and/or purchase of property before filing the return of income
must necessarily be deposited in an account under the capital gains account
scheme, so as to claim exemption. According to the Bombay High Court, this
aspect had not been noticed by the Karnataka High Court, and the entire basis
of the decision of the Karnataka High Court was the intent of the parties.
According to the Bombay High Court, in interpreting a fiscal statute, one must
have regard to the strict letter of law, and intent can never override the
plain and unambiguous letter of the law. The Bombay High Court observed that
while it should not easily depart from a view taken by another High Court on
considerations of certainty and consistency in law, the view of other High
Courts were not binding upon it unlike a decision of the Supreme Court or of a
larger or coordinate bench of the same court. If, on an examination of the
decision of the other High Court, it was unable to accept the same, it was not
bound to follow/accept the interpretation of the other High Court, leading to a
particular conclusion.
In the case
before it, the Bombay High Court found that the decision of the Karnataka High
Court was rendered sub-silentio; i.e. no argument was made with regard to the
requirement of deposit in notified bank account under the capital gains account
scheme before the due date as required by section 54F(4). The Bombay High Court
relied on Salmond’s Jurisprudence for the proposition that a precedent
sub-silentio is not authoritative. The Bombay High Court therefore held that it
could not place any reliance upon the decision to conclude the issue on the
basis of that decision.
The
Bombay High Court further rejected the reliance on the decision of the Delhi
High Court in the case of Ravindra Kumar Arora (supra), where the court had
held that the provisions of section 54F should be liberally construed, on the
grounds that in that case, all the requirements of section 54F stood satisfied,
and the only issue was the addition of the name of his wife in the purchase, on
the ground that that case had no application to the facts before it.
According
to the Bombay High Court, no occasion to give a beneficial constructions to a
statute could arise when there was no ambiguity in the provision of law, which
was subject to interpretation. In the face of the clear words of the statute,
the intent of parties and/or beneficial construction was irrelevant. It relied
on the decisions of the Supreme Court in the cases of Sales Tax Commissioner,
vs Modi Sugar Mills 12 STC 182, Mathuram Agarwal vs State of Madhya Pradesh 8
SCC 67 and CIT vs. Thana Electricity Supply Ltd 206 ITR 727 for this
proposition.
The
Bombay High Court also rejected the argument that since the funds had been
earmarked to be invested in construction of a house, the funds could be
regarded as appropriated for the purpose of purchase of new residential house,
and therefore the requirements of section 54F(4) were satisfied. According to
the Bombay High Court, the word “appropriated” had been used with reference to
the cases where property had already been purchased prior to the sale of the
capital asset, and the amount received on sale of the capital asset was
appropriated towards consideration which had been paid for purchase of the
property. According to it, the plain language of the section made a clear
distinction between cases of appropriation (purchase prior to sale of capital
asset) and utilisation (purchase/construction after the sale of capital assets).
Therefore, the word “appropriated” would have no application in cases of
purchase/construction of a house after the sale of capital asset, as was the
fact in the case before it.
Referring
to the argument on behalf of the assessee, that since the entire amount had
been paid before the last due date to file the return specified in section
139(4), the exemption was available, based on the decision of the Gauhati High
Court in the case of Rajesh Kumar Jalan, the Bombay High Court noted that the
factual situation before it was different. In the case before the Gauhati High
Court, the amounts were utilised before the date of filing of the return of
income, whereas in the case before the Bombay High Court, only a part of the
amounts were utilised before the date of filing of the return of income.
Therefore, the Bombay High Court was of the view that the decision of the
Gauhati High Court in that case was not applicable to the case before it.
The
Bombay High Court therefore held that the assessee was entitled to an exemption
under section 54F only in respect of the amount of Rs. 35 lakh actually paid
before the date of filing of the return of income, and not in respect of the
entire amount of Rs. 69.60 lakh agreed to be paid for purchase of the new
house.
Observations
Section 54 (2) reads
as under:
The amount of the capital gain which is not
appropriated by the assessee towards the purchase of the new asset made within
one year before the date on which the transfer of the original asset took
place, or which is not utilised by him for the purchase or construction of the
new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit
being made in any case not later than the due date applicable in the case of
the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be
specified in, and utilised in accordance with, any Scheme which the Central
Government may, by notification in the Official Gazette, frame in this behalf
and such return shall be accompanied by proof of such deposit; and, for the
purposes of sub-section (1), the amount, if any, already utilised by the
assessee for the purchase or construction of the new asset together with the
amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this
sub-section is not utilised wholly or partly for the purchase or construction
of the new asset within the period specified in sub-section (1), then,—
(i) The amount not so
utilized shall be charged under section 45 as the income of the previous year in which
the period of three years from the date of the transfer of the original asset
expires; and
(ii) The assessee shall be
entitled to withdraw such amount in accordance with the Scheme aforesaid.
The said sub-section
was introduced in the Finance Act, 1987 w.e.f. 01.04.1988. The intention behind
the introduction is explained vide memorandum explaining the provisions, as
under:
“The existing provisions under sec. 54, ….. the original assessments
need rectification whenever the taxpayer fails to acquire the corresponding new
asset. With a view to dispensing with such rectification of assessment, the
bill seeks to provide for new Scheme for deposit of amounts meant for
reinvestment in the new asset. Under the proposed amendment, … also.”
Circular No. 495 dt.
22.9.1987 has explained the amendment vide para 26.2 & 26.3 to avoid the
need for rectification of the assessment order of the year of transfer on
account of the assessee’s failure to acquire corresponding new asset within the
permissible time.
On a combined reading,
it is gathered that sub-section 2 has been introduced to provide for the
deposit of that part of the gain which has remained unutilized upto the date of
filing of return. The provision simultaneously ensures that the amount so
deposited in the designated account shall be deemed to be the cost of the new
asset, so as to enable an assessee to claim relief for the assessment year
corresponding to the year of transfer of the original asset without any further
compliance needed. As it is seen, the provision is primarily introduced to
avoid any rectification of the original assessment that maybe required, to meet
the consequences of the failure of the assessee to acquire the new asset within
the overall time permitted by law. Apparently, the law of sec. 54 and other
similar sections permitted and continue to permit an assessee to reinvest the
gains or the consideration within the prescribed time. This relief has neither
been taken away by the amendment nor is it intended to be taken away. In that view
of the matter, the core requirement for a relief continues to be the reinvestment
of the gains or consideration within the overall framework of the law.
The only purpose of
the amendment, therefore is to provide for a procedural mechanism in the form
of introduction of the Scheme so as to avoid the consequential rectification in
limited cases of failure of an assessee to reinvest. It may therefore not be
appropriate, to altogether deny the benefit to an assessee in a case where he
has reinvested the gains or the consideration in new asset within the
permissible time, though without depositing the gain or the consideration under
the Scheme. This more so, as in the case before the Bombay High Court, the
entire payment has been made before the date of the assessment.
In reality, one
routinely comes across cases where the payment of consideration is deferred for
several reasons, leading to non-compliance of conditions for deposit under the Scheme.
However, the transferor, on receipt of the consideration after the filing of
return of income, acquires or is in a position to acquire the new asset within
the specified period. Many intended transactions are seen to be not implemented
simply for inability to realize the funds by the due date of filing the return
of income. A provision introduced to facilitate the smooth assessment cannot be
so construed as to defeat the provisions of law.
The Courts seem to be favoring
the view that the deposits made within the extended time of s.139(4) would be
in compliance with the provisions of law. The Courts also seem to be of the
view that the benefit of the sections should not be denied in cases where the
new asset is purchased or constructed within the time extended u/s.139(4), even
where the deposits are made under the Scheme. Under the circumstances, no
serious controversy should arise in cases where reinvestment is made within
such extended time, with or without routing the investment through the
designated account.
One may also consider
the possibility of always routing the reinvestment through the designated
account, irrespective of the delay in depositing the gains or consideration
under the Scheme. This may help the assessee in contending that he has complied
with the provisions of law, but for the delay in depositing under the Scheme,
which delay may be condoned.
There is no doubt that
the entire Scheme of exempting the Capital Gains from taxation on reinvestment is
for the benefit of the assessee and for directing the investments in the
desired channels. It is a settled position in law that such provisions being beneficial
provisions for the assessee, should be construed liberally, so as to facilitate
the deduction and not to deny it.
In view of the above
discussion, it appears that the view of the Karnataka High Court is a better
view, in as much as the court has taken a view that promotes the legislative
intent behind the main provisions of law. It is respectfully submitted that an
important factor that should have been appreciated in Humayun’s case was that
there had been no loss of revenue nor was there any delay in reinvestment, and
that the entire payment for the new house had been made by the time the
assessment was completed.
