Capital Gain - Tax planning based on sec 54

All about Capital Gain exemption under section 54 & 54 F and its applicability under various

circumstances: -

If an individual transfers any long term capital asset and plans to reinvest the sale proceeds in a new residential house property then he is eligible to claim exemption u/s 54 and 54F to reduce his tax liability.

St i l l there are many doubts and confusion about its appl icabi l ity under various circumstances, conditions, etc.

The same are dealt herewith with case laws:-

1) Date of purchase of New House- For the purpose of section 54, the date of agreement to

purchase should be taken as the date of purchase and the date of registration of sale deed for

purchase is not relevant - CIT V. R.L. Sood[2000] 108 Taxman 227/245 ITR 727 (Delhi).

2) No Restriction on location of the New House Property - An interesting thing to note about both

the Exemptions u/s 54 & 54F are that there are no restrictions in regard to the location of the new

house property. There are no provisions in both the sections which say that the new house property

should be located in India. Thus if an individual or an HUF sells any Long term capital asset to

purchase a new house property outside India, he can still claim exemption u/s 54 (sale of a

residential house property) and u/s 54F (sale of any long term capital asset other than a residential

house property.

3) Exemption is independent of the Residential Status - Both the above sections restrict

the exemption to an individual or an I-IUF. But the sections do not decline the exemption

on the basis of the residential status. Thus an NRI, residing outside India and having

foreign income, can also claim exemption u/s 54 and 54F on the sale proceeds aris ing

from the sale of any long term capital asset in India.

4) Purchase need not necessarily be on 'cash and carry' basis - The word 'purchase' in

section 54 must be interpreted in its ordinary meaning, as buying for a price or equivalent

of p r i c e b y p a y m e n t i n k i n d o r a d j u s t m e n t t o w a r d s a n o l d d e b t o r f o r o t h e r

m o n e t a r y consideration. There is no stress in the section on 'cash and carry'. Thus,

where the eldest brother in a coparcenar ies compris ing four brothers sold h is own

house and acquired the common house from his three brothers who executed release

deeds for a consideration, there w a s a ' p u r c h a s e ' b y t h e e l d e s t b r o t h e r o f t h e s h a r e

o f e a c h o f t h e b r o t h e r s f o r a p r i c e - CIT v. T.N. Aravinda Reddy [1979] 1 Taxman 40

(AP)/120 ITR 46 (Sc).

5) Purchase' does not mean that the new house must be registered in assessee's

name - For the purpose of attract ing the provis ions of sect ion 54, i t is not necessary

that the assessee should become the owner of the property purchased. The word

'purchase' occurr ing in sect ion 54(1) has to be given i ts common meaning, v iz . , buy

for a pr ice or equivalent of price by payment in kind or adjustment towards a debt or for

other monetary consideration. Therefore, for the purpose of applicabil ity of section 54,

registration of the document is not imperative - Balraj v. CIT [2002] 123 Taxman 290/254

ITR 22 (Delhi).

6) Holding of legal title within prescribed time is not a pre-condition - Taking into

consideration the letter as well as the spirit of section 54 and the word 'towards' used

before the word 'purchase' in section 54(2), i t seems that the word 'purchase' is not

used in the sense of legal transfer and therefore, the holding of a legal title within a

period of one year is n o t a c o n d i t i o n p r e c e d e n t f o r a t t r a c t i n g s e c t i o n 5 4 - C I T v .

D r . L a x m i c h a n d N a r p a l Nagda [1995] 211 ITR 804 (Bom.).

7) Date of tak ing possess ion re levant for comput ing t ime- l imit - D a t e o f t a k i n g

o v e r possession of property purchased, and not the date of registration of sale in favor

of the a s s e s s e e , i s r e l e v a n t f o r c o m p u t i n g t h e p r e s c r i b e d t i m e - l i m i t - C I T V . M r s .

S h a h z a d a Begum [1988] 173 ITR 397 (AP).

8) Purchase of portion of self-occupied house is also eligible for exemption -

Section 54 nowhere states that a residential house which is purchased by the assessee

so as to avai l the exemption should not be the one in which the assessee was residing.

One cannot argue that assessee is not ent i t led to exemption under sect ion 54 merely

because the assessee was res id ing in the house which was purchased by h im. Thus ,

where the assessee so ld a house property owned by her and out of the sale proceeds

purchased 15 per cent share in another house property owned by her husband and

son, exempt ion was a l lowable even though the assessee was res id ing in the sa id

house pr ior to purchase, and cont inued to reside in the same house after purchase -

CIT v. Chandanben Maganlal [2002] 120 Taxman 38 (Guj.).

9) Purchase of two flats converted into one residential unit - The contention that the

phrase 'a residential house' in section 54 would mean one residential house does not

appear to be the correct understanding. The expression 'a residential house' should be

understood in a sense that building should be of residential in nature and 'a' should not

be understood to indicate a singular number. When a Hindu undivided family's residential

house is sold, to say that the capital gain should be invested for the purchase of only one

residential house is an incorrect proposition. After all, the Hindu undivided family

property is held by the members as jo int tenants . I f the members keeping in v iew the

future needs in event of separat ion purchase more than one residential bui lding, i t

cannot be said that the benefit of exemption is to be denied under section 54(1).

Where assessee HUF purchased two residential f lats ad jacent to each other on same

day by two separate reg is tered deeds and vendor had cert i f ied that he had e f fected

necessary modi f i cat ions to two f la ts to make them one residential apartment,

assessee's c laim for exemption could not be denied on ground that sect ion 54(1) does

not permit exempt ion for purchasers for more than one res ident ia l premises - CIT v.

D. Ananda Basappa[2009] 180 Taxman 4/309 ITR 329 (Kar.).

10) Whether benefit is available on more than one house purchased - In case the

assessee has purchased more than one house/flat within the period prescribed in

section 54, i t i s for the assessee to c la im re l ie f aga inst the purchase of any one of

the house/f la t provided the other condit ions mentioned in the section are satisf ied -

K.C. Kaushik v. P.B. Rane, ITO [1990] 84 CTR (Bom.) 62.

11) Whether benefit of exemption is avai lable to Firm - A f i rm is not ent i t led to

exemption under section 54 - CIT v. K. Gangiah Chetty & Sons [1995] 214 ITR 548 (Mad).

When the partners used the property prior to the dissolution of the firm for their

residence, it must be held that they were owners of the property and they were us ing

the property in their own right for the purpose of residence - CIT V. M.K. Chandrakanth

[2002] 125 Taxman 932/258 ITR 14 (Mad)

12) Exemption is al lowable in full even if house is partly purchased and partly

constructed - The main purpose of the statute is to give relief for the acquisition of a new

res ident ia l house. In that context , i t does not real ly matter whether the new

res ident ia l house i s part ly constructed or part ly purchased - B .B . Sarkar v . C IT [1981]

132 ITR 150 (Cal)

13) Exemption is a l lowable even i f a share in new property is purchased - When

the Act enables an assessee to get exemption from payment of tax in respect of

purchase or construction of a residential house, purchase or construction of a portion of

the house should also enable the assessee to claim the exemption. It is possible that a

person may not be in a posit ion to purchase the whole res ident ia l house at a t ime and

in the c i rcumstances an assessee might purchase a portion of the house or some

interest in the house. Thus, where the assessee sold a house and from the sale proceeds

purchased 15 per cent undivided share in a house property from her husband and her son,

and she was earlier residing in that house, exemption under sect ion 54 can be al lowed -

CIT v. Chandanben Maganlal [2000] 245 ITR 182 (Guj.).

14) Whether Refund can be Claimed - He can also claim refund if he has paid taxes on the

capital gains arising on sale of long term capital asset by claiming exemption u/s 54 and 54F

while filing the income tax return. After making the re-investment in a new residential house

property outside India he can still claim exemption by filing his return within the due date.

15) Construction cannot precede sale of old house - To claim exemption under section 54, the

construction of the new house should be within two years after the transfer of the existing

house. The exemption is not available where the new construction is made b e f o r e t h e

t r a n s f e r o r s a l e o f t h e e x i s t i n g h o u s e - S m t . S h a n t a b e n P . Gandhi v. CIT [1981]

129 ITR 218 (Guj.).

Exemption on capital gains could not be refused to the assessee simply on the ground that

the construction of the new house had begun before the sale of the old house - CIT V.

H.K. Kapoor [1998] 150 CTR (All.) 128.

The date of commencement of the construction of the new house is not material. To get the

benefit of section 54, the assessee must have constructed the new house within the prescr ibed

per iod f rom the date of sa le o f the o ld house - C IT V . Subramanya Bhat [1987] 165 ITR

571 (Kar.).

16) Where property is owned by more than one person - The other Co-owners release their

share or interest in the property in favour of one of the Co-owner, it will be deemed that the

property has been purchased by the release. Such release also fulfills the condition under

sec 54 as to purchase. - CIT V. T.N. Aravinda Reddy [1979] 120 ITR 46/2 Taxman 541 (SC)

17) Flats purchased under Self financing scheme - As per CBDT Circular No. 471, dated 15-10-1986,

cases of allotment of flats under the self-financing scheme of the Delhi Development

Authority shall be treated as cases of construction for the purpose of capital gains and

therefore, investment of capital gain in purchase of DDA Flat in the form of first installment of

price of flat within two years of sale of original property would entitle assessee to claim

exemption in respect of capital gain even though construction of flat was not complete in

two years - Smt. Shashi Varma v. CIT [1997] 224 ITR 106 (MP)/CIT v. Smt. Brinda Kumari [2001]

114 Taxman 266 (Delhi).

A s s e s s e e n e e d n o t n e c e s s a r i l y h i m s e l f c o n s t r u c t n e w h o u s e - T h e p u r p o s e b e h i n d

t h e e x e m p t i o n u n d e r s e c t i o n 5 4 ( 1 ) i s t h a t i f a n y a s s e s s e e s e l l s h i s r e s i d e n t i a l

house and purchases a new house aga inst the sa le cons iderat ion , the cap i ta l ga ins

a r i s i n g o u t o f t h e s a l e o f t h e e a r l i e r h o u s e s h o u l d n o t b e t a x e d . W h e t h e r t h e

assessee h imsel f constructs the house or he gets i t constructed by a contractor or a

th i rd party does not make any d i f ference . The bas ic requ i rement for the purpose of

r e l i e f u n d e r s e c t i o n 5 4 ( 1 ) i s t h a t t h e a s s e s s e e s h o u l d i n v e s t t h e s a l e p r o c e e d s i n

t h e c o n s t r u c t i o n o f a r e s i d e n t i a l h o u s e , w h i c h h a s b e e n c o n s t r u c t e d f o r t h e

a s s e s s e e . T h u s , w h e r e t h e a s s e s s e e s o l d a f l a t , a n d w i t h i n t w o y e a r s e n t e r e d i n t o

an agreement for the purchase of a new f lat which was under construct ion, and pa id

t h e a m o u n t s i n i n s t a l l m e n t s w i t h i n t h r e e y e a r s o f t h e s a l e o f t h e e a r l i e r f l a t ,

e x e m p t i o n i s a d m i s s i b l e - C I T v . S m t . B h a r a t i C . K o t h a r i ( 2 0 0 0 ] 2 4 4 I T R 3 5 2

(Cal.) .

18) C o m p u t a t i o n o f d e d u c t i o n - W h e r e i n v e s t m e n t i n n e w h o u s e h a s n o t t a k e n

p l a c e i n t h e y e a r o f t r a n s f e r o f o l d h o u s e , c a p i t a l g a i n s c a n b e t a x e d o n l y i n t h e

year in which t ime l imits for making such investment expire - The appl icat ion of the

special provisions contained in c lauses (i) and (ii) of section 54(1) does not depend

o n a n y e l e c t i o n b y t h e a s s e s s e e a n d o p e r a t e s i n a l l c a s e s f a l l i n g w i t h i n s e c t i o n

5 4 ( 1 ) . T h e p r o v i s i o n s o f s e c t i o n 5 4 ( 1 ) will p r e v a i l o v e r t h e d e e m i n g f i c t i o n o f

s e c t i o n 4 5 w h i c h t r e a t s c a p i t a l g a i n a s t h e d e e m e d i n c o m e o f t h e p r e v i o u s y e a r .

T h e r e f o r e , t h e a s s e s s e e c a n n o t b e s u b j e c t e d t o p a y i n c o m e - t a x o n h i s c a p i t a l g a i n

u n t i l t h e e x p i r y o f t h e o u t e r l i m i t o f o n e y e a r o r t w o y e a r s a s t h e c a s e m a y b e , a t

t h e e n d o f w h i c h a l o n e i t c o u l d b e p o s s i b l e t o c o m p u t e d i f f e r e n c e b e t w e e n t h e

amount of capita l ga in and the cost of the new asset and i t i s at th is stage that the

q u e s t i o n o f c h a r g i n g s u c h d i f f e r e n c e u n d e r s e c t i o n 4 5 a s i n c o m e o f t h e p r e v i o u s

year can ar ise. I t would be in consonance with sect ion 54(1) i f , instead of charg ing

c a p i t a l g a i n t o i n c o m e - t a x i n t h e p r e v i o u s y e a r i n w h i c h t r a n s f e r o f o r i g i n a l a s s e t

took p lace, the ITO waits till the outer per iod of one year or two years as the case

may be is over when he can work out the dif ference for charging i t as income of the

p r e v i o u s y e a r , u n l e s s t h e r e i s a c o m m u n i c a t i o n o n r e c o r d t h a t t h e e v e n t o f s u c h

p u r c h a s e o r c o n s t r u c t i o n i s n o t t o t a k e p l a c e o r t h a t i t h a s a l r e a d y t a k e n p l a c e

d u r i n g t h e a s s e s s m e n t p r o c e e d i n g s . I f t h e r e i s s u c h a c o m m u n i c a t i o n o n r e c o r d ,

t h e I T O c a n m a k e t h e n e c e s s a r y a d j u s t m e n t s a n d b r i n g t h e c a p i t a l g a i n t o t a x i n

t h e y e a r o f t r a n s f e r o f o r i g i n a l a s s e t i t s e l f w i t h o u t w a i t i n g f o r t h e e x p i r y o f t h e

prescr ibed t ime l imits of one year or two years . In such cases a lso, i f the assessee

purchases a new asset wi th in one year or constructs a new asset wi th in two years ,

t h e I T O i s b o u n d t o a m e n d t h e o r d e r o f a s s e s s m e n t s o a s t o e x c l u d e t h e a m o u n t

o f c a p i t a l g a i n n o t c h a r g e a b l e t o t a x u n d e r s e c t i o n 5 4 ( 1 ) a s l a i d d o w n i n s e c t i o n

155(8) - Harsutra i J . Rava l v . C IT [213132] 122 Taxman 165/255 ITR 315 (Guj ) .

19) Capita l ga ins account scheme - F o r t r a n s f e r o f d e p o s i t u n d e r C a p i t a l G a i n s

A c c o u n t s S c h e m e , 1 9 8 8 f r o m A c c o u n t ' E V t o A c c o u n t ' A ' , c l e a r a n c e o f A s s e s s i n g

Off icer i s not required - Sadula Janardhan (HUF) v .State Bank of Hyderabad [2006]

286 ITR 291 (AP) .

More Practical and Supreme Court Cases

Reinvestment in Overseas Premises

1. Issue for consideration:

a. 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 fulfillment 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.

b. 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 fulfillment 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.

c. Both these provisions restrict the benefit of exemption to individuals and Hindu Undivided Families and grant exemption, irrespective of the residential status of the assesses. These provisions do not confer or deny the exemptions for tax on the basis of the location of the residential house.

d. In the advent of the globalization, it is not uncommon, that the new residential house is acquired by an assessee 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:

a. 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.

b. 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 utilized 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.

c. 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.

d. 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 assessee’s 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.

e. 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 was relied upon.

f. The honorable Tribunal concurred with the view that the legislative intent behind introduction of

section 54F was to be gathered from 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:

a. 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.

b. 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 were 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.

c. 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:

i. 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 utilized for the purchase of the property,

ii. The assessee had not purchased the property in India and the Income-tax Act extended

to the ‘whole of India’ only,

iii. 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.

d. 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.

e. 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:

a. 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 utilized for purchasing property.

b. 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 be 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.

c. On appeal the CIT (A) found that the entire sale proceeds had been utilized 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 asset 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.

d. 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.

e. 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.

f. Lastly, the Tribunal observed that it was the settled law that if there were two views, the Court

had to adopt the interpretation that favored the assessee.

5. Observations:

a. 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.

b. 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.

c. 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.

d. 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:

i. “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.

ii. 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 . . . . . .”

e. 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 authorized to do so.

f. 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 explaining the alleged intention behind its introduction.

g. 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.

h. 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.

i. 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 analyzed the law in detail in concluding that the benefit of exemption is available for

overseas investment.

j. 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 anywhere in the world by a non-resident cannot be denied.

k. 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.

l. 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:

i. “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;. . . . . .”

m. 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.

n. 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.

o. 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.

p. 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.