TMI Blog2005 (11) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 44 - SUPREME COURT] and K.P. Varghese v. ITO [ 1981 (9) TMI 1 - SUPREME COURT] , we find that a residential house purchased/constructed must be in India and not outside India, in USA. This interpretation is strongly supported by the marginal note to section 54F. Section 54F inserted by the Finance Act, 1982, with effect from 1-4-2003. It has been explained in Circular No. 346,- Explanatory notes on the provisions of Finance Act, 1982 in para 20.2 with a view to encouraging house construction, the Finance Act, 1982, has inserted a new section 54F. . Thus, we hold that benefit u/s 54F is not allowable for a residential house purchased/constructed outside India. In the result, the appeal is dismissed. - R.P. TOLANI AND A.L. GEHLOT, JJ. Milin Mehta for the Appellant . G.M. Chauhan for the Respondent. ORDER A.L. Gehlot, Accountant Member. - This appeal is filed by the assessee against the order of CIT(A)-III, Baroda dated 15-9-2000 for the assessment year 1998-99. 2. The grounds raised by the assessee are as under : "1. The ld. CIT(A) has erred in fact and in law in confirming the reopening of the assessment under section 147 of the Income-tax Act, 1961. 2. The ld. CIT(A) has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... house property in USA, the investment in which is more than the net consideration in respect of the original asset. The Assessing Officer has denied exemption on the two grounds, one, the sales consideration was not utilised for acquiring the new asset and second, the new asset was purchased outside India and hence, the provisions of the Income-tax Act is not applicable in respect of the new asset. I do not agree with the first conclusion of the Assessing Officer as section 54F does not stipulate that the sale consideration should be utilised for acquiring the new asset. The new asset may be acquired out of some other source. So far as the second conclusion is concerned. I tend to agree with the Assessing Officer. Section 54F was introduced in the Act by Finance Bill, 1982. Memorandum explaining provisions in the Finance Bill, 1982 explains that the exemption in section 54F is granted with a view to encouraging house construction. This would naturally mean that house construction would be encouraged by provisions of this section in India and not outside India." 7. The ld. AR reiterated the following submission which were made before CIT(A) : "Section 54F (with which your appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption under section 54 because all the conditions laid down by section 54 are fulfilled and section 54 is evenly available to both, the residents and non-residents. Denying the benefit to the non-resident is not warranted by the language of the section. 5. From the above submissions it is crystal clear that your appellant s claim satisfies all the conditions laid down by section 54F and is, therefore, justly entitled to be allowed the exemption claimed. The ld. Assessing Officer s order rejecting your appellant s claim is based on an arbitrary interpretation of the relevant provision of the Act and cannot be sustained by any judicious, rational, just and fair interpretation of the statute." The ld. AR submitted that there is no such stipulation under section 54F that new residential house must be in India. He further submitted that wherever Legislature found requirement of such stipulation in the section same is provided in that section. For this purpose, he referred sections 54 and 47( iv ) of the I.T. Act. The ld. AR submitted that language of section is clear, same is to be read accordingly. The ld. AR in support of contention cited following decisions : 1. Padmasundara Rao v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a ) the Jurisdictional High Court held as under : "When the Legislature granted exemption under section 5(1)( xxviii ) of the Act in respect of shares in a Co-operative Housing Society, the Legislature intended to grant exemption in favour of all the rights flowing from shares in a Co-operative Housing Society except interest, which the Legislature itself brought in within the tax net by making an express proviso in sub-section (7) of section 54 of the Act." 10.2 The Allahabad High Court in the case of Harijan Evam Nirbal Varg Avas Nigam ( supra ), has held that the constitution is the Supreme law of the land. All other laws, including I.T. Act, are sub-ordinate to the constitution and must be read and interpreted in the light of constitutional provisions. 10.3 The Apex Court in the case of Padmasundara Rao ( supra ) has held while interpreting a statute legislative intention must be found in the words used by the Legislature itself. 10.4 With the above present legal background, if we see legislative history, we noticed that originally the income-tax was first introduced in India in 1860. After independence the Income-tax Bill, 1961 came out of the legislative anvil and the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (FB), was rendered on June 22, 1979, i.e. , much prior to the amendment by the 1984 Act. If the Legislature intended to give a new lease of life in those cases where the declaration under section 6 is quashed, there is no reason why it could not have done so by specifically providing for it. The fact that the Legislature specifically provided for periods covered by orders of stay or injunction clearly shows that no other period was intended to be excluded and that there is no scope for providing any other period of limitation. The maxim " actus cruiae neminem gravabit " highlighted by the Full Bench of the Madras High Court has no application to the fact situation of this case." 10.5 In the case of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) "5. Now, on these provisions the question arises as to what is the true interpretation of section 52, sub-section (2). The argument of the revenue was, and this argument found favour with the majority judges of the Full Bench, that on a plain and natural construction of the language of section 52, sub-section (2), the only condition for attracting the applicability of that provision was that the fair market value of the capital asset transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the object and purpose which the Legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which section 52, sub-section (2), appears, because, as pointed out by judge Learned Hand in the most felicitous language : ". . . the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create." Keeping these observations in mind we may now approach the construction of section 52, sub-section (2). 6. The primary objection against the literal construction of section 52, sub-section (2), is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but it can certainly help to fix its meaning. It is a well-recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. There are many situations where the construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of re-sale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15%. Many other similar situations can be contemplated where it would be absurd and unreasonable to apply section 52, sub-section (2), according to its strict literal construction. We must, therefore, eschew literalness in the interpretation of section 52, sub-section (2), and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction: Vide Luke v. IRC [1963] AC 557; [1964] 54 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoid or reduce the liability of the assessee to tax on capital gains. Now, it is necessary to bear in mind that when capital gains are computed by invoking sub-section (1) it is not any fictional accrual or receipt of income which is brought to tax. Sub-section (1) does not deem income to accrue or to be received which in fact never accrued or was never received. It seeks to bring within the net of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the capital asset. But since the actual consideration received by the assessee is not declared or disclosed and in most of the cases, if not all, it would not be possible for the ITO to determine precisely what is the actual consideration received by the assessee or in other words how much more consideration is received by the assessee than that declared by him, sub-section (1) provides that the fair market value of the property as on the date of the transfer shall be taken to be the full value of the consideration for the transfer which has accrued to or is received by the assessee. Once it is found that the consideration in respect of the transfer is understated and the condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1898 found the rule "as necessary now as it was when Lord Coke reported Heydon s case". The rule was reaffirmed by the Earl of Halsbury in Eastman Photographic Materials Company Ltd. v. Comptroller-General of Patents, Designs and Trade-Marks [1898] AC 571, 576 (HL) in the following words : "My Lords, it appears to me that to construe the statute now in question, it is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which the former Act had given rise, and to the latter Act which provided the remedy. These three things being compared, I cannot doubt the conclusion." This rule being a rule of construction has been repeatedly applied in India in interpreting statutory provisions. It would therefore, be legitimate in interpreting sub-section (2) to consider what was the mischief and defect for which section 52 as it then stood did not provide and which was sought to be remedied by the enactment of sub-section (2) or, in other words, what was the object and purpose of enacting that sub-section. Now, in this connection the speech made by the Finance Minister while moving the amendment introducing sub-section (2) is extremely relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which section 52 as it then stood did not provide and which was son lit to be remedied by the enactment of sub-section (2) and why the enactment of sub-section (2) was found necessary. It is apparent from the speech of the Finance Minister that sub-section (2) was enacted for the purpose of reaching those cases where there was understatement of consideration in respect of the transfer or to put it differently the actual consideration received for the transfer was "considerably more" than that declared or shown by the assessee, but which were not covered by sub-section (1) because the transferee was not directly or indirectly connected with the assessee. The object and purpose of sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bona fide transactions where the consideration for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee, so that they do not escape the charge of tax on capital gains by understatement of the consideration. This was the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no view-point can be rationally considered as capital gains or any other type of income. It is a well-settled rule of interpretation that the court should as far as possible avoid that construction which attributes irrationality to the Legislature. Besides, under entry 82 in List I of the Seventh Schedule to the Constitution, which deals with "Taxes on income other than agricultural income" and under which the Income-tax Act, 1961, has been enacted, Parliament cannot "choose to tax as income an item which in no rational sense can be regarded as citizen s income or even receipt. Sub-section (2) would, therefore, on the construction of the revenue, go outside the legislative power of Parliament and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax. Sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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