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TMI Blog2019 (4) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax (Appeals) erred in confirming the addition made disallowing the exemption u/s.54 on account of Investment made in Residential house outside India. 2) The ld. Commissioner of Income Tax (Appeals) ought to have appreciated that amendment made u/s.54 in regard to allowably of exemption only in case residential house situated in India is effective from 1.4.2015 i.e. A.Y. 2015-16 and therefore not applicable in the current assessment year." 3. The brief facts of the case are that the assessee has declared capital gain on sale of residential building of Rs. 1,30,30,360/-. The AO assessed long term capital gains of the aforesaid property at Rs. 1,68,71,359/- . The learned CIT(A) while adjudicating first appeal filed by the assessee was pleased to accept contentions of the assessee and the long term capital gains declared by the assessee in return of income were accepted and the additions so made on this ground stand deleted by learned CIT(A). The decision of learned CIT(A) has attained finality as it could not be shown by learned DR that Revenue has filed an appeal before tribunal challenging relief granted by learned CIT(A) on this issue. So far so good. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein the claim of assessee while reinvesting in property outside India was not allowed u/s 54F. iv. On the basis of these decisions, the AO makes an argument in favour of interpretation of the provisions of the Act in a holistic manner and in the appropriate context, to arrive at its proper meaning, that is, the context of section 54. In the case laws cited by the A0s, such a view has been taken. 9.3 On the other hand, the assessees (and their ARs) rely on the following decisions of Hon'ble ITAT: Prema P. Shah Vs. ITO 282 ITR 211 (Mum)(2006) Dr. Girish M Shah (ITA No.3582/Mum/2009) Ms. Dhun Jehan Contractor (ITA No.7058/Mum/2013) Giridhar Mohanani (ITA No. 4591/ Mum/2013) Mrs Varsh Girdhar (ITA No. 4592/Mum/2013) Vinay Mishra Vs ACIT 30 taxmann.com 341 (Bang)(2013) N. Ranganatham Vs ITO 51 taxmann.com56 (Chennai)(2014) ITO (IT)-1(1) vs Farokh Jal Deboo (ITA No.4650/ Mum/2013) In these case laws, it has been pointed out that there is no mention of the word 'India' in section 54 and the unambiguous meaning of the provisions of the section is to be derived from the law as made by the Legislature in its wisdom. It is only by way of the Finance (No.2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o them by virtue of section 5(2) of the Act in case of non-residents. As section 54 is mentioned in the charging section in case of the head of income 'capital gains', that is, in section 45, it is part of the charging section and thus, automatically includes the words 'in India' in case of non-residents on account of provisions contained in section 5(2) of the Act. This is elaborated at length in the following paragraphs. 9.4(i) A reference is first made to section 5(2) of the Act, which provides for the Scope of Total Income in the case of a non-resident: (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Thus, the total income in case of a non-resident includes all income from whatever source derived, but all such income should either be received or deemed to be received in India or accrue or arise or deemed to accrue or arise in India. Section 2(24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gains' and 'income from other sources'. Thus, any item of income must fall under one of these heads of income in order to be chargeable, and, also for the purpose of computation of 'total income'. If there is any income which falls outside these heads of income, there should be a separate charge for the same (as is done in case of certain items of income included while aggregating the income - by way of sections 68 to 69D of the Act, which provide for a separate charge for such items). 9.4(iii) The first step thus involves the characterisation of income - under what head of income it can be put. If the income is of the nature of salaries and it is to be placed under the head "Salaries" then for chargeability of income under this head and its computation, the provisions contained in Chapter IV-A of the Act shall apply. 9.4(iv) By way of example, it can be seen that section 15 of the Act is the charging section for income under the head 'salaries'. In this context, the following are regarded as chargeable: i. any salary due to an assessee from an employer in the previous year, whether paid or not; [s.15(a)] ii. any salary paid or allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax under the head "Income from other sources"', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to F. It can be seen that none of these charging sections for respective heads of income mention that the income should accrue or arise 'in India'. In other words, there is no condition or presumption that the income should 'accrue or arise' in India. 9.4(vi) As already mentioned above, the reason for this is imbedded in, and intrinsic to, the charging section for the Income Tax Act, 1961. Section 4 of the Act provides a charge of income-tax for 'total income' of a person. Thus, section 4 has a direct connect with section 5 of the Act which provides for the scope of total income (the definition of ‗total income' in section 2(45) of the Act defines it to mean the total amount of income referred to in section 5, computed in the manner laid down in the Act, thereby, as mentioned earlier, linking section 14 to section 5). Section 4 of the Act does not mention that the charge is for 'total income' accruing or arising only 'in India'. Hence, the charging sections for respective head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to different heads of income, the allowable deductions are provided separately. In other words, the allowable deductions are contained in a separate section and not in the charging section itself. This is presented below in a tabular form. SI. Head of income. Charging section Section (s) in which provision made for allowable deductions 1 salaries 15 16 (under the head 'deductions from salaries 2 Income from 22 24 (under the head 'Deductions from house property income from house property ) 3 Profits and gains 28 29 (under the head 'Income from profits of business or and gains of business or profession, how profession computed'). Section 29 provides that it has to be computed in accordance with provisions contained in sections 30 to 43D. 4 Capital gains 45 48 (under the head 'mode of computation') 5 Income from 56 57 (under the head 'deductions') other sources As mentioned above, while the allowable deductions are mentioned separately and are not included in the specific charging section under each head of income, the charging section in case of 'capital gains' itself contains reference to section 54, thereby, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or (ii) if the amount of capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain. (2) 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 accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident who has sold residential house in India and purchased or constructed a new residential house outside India, the implication of this condition would be to extend the jurisdiction of the IT Act, 1961 over a non-resident on transfer of a capital asset in form of an immovable property situated outside India for purpose of charging income under the head capital gains and also providing for its cost of acquisition to be Nil. However, as mentioned above, the conjoint reading of section 4 with section 5(2) of the Act strictly prohibits this action and is abhorrent to this idea. ii. If the amount of capital gain is equal to or less than the cost of new asset purchased or constructed, then there would no income in the previous year of capital gain. But again an additional condition is imposed, that of computing the capital gain arising on transfer of the new asset within three years of its purchase or construction. In the case of such an eventuality, the capital gain is to be computed by taking the cost of the asset so transferred by reducing it by the capital gains arising from the transfer of the original asset. Again, taking the case of a non-resident who has sold residential hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia in case of a non-resident, there is no jurisdiction over such taxation as envisaged in section 54 (1) of the Act for three years over the new asset and its transfer. This anomaly withers away if the words 'in India are read into section 54 read with section 45 on account of provisions of section 5(2) of the Act in the case of a non-resident. 9.6(i) When the Finance (No.2) Act, 2014 inserted the words 'in India' into section 54(1) of the Act with effect from 01.04.2015, so far as non-residents were concerned, this insertion was only clarificatory in nature. On account of section 5(2) of the Act, these words were already operating there in the background. Thus, in case of non-residents, evidently, its impact is retrospective and not prospective. Even otherwise, the Memorandum to clauses 22 and 24 of the Finance (No.2) Bill, 2014 states that 'the benefit was intended for investment in one residential house within India'. 9.6(ii) It has also been mentioned above that when the words 'in India' are not read into section 54(1) of the Act, anomalous situations arise by way of extension of jurisdiction of the Act over non-residents in case of transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et purchased or constructed has to be 'in India' for application of section 54 in their case. 9.7 The arguments outlined in detail above were not presented before Hon'ble ITAT Benches in the decisions mentioned earlier. Thus, these have not been considered by Hon'ble ITAT. In light of what has been outlined above in paras 4 to 6, it is evident that provisions of section 54 can apply in the case of a non-resident only when the new residential house is purchased or constructed in India by virtue of conjoint reading of sections 4 and 5(2) and section 14 of the Act and thereby importing its meaning into section 54 read with section 45 of the Act. In fact, the words 'in India' are already present in section 54 of the Act when applying it in the case of a non-resident and thus, the new residential house has to be purchased or constructed in India to give effect to the provisions of this section in the case of a non-resident. Considering the above discussion, the claim of the assessee regarding exemption u/s 54 of the I T Act , 1961 is hereby disallowed and the entire Capital Gain is taxed accordingly" 4. Aggrieved by an assessment framed by the AO u/s 143(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, ____________________ The proposed amendment reads as under- In section 54 of the Income-tax Act, in sub-section (1), for the words "constructed, a residential house", the words "constructed, one residential house in India" shall be substituted with effect from the 1st day of April, 2015. There has been similar amendment to section 54F of the Income-tax Act and the amendment reads as under- In section 54F of the Income-tax Act, in sub-section (i), for the words "constructed, a residential house", the words "constructed, one residential house in India" shall be substituted with effect from the 1st day of April, 2015 ( clasuse 24 of the Finance Bill. Thus, the amendment to these t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the Legislature. "An intention to produce an unreasonable result", said Danckwerts L. J. in Artemiou vs. Procopiou [1966] 1 QB 878 (CA) "is not to be imputed to a statute if there is some other construction available". Where to apply words literally would "defeat the obvious intention of the legislation and produce a wholly unreasonable result" we must "do some violence to the words" and so achieve that obvious intention and produce a rational construction (per Lord Leid in Luke vs. IRC [1964] 54 ITR 692/[1963] AC 557 where at page 577, he also observed: "this is not a new problem, though our standard of drafting is such that it rarely emerges.". In view the above, as there are contrary decisions on the subject, though the latest decision of the ITAT is in favour of the revenue, the amendment to the statute set at test the controversy. In the light of the amendment and also following the decision of Hon'ble ITAT in the cases of Leena S. Shah & Farhad Bottlewala (Supra) the stand taken by the AO is uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of ITO v. Mr. Nishant Lalit Jadhav, ITA no. 6883/Mum/2014 , order dated 26.04.2017 for assessment year 2011-12, ITAT Chennai Bench decision in ITO (International Taxation-2(1)), Chennai v. Mrs. Saroja Naidu in (2017) 88 taxmann.com 784 (Chennai), and decision of Mumbai-tribunal in the case of ITO v. Shri Farokh Jal Deboo in ITA no. 4650/Mum/2013 and ITA no. 3478/Mum/2013 , vide common order dated 05.02.2016, wherein in all these cases decision had been taken in favour of the tax-payers on this issue . The assessee has also relied upon decision of Mumbai-tribunal in the case of Dhun Jehan Contractor v. ITO in ITA no. 7058/Mum/2013 , vide orders dated 13.05.2015 and also decision of Mumbai-tribunal in the case of ITO v. Shri Anil P. Mukhi in ITA no. 6803/Mum/2010, vide order dated 16.02.2012 wherein the decision has been taken in favour of the taxpayers on this issue. The assessee also submitted that amendment was made by Finance Act 2014 w.e.f. 01.04.2015 in Section 54 / 54F of the 1961 Act, which amendement will apply accordingly to assessment year 2015-16 and subsequent assessment years, wherein after the aforesaid amendment now deduction u/s 54/54F of the 1961 Act shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd including cited case laws. We have observed that the assessee has sold property in India on which long term capital gains arose and the assessee claimed deduction u/s. 54 of the Act with respect to investment made in the residential property situated outside India in Michigan, USA. The authorities below have denied the deduction u/s 54 of the 1961 Act on the ground that no deduction can be allowed u/s. 54 if the new residential property in which investment is made is situated outside India . We have observed that vide Finance Act 2014 an amendment has been made in Section 54 of the 1961 Act w.e.f. 01.04.2015, which shall be applicable for assessment year 2015-16 and subsequent assessment as provide in circular issued by CBDT , wherein it is stipulated that deduction u/s. 54 shall be allowed only when the new residential property in which investment is made for claiming deduction u/s 54 of the 1961 Act is situated in India . We are presently concerned with AY 2014-15 which is prior to AY 2015-16. It will be profitable at this stage to reproduce Section 54(1) of the 1961 Act both prior to its amendment by Finance Act, 2014 as well post amended section, which are reproduced hereund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three year after the date of transfer constructs, a residential house then the amount of capital gains to the extent invested in the new residential house is not chargeable to tax under section 45 of the Act. The existing provisions contained in sub-section (1) of section 54F, inter alia, provide that where capital gains arises from transfer of a long-term capital asset, not being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house then the portion of capital gains in the ratio of cost of new asset to the net consideration received on transfer is not chargeable to tax. The benefit was intended for investment in one residential house within India. Accordingly, it is proposed to amend the aforesaid sub-section (1) of section 54 so as to provide that the rollover relief under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, she has purchased a residential house in U.S.A. out of the capital gain on sale of the plot in India and thus she has fulfilled the conditions stipulated in section 54F of the Income-tax Act. She has invested the capital gains in a residential house within the stipulated time. There was no condition in section 54F of the Income-tax Act at the relevant time that the capital gain arising out of transfer of capital asset should be invested in a residential house situated in India. The language of section 54F of the Income-tax Act before its amendment was that the assessee should invest capital gain in a residential house. It is only after the amendment to section 54F of the Income-tax Act by the Finance (No. 2) Act, 2014, which came into effect with effect from 1.4.2015 that the assessee should invest the sale proceeds arising out of sale of capital asset in a residential house situated in India within the stipulated period. Thus on a plain reading of section 54F of the Income-tax Act before its amendment by the Finance (No. 2) Act leaves no room for any doubt that the assessee should restrict her investment within India or outside India. The only condition was that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment by Finance Act 2014 in Section 54F, with effect from 01.04.2015 wherein the benefit of deduction u/s 54F will be allowed only when reinvestment in residential house property is made within India. Prior to the aforesaid amendment , there was no bar for the taxpayer making investments outside India in residential house property to get the benefit of deduction u/s. 54F provided other conditions are fulfilled. We are presently concerned with appeal for AY 2011-12 which is prior to amendment of Section 54F by Finance Act, 2014 w.e.f. 01-04-2015. There is no dispute between rival parties so far as compliance of the other conditions by the assessee as stipulated u/s 54F of the 1961 Act to get the benefit of deduction u/s 54F are concerned . The Hon'ble Gujarat High Court in the case of Leena Jugalkishore Shah(supra) has allowed the deduction u/s. 54F to the taxpayer making investments outside India in residential house properties . The relevant portion of the decision of Hon'ble Gujarat High Court in the case of Leena Jugalkishore Shah(supra) is reproduced here under:- "9. We have heard learned counsel for the parties. We have perused the order of the Tribunal. There is no findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uous or capable of more meanings than one, then the court has to adopt the interpretation which favours the assessee. Section 54F of the Act before its amendment was clear that the assessee should investment in a residential house. The language of section is clear and unambiguous. Therefore, we cannot import into the statute the words `in India' as interpreted by the authorities. Thus, taking into consideration the above facts, we are of the opinion that benefit of section 54F before its amendment can be extended to a residential house purchased outside India. In that view of the matter, the appeal is allowed. The order of the Tribunal is set aside. We answer the question in favour of the assessee and against the revenue." The Mumbai tribunal has followed the decision of Hon'ble Gujarat High Court in the case of Leena Jugalkishore Shah(supra) while deciding appeal in the case of the Nishant Lalit Jadhav(supra). No contrary decision of Hon'ble High Courts and/or Hon'ble Supreme Court is brought to our notice by Revenue. Respectfully following the decision of Hon'ble Gujarat High Court in the case of Leena Jugalkishore Shah(supra) and also decision of the coordinate benches of ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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