AAR-New Delhi : Where applicant purchases a residential house abroad in assessment year 2012-13 out of capital gain on sale of inherited property in India within two years from date of sale, he has to be allowed benefit of deduction under section 54

Authority For Advance Rulings, New Delhi

Dipankar Mohan Ghosh, In re

Section : 54

Assessment Year : 2012-13

R.S. Shukla, Incharge Chairman

And Ashutosh Chandra, Member Revenue

A.A.R. No. 1356 of 2012

December  22, 2017

RULING

Ashutosh Chandra, Member Revenue – The applicant is an individual and a holder of British Passport, settled and residing in the UK. The residential status of the Applicant is Non-Resident, Person of Indian Origin and has been regularly assessed to tax in India under PAN AMRPG9569K. The application was admitted vide our order dated 11 August 2015.

2. As per the application, Mr Ajoy Kumar Ghosh, deceased father of the Applicant, was allotted Leasehold rights in residential land admeasuring 2000 Sq. yds bearing No 1/26 at Shanti Niketan, New Delhi, in terms of Sub Lease dated 15.2.1968. He constructed a residential house there upon, which was completed in terms of Completion Certificate dated 24.4.1971. However, he expired on 28 September 2002, leaving a Will dated 30 January 1985, in accordance with which his wife Mrs. Mallika Ghosh, mother of the Applicant, was granted life interest in the property, having no disposable interest, and thereafter upon demise of Mrs Mallika Ghosh on 19 February 2009 the property devolved equally upon the Applicant and the wife of his deceased brother.

2.1 The Applicant, on 29.4.2011, relevant to A.Y. 2012-13, sold his 50% undivided share in the aforesaid residential property to Umra Securities Ltd 108, Ansal Bhawan, 16 Kasturba Gandhi Marg, New Delhi – 110001, for a consideration of Rs 85,09,00,000 and after reducing the proportionate expenses and withholding tax and adding other income, net amount of Rs. 69,42,05,025 was remitted to the applicant in GBP vide RBI approval dated 18 July, 2011.

2.2 The Applicant, on the sale of the aforesaid property is stated to have earned Long Term Capital Gain of Rs 80,27,22,960 liable to Capital Gains Tax and has filed a detailed computation alongwith the Application.

2.3 The Applicant has claimed deduction u/s54 of the Act, amounting to Rs 24,77,86,100 being the INR equivalent of GBP28,64,974(GBP26,75,000 + Stamp Duty+ Expenses]- [INR 24,77,86,100 at then rates of Exchange] being purchase consideration of leasehold rights for 971 years in residential Flat bearing No 47, Abingdon Court, Abingdon Villas, Kensington, London W 8 6BT for a consideration of GBP 26,75,000 plus stamp duty and other expenses estimated at GBP 1,89,974.34 (Approx.), aggregating to GBP28,64,974.34 paid out of Account No.64265056 maintained with Natwest Bank, UK, out of monies received as Sale consideration and remitted from India.

3. On the above facts, the applicant has sought a Ruling on the following questions:

(i) Whether the applicant, being a resident of UK, is justified in taking a view, that having sold his share of residential property situated at 1/26, Shanti Niketan, New Delhi the capital gains arising in terms of section 45 of the Act, is eligible for deduction u/s 54 of the Act to the extent of reinvestment in acquiring a residential property abroad i.e. in U.K., having satisfied all other conditions of Section 54 of the Income-Tax Act, 1961?

(ii) Whether on the facts and in the circumstances of the case, the Applicant is justified in taking a view that the deduction under section 54 cannot be denied, on the basis of a different view being expressed by ITAT Ahmd in case of Leena J. Shah, as it is settled law, that the interpretation in favour the applicant should be adopted?

(iii) If the answer to either of questions Number 1 or 2, is in affirmative, what would be the basis and the method of determination of long term capital gain and applicable tax thereon?

4. The Revenue, in their earlier response relied on the decision of the Mumbai Bench of the ITAT in the case of Farhad Bottlewala v. ACIT [IT Appeal No. 1761 (Mum.) of 2012, dated 31.8.2012], to say that the same issue had been addressed in this case and held against the assessee. The case of Leena J Shah, as decided by the ITAT, Ahmedabad Bench was also cited as it followed the above decision in the case of Farhad Bottlewala. The Revenue referred to the Explanatory Notes to the Finance (No. 2) Act 2014, to state that the amendment was made only to clarify that the benefit under sections 54/54F were intended to be granted when the investment was made in India.

4.1 The Revenue also cited the decision of the Hon’ble Supreme Court in the case of K P Varghese, to argue that the statute must be construed having regard to the object and purpose which the legislature had in view while enacting that provision. It highlighted the principles of interpretation as laid down by the Hon’ble Supreme Court in Novopan India Ltd. v. CCE & C1994 taxmann.com 231 (SC), as also in State of Gujarat v. Essar Oil Ltd. [Civil Appeal No. 599 of 2012, dated 17-1-2012], to state that in cases of exemptions, in case of doubt or ambiguity, the decision should go in favour of the State.

4.2 It was argued that the Legislature did not intend to allow deduction in respect of a house outside India, and the provisions have to be construed strictly.

5. The Applicant, represented by his Counsel, Mr U.N.Marwah FCA, submitted that the applicant has complied with all the conditions stipulated for claiming deduction u/s 54 of the Act. The capital gains on sale of residential house in New Delhi, India has been partly reinvested in acquisition of a residential property in London, UK and the amount reinvested in acquiring the residential property abroad is liable for deduction while computing the taxable capital gains. It was submitted that in the provisions of Section 54 as they existed for the AY 2012-13, there was no restriction imposed in law to the effect that reinvestment in residential property has to be located in India, as per the terms of the section which stood prior to the prospective amendment made w.e.f 01.04.2015 by the Finance Act, 2014.

5.1 It was submitted that the Finance Act 2014 amended Section 54 by introducing that the reinvestment in residential property has to be “in India”. The insertion of words “in India” in Section 54 of the Act will have a prospective effect and not retrospective effect. In this regard, reliance has also been placed on the Explanatory Notes to the Finance Act while proposing the amendment to sections 54 and 54F of the Income-tax Act which read as under: (Circular No. 01/2015 – Explanatory Notes to the provisions of the Finance (No. 2) Act, 2014)

“20.5 Applicability – these amendments take effect from 1st April, 2015 and will accordingly apply in relation to assessment year 2015-16 and subsequent assessment years.”

It was contended that since it has been specifically mentioned that the amendment will apply in relation to the A.Y. 2015-16 onwards the same cannot be applied in respect of any year prior to AY 2015-16. The amendment is clearly substantive and not clarificatory as the applicability was clearly made effective from a prospective year.

5.2 Under the provisions of Income Tax Act, 1961 since non-resident Indian’s income is subjected to income-tax and there is no specific prohibition in Income Tax Act, 1961 debarring the non-resident from the benefit of exemption under section 54 of the Act, and therefore a non-resident applicant cannot be treated differently from a resident applicant unless specifically prohibited.

5.3 The applicant had initially relied on several ITAT orders, but during the course of these proceedings, relied mainly on the decision of the Hon’ble Gujarat High Court, in the case of Leena Jugalkishore Shah, and subsequent decisions, in support of his contention that the amount of reinvestment in Residential Property outside India is eligible for deduction u/s54 of the Income Tax Act, while computing taxable capital gains.

5.3.1 In Leena Jugal Kishore Shah v. Asstt. CIT [2016] 72 taxmann.com 185/392 ITR 18 (Guj.), it was held that:

“9. . 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 assessee should restrict her investment within India or outside India. The only condition was that the assessee should invest in a residential house………… . When the section 54F of the income-tax act was clear and unambiguous, there is no scope for importing into the statute the words which are not there. Such importation would be not to construe but to amend the statute. If there is any defect in the Act, it can be remedied only by the legislation and not by judicial interpretation.”

5.3.2 It was also submitted that the above judgement was applicable in the case of deduction u/s 54 also. The case of ITO v. Nishant Lalit Jadhav [IT Appeal No. 6883 (Mum.) of 2014, dated 2-11-2016] (AY. 2011-12) has been cited in support:

“[Para 5] The said judgement is with reference to Section 54 as in case of Applicant, wherein while relying on decision of Gujrat High Court the tribunal stated the language of Section 54 and 54F are parimateria.

A similar situation, though in the context of section 54F of the Act, has been considered by the Hon’ble Gujarat High Court in the case of Smt.Leena J. Shah (supra); notably, so faras the impugned issue is concerned, the requirement of sections 54 & 54F of the Act is pari-materia, inter-alia, requiring the assessee to make investment in a new residential house in order to avail the exemption on the capital gains earned.”

5.3.3 The case of ITO v. Mrs. Saroja Naidu [IT Appeal No. 375 (Mds.) of 2015, dated 2-11-2016] has been cited to demonstrate that the decision in the case of Leena J Shah was followed by the ITAT and where the provisions of the Act under consideration were as contained in section 54, as is the case in the present application.

5.4 The Applicant has referred to the case of Vinay Mishra v. Asstt. CIT[2013] 30 taxmann.com 341/141 ITD 301 (Bang. – Trib.), to state that on a plain reading of the provisions of section 54F one does not find anything therein to suggest that the new residential house acquired should be situated in India. The words ‘in India’ cannot be read into section 54F, when Parliament in its legislative wisdom has deliberately not used the words ‘in India’ in section 54F.In this view of the matter, the assessee’s claim for exemption under section 54F was to be allowed since all conditions laid down in this section are satisfied for availing of the said exemption.

5.5 The Applicant submitted that the decision of the Gujarat High Court in case of Leena J. Shah (Supra) is the solitary decision of any High Court in India which is in favour of the Applicant, there being no decision of any Tribunal or High Court, presently in favour of the Revenue. The decision in case of Leena J. Shah by ITAT Ahmedabad, was over-ruled by the High Court. The decision of Mumbai ITAT in Farad Bottlewala cited by the Learned DR was also over-ruled by its Co ordinate benches in numerous cases. It has been submitted that in view of the fact that there being no decision against the view of the Applicant, the decision of the Hon’ble High Court of Gujarat in Leena J. Shah is binding on all authorities below including the Authority for Advance Ruling.

5.6 The Applicant in support of his arguments has cited various cases to state that the judicial discipline has to be followed by following the orders of the higher appellate authorities; that until a contrary decision is given by another competent High Court, the decision of the High Court becomes binding on all lower appellate authorities; and that in quasi judicial tribunals also decisions of higher authorities are binding.

5.7 The Applicant submitted that on merits, it is entitled in law and on facts, having complied with all conditions stipulated in Section 54, to Deduction in respect of the amount invested being Rs 24,77,86,100equivalent of GBP28,64,974 (GBP26,75,000 + Stamp Duty+ Expenses ] at the then rates of Exchange in acquiring the residential house in London.

6. The Applicant thereafter submitted that Question No 2 raised in the Application, has become infructuous due to the fact that at the time of filing the application there was divergence of opinion amongst the ITAT decisions as Ahmedabad ITAT, in the case of Leena J. Shah, had denied the benefit of Deduction u/s54F to the assessee by reading the words “In India” in the Section. However this decision has since been reversed by the Hon’ble High Court of Gujarat in the same case, as discussed above. Further at present there is no decision in favour of the Revenue and hence Question No 2 no longer survives.

7. The Applicant has also dealt with the issue raised in Question No 3, relating to computing and quantifying the amount of taxable capital gains on sale of residential house in India after allowance of deduction u/s54 of the Income Tax Act in respect of amount invested in acquiring the Residential house in London.

7.1 The Applicant submitted that the residential property sold by the applicant is a Long term Capital asset in terms of Explanation 1 to section 2(42A) of the Act read with section 49(1) and section 55(2)(b)(ii). The applicant became the owner of the property by inheritance. Therefore while calculating “period of holding”, the period for which the capital asset is held by the previous owner i.e. his father Late Mr Ajoy Kumar Ghosh, is includable and therefore the applicant is deemed to have held the asset since 27.02.1968.

7.2 In terms of provision of section 55(2)(b)(ii) read with section 49(1)(iii) and explanation to section 49(1) the cost of acquisition of the residential house at Shanti Niketan, New Delhi in India which was sold, shall be the cost of capital asset to the previous owner or the Fair Market Value as on 01.04.1981 at the option of the assessee i.e. Rs. 36,37,500 (50% of 72,75,000/-) which is its Fair Market Value as on 01.04.1981. The Applicant relied on the decision of the Bombay High Court in the case of CIT v. Manjula J. Shah[2011] 16 taxmann.com 42, wherein the Hon’ble High Court accepted that indexed cost of acquisition of capital asset had to be computed with reference to the year in which the previous owner first held the asset.

7.3 Regarding the cost of improvement it was stated that since the property became the property of the previous owner before 1.4.1981, therefore the cost of improvement shall include all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on after the said date by the previous owner of the assessee.

7.4 The Applicant further submitted that he had filed Return of Income for AY 2012-13 pursuant to notice u/s 148 declaring income of Rs 55,48,95,950 which included Taxable Long Term Capital gains of Rs 55,40,86,739 after deduction u/s54 of Rs 24,77,86,100. The Tax Deducted at Source was Rs 16,55,24,372 and the Applicant claimed a refund of Income Tax of Rs 5,15,63,080. Thus it was submitted that the quantification as filed was correct. He has got a valuation done and has opted for fair market value as on 1.4.1981 and duly indexed it as per the provisions of clause (iii) of explanation to section 48.

8. In response to the contentions of the Applicant, the Revenue represented by Mrs Kavita Pandey, CIT (DR), submitted that Section 54 along with other related sections are part of Chapter IV of the IT Act, and has been mentioned in Section 45 which is the charging Section for Capital Gains tax.

8.1 The Chapter pertaining to Computation of Income is Chapter IV and for the purpose of computation of income, various deductions have been provided under each Head of Income, apart from Chapter VI A. The provisions of Sections 54 to 54H are not included in the section pertaining to deductions and do not fall under the head rebates and reliefs as provided under Chapter VIII of the Act as well. They are also not in the nature of exemption, as in Section 10 of the Act. Section 54 is to be read in conjunction with Section 45 and thus is part of Charging provision. In fact it is a provision for Roll Over of charge. This is also evident from the Explanatory Memorandum to Finance Act 2014. Thus, the charge of Capital Gains u/s 45 on the House Property sold by the Applicant in India has been Rolled Overto another asset to be charged to tax at the time of transfer of such asset as per the conditions and methodology provided under Section 54 of the Act, read with Sections 45 and 48. It is a part of the charging section and is not distinct from it. Since the Applicant has made a claim of “Deduction u/s 54” which has not been provided in the statute, its plea deserves to be rejected, as the provisions are not in the nature of deduction.

8.2 It is submitted that the charging section 4, is both in respect of Residents and in respect of Non-Residents and in this section there is no mention of the word ‘India’. Also, the distinction between Resident and non Resident for the first time is introduced in section 5, “Scope of Total Income” only. In this section, the provisions of Clause (a) and (b) are the same for both Residents and Non-Resident. However, by virtue of Clause (c) to Section 5(1), the Act makes Global Income of residents chargeable to tax. The same is not true for Non-residents. Section 5(2) is for non-residents. Section 5 refers to Section 14, which is the Section for classification of income under various heads for the purpose of charge and for the purpose of computation of Total Income. None of the charging sections for respective heads of income mention that the income should accrue or arise ‘in India’. The reason for this is embedded in, and intrinsic to, the charging Section for the Income Tax Act, 1961. Section 4 of the Act only provides a charge of income-tax for ‘Total Income’ of a person. Hence, the charging sections for respective heads of income are foreclosed and precluded from using any different phraseology. The Act has been made to tax global income of the Residents. The charging sections under various heads do not specify residents ‘in India and outside India’, the clear reason being that having already been stipulated in Section 5, it will amount to repetition.

8.3 It is submitted that Capital Gains is to be charged either as per the provisions of the Section 45 or as per the provisions of Section 54 to 54H read with Section 45 and computed after allowing deductions under Section 48. This Basis of Charge as provided in Section 45, a reading of which shows that when the person concerned is a Non-Resident, his or her income can only include Profits and Gains arising ‘in India’ from transfer of a capital asset, when it is read conjointly with Section 5(2) of the Act. Thus, there is no need to mention the words ‘in India’ in Section 45 or any such charging Section again. The words ‘in India’ has the automatic operation therein when dealing with the income of Non-Residents. Thus, the conjoint reading of Section 4, Section 5(2) Section 14, Section 45 and Section 54 in the case of a Non-Resident makes the flow clear that the words ‘in India’ are to be automatically read into Section 45 and Section 54 in the case of a Non-Resident There is no requirement of separately mentioning the same.

8.4 It is further submitted that if a Non-Resident applies the Capital Gains for Roll Over benefit and the ‘New Asset’ being an asset in India, it is perfectly in tandem with the provisions of the Act, and the Capital Gains in such case is taxable in India as per the provisions of Section 5(2) of the IT Act, read with Sections 45 and 54, after withdrawal of the Roll Over benefit. This is because both as per the provisions of Section 5 (2) and under Article 14 of the Indo-UK DTAA, the income from Capital Gains is to be taxed where the property is situated. However, if the ‘New Asset’ in the case of Non-Resident is situated outside India, the computation and the charging provisions fail for the reason that there is no instrument under the Act or the Treaty by virtue of which income of a Non-Resident arising ‘Outside India’ can be taxed in India as the same is neither received, deemed to be received nor accrues or arises or is deemed to accrue or arise in India. As such, the Act has no Authority to tax such income and the Applicant has no obligation to pay tax under such situation. Even in a case where the Tax Treaty applies, the situation remains the same. The legislature can never have such intention which fails its own legislation, as in this case. The intention has been clarified by the legislature when it has brought out Amendment to the provisions by the Finance Act 2014.

8.5 The Revenue has cited the case of CIT v. Gold Coin Health Food (P.) Ltd.[2008] 304 ITR 308/172 Taxman 386 (SC), dated 18 August, 2008 where the Division Bench held that merely because the amendment was stated to take effect from 1.4.2003, that cannot be a ground to hold that the same did not have retrospective effect, and on the facts of the case, it was held that Explanation 4 to Section 271(1)(c) was clarificatory and not substantive. In the case of Fiduciary Shares & Stock (P.) Ltd. v. Asstt. CIT[2016] 70 taxmann.com 23/159 ITD 554 (Mum. – Trib.) for AY 2009-10, Hon’ble ITAT ‘F’ Bench, Mumbai has held that the amendment made in Explanation to Section 73 of the Act by the same Finance (No.2) Act, 2014 with effect from 01.04.2015 is clarificatory in nature and will apply retrospectively for the reason that if it is not construed as such, certain piquant situations arise which cannot be supposed to arise. The ITAT referred to the decision of Hon’ble Apex Court in the case of Allied Motors (P.) Ltd. v. CIT[1997] 224 ITR 677/91 Taxman 205 (SC), wherein it was held that the first proviso to Section 43B of the Act was curative in nature and hence retrospective in operation, i.e. w.e.f. 01.04.1984 from when the Section was brought on the statue.

8.6 It is submitted that if the amendment is not considered clarificatory in nature, as in case of aNonResident, anomalous situations would arise, and bowing to the judicial pronouncements cited above, the word situated ‘in India’ deserve to be read in and considered present in the construction of Section 54 of the Act from the very beginning of the Income Tax Act with regard to taxation of Non-Residents.

8.7 The Revenue has again cited the case of K.P. Varghese v. ITO[1970] 77 ITR 719 (Ker.), wherein the Hon’ble Supreme Court observed that we must not adopt a strictly literal interpretation of a statute but we must construe its language having 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.

8.8 The case of Novopan India Ltd. (supra) has been cited to say that in case of ambiguity, a taxing statute should be construed in favour of the assessee, assuming that the said principle is good and sound, does not apply to the construction of an exception or an exempting provision; they have to be construed strictly. This view was reaffirmed in Essar Oil (supra).

8.9 The Revenue submits that in the instant case, when there is a conflict between two or more statutes, or two or more parts of a statute, then the Rule of Harmonious Construction needs to be adopted, ie. every Statute has a purpose and intent as per law and should be read as a whole. This Rule of Harmonious Construction is the thumb rule to interpretation of any Statute.

8.10 With reference to the Applicant’s stand that not following the decision in the case of Leena Jugal Kishore v. Asstt. CIT[2016] 72 taxmann.com 185/392 ITR 18 (Guj.), would amount to judicial indiscipline, and with reference to the decision of Hon’ble Supreme Court in the case of Union of India v. Kamakshi Corpn. Ltd. AIR 1992 SC 711 , it is submitted that the issue involved in the cited decision is entirely different. In the decision cited supra, the Subordinate Authority had defied the Orders of the Appellate Authority in case of the same assessee for the same year which can neither be permitted as per the principles of Interpretation of the Statute nor as per the Applicable Law.

8.11 The Revenue has also argued that sections 54 and 54F are not pari-materia for the following reasons:

8.11.1 Section 54 was brought into the Income Tax Act 1961 from the 1922 Act. The Roll Over benefit for transfer of one house property and application of the long term capital gain to another house property was provided, and were included in Section 12B of the IT Act. This corresponded to Section 56 of the 1961 Act which after subsequent Amendments got renumbered to Section 54 of the IT Act. The provisions of the Section 54F were introduced into the IT Act in 1982, with the intention, of encouraging house construction as provided in the explanation to Finance Act 1982.

8.11.2 The intention of section 54 was to alleviate the hardship of the tax payer so that they could replace the house properties for self occupation as and when required, as can be construed from the Memorandum explaining provisions of the Finance Act 1982. The intention of the section 54F was to encourage house construction.

8.11.3 The benefit of provisions of Section 54 is applicable upon the LTCG arising upon the sale of residential house property.The benefit of provisions of Section 54F is applicable upon the LTCG arising upon the sale of Capital Asset other than residential house property. (This is the only similarity).

8.11.4 In section 54, there is no conditionality for allowing of the benefit with regard to the number of houses owned by the assessee post 1982. Section 54F has the conditionality of ownership of only one additional house property.

8.11.5 In section 54, the Roll Over of the LTCG is upon acquisition of the New Asset which should be residential house property. In 54F the Roll Over of the LTCG is upon acquisition of the New Asset which should be residential house property.

8.11.6 In section 54, the Roll Over benefit is allowable upon the application into the New Asset of the LTCG arising on transfer of the original asset. In 54F the Roll Over benefit is allowable upon the application into the New Assetof the net consideration arising on transfer of the original asset.

8.11.7 In section 54, Roll Over benefit is withdrawn if the New Assessee transfers the asset within a period of three years of its acquisition. In 54F, Roll Over benefit is withdrawn if the assessee acquires or constructs within a period of two/three years as the case may be, another residential house property.

8.11.8 In section 54, the withdrawal of Roll Over benefit is by way of charging of Capital Gains on the New Asset and for this purpose, while computing the Capital Gains, reduction of the Roll Over benefit so availed from the cost of acquisition of the New Asset is allowed. In section 54F the withdrawal of the Roll Over benefit is by way of charging of Capital Gains to the extent the net consideration was applied to the New Asset.

Thus, it can be seen that the provisions of the Section 54 are materially different in all aspects-intention, conditions for application of the benefit, conditions for withdrawal of Roll Over benefit and the methodology of withdrawal of allowing and the Roll Over benefits.

8.12 The Revenue submits that another important reason for the Applicant’s case not being covered by the decision of Hon’ble Gujarat High Court cited Supra is that the submissions made during these proceedings were not made before the Hon’ble Gujarat High Court. Nor did these facts formthe basis of the decision and that decision in Leena J Shah was based on different set of arguments, and as such, the same is not applicable to the case of the Applicant. It is stated that the aspects of the charging Sections of the Act to be read conjointly with the provisions of Section 5(2) of the Act in the case of a Non Resident were not presented before Higher Judicial Authorities and have not been considered in the decisions referred to by the Ld. AR of the Applicant.

8.13 The decision of the Hon’ble Supreme Court in the case of Rameshwar Lal Sanwarmal v. CIT AIR 1980 SC 372 has been cited to say that while the Hon’ble Supreme Court in the case of the assessee had given a decision favourable to the Revenue for an earlier assessment year, for a subsequent assessment year the decision has been given against the Revenue following the subsequent decision of the Supreme Court in another case.

9. The Applicant in his Rejoinder submitted that the contention of the Learned DR regarding reading the words “in India” into the section prior to amendment is wholly misplaced as this argument was considered by the Hon’ble High Court of Gujarat in case of Leena J. Shah(Supra) and rejected. This issue has also been considered by various tribunals and have been rejected on the ground that the language prior to amendment was clear and unambiguous not requiring reading into what was not there.

9.1 Regarding the sections 54 and 54F the Applicant submitted that the case of Gujarat High Court in Leena J Shah, though u/s54F is squarely applicable for the reason that the provisions of section 54F and Section 54 are pari-materia as in both the sections deduction is allowed to assessee upon reinvesting in the purchase of residential property within the stipulated period. Further, the Applicant, in support of his contention stated that Section 54F is pari-materia with Section 54 and relied on excerpts of decisions in the following cases: Nishant Lalit Jadhav (supra); Vinay Mishra (supra); CIT v. Ravinder Kumar Arora[2012] 342 ITR 38/203 Taxman 289/15 taxmann.com 307 (Delhi); CIT v. Kamal Wahal[2013] 30 taxmann.com 34/214 Taxman 287/351 ITR 4 (Delhi).

9.2 On the issue that the section was unworkable for the reason that Revenue could not be aware of sale of new asset within 3 years, he submitted that the law mandates and places an obligation on all assessees, irrespective of residential status, to truthfully file their Return of Income and disclose all facts. The Income Tax Act, 1961 assumes the power to tax the Income of a non resident, it also allows such a person all the benefits that flow from the provisions of the Act unless, specifically prohibited. Provision of Section 54 is applicable to all assessees whether Resident in India or Non- Resident. Merely because the AO has no control, though he has jurisdiction over the assessee, the benefit of the provisions of section 54 cannot be denied. It is also relevant to State that in the case of Applicant though more than 3 years have elapsed since the new asset was acquired, the same till date has not been sold.

9.3 The Applicant contended that the language of Section 54/54F of the Income-tax Act was clear and unambiguous prior to the amendment as held in the case of Leena J Shah by the Hon’ble Gujarat High Court, mentioned above. When the language is plain, unambiguous and admits of only one meaning no question of construction or interpretation arises, and the Act speaks for itself. He relied on various decisions as under: Institute of Chartered Accountant of India v. Price Ware-House [1997] 90 Comp. Case 113 (SC); CIT v. Vegetable Products Ltd.[1973] 88 ITR 192 (SC); Smt. Tarulata Shyam v. CIT[1977] 108 ITR 345 (SC). And if there qwas any ambiguity, the same has been put to rest by the Gujarat High Court.

9.4 The Applicant stated that in accordance with the scheme of Act, Section 4 & 5 of the Act are the charging sections which determine the scope of total income of the assessee. Once a transaction is undertaken by the assessee which is covered under the scope of total income in accordance with section 5 of the Act, the income will be computed under various heads of Income u/s 14 of the Act. In the applicant’s case, the gain on sale of a residential property will be treated as income as per section 5 of the Act. But the manner in which the income will be computed has been given in Chapter IV of the Act, wherein there is no restriction that the reinvestment in residential house is to be made in India.

10. We have heard both the Applicant and the Revenue, and also considered the provisions of law attracted in this case and the cases cited.

10.1 The applicant has purchased a residential house in London out of the capital gain on sale of the inherited property in India, within two years from the date of sale and the capital gains. We find that there was no condition mentioned in 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”. It is only after the amendment to section 54 of the Income-tax Act by the Finance(No. 2) Act, 2014, which came into effect with effect from 1.4.2015, and was made applicable from the Assessment Year 2015-16, that the assessee was required to 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 54 of the Income-tax Act before its amendment by the Finance (No. 2) Act, 2014 it appears that there was no restriction that the assessee should make his investment within India. The only condition mentioned in the Act was that the assessee should invest in a residential house.

10.2 Even as these proceedings were pending, the Hon’ble Gujarat High Court decided a matter in the case of Leena Jugalkishore Shah (Supra), on a similar issue, though this is disputed by Revenue, in favour of the assessee, and the Applicant has sought to take support from that case and to claim that prior to the aforesaid amendment, there was no requirement of making the investment in India to take the benefit u/s 54, and that being so he had fulfilled all the requirements of the Act and was entitled to the deduction.

10.3 Since the main plank of the Applicant’s argument is based on the decision of the Hon’ble High Court of Gujarat in the case of Leena Jugalkishore Shah, let us first deal with the Revenue’s objection that the facts of that case were different, in that that case dealt with the provisions of section 54F, whereas in the Applicant’s case the provisions of section 54 were attracted and that these two provisions were not pari-materia.

10.3.1 The Revenue has pointed out various distinguishing features between the two provisions, starting from the purpose of introduction being different, in one being to alleviate hardship of tax payers, and in the other to promote housing; about the number of houses owned; in the application of the roll over benefit; the period of withdrawal of the benefit; and in the method of computation while withdrawing the roll over benefit. However, it is seen that Revenue accepts that one issue that is common to both the provisions is that the roll over benefit is applicable on long term capital gains arising from the sale of a capital asset and investment in a residential house. To us that is indeed the key issue in this case, and the language of the two provisions with regard to this are similar, and which has been squarely dealt with by the Hon’ble Gujarat High Court, namely whether the benefit would be available if such investment is made outside India. In fact we find that both these provisions have been referred to by both the sides before the Hon’ble High Courtin this case, and were very much within its purview. The thrust of the whole decision is on this issue itself. Even when the amendment of 2014 was discussed and the Explanatory notes referred to, both the sections 54 and 54F have been considered together by the Hon’ble High Court. Such was also the finding of the ITAT, Mumbai Bench in the case of Nishant Lalit Jadhav, cited by the Applicant, wherein the finding was that the two sections 54 and 54F were pari materia. On this issue, therefore, we are of the view that as far as the issue raised before us by the Applicant is concerned, the decision cited by it was as much applicable to section 54, as to section 54F.

10.4 Before proceeding further, it may be mentioned that the case of Leena Jugalkishore Shah cited by the Applicant is the only case decided by a High Court on this issue and which, we understand, has not been challenged further. It has therefore attained finality.

10.5 Coming to the other objections taken by the Revenue, it has been contended that since the Applicant has, in the question raised before the Authority, referred to the “Deduction under section 54”, its application deserves to be rejected since this is not a section for granting any deduction or exemption but is rather a charging section. While that is so, we do not agree. The terms benefit, deduction, exemption have been loosely used, in fact in several decisions, to denote the meaning “capital gains not to be charged”. Even while bringing about the amendment, through the Finance Act 2014, the words used were :

“20. Capital Gains exemption in the case of investment in a residential house property”. Hence, due to this usage alone the real issue cannot be kept aside, or the Application rejected.

10.6 The Revenue has vehemently argued that the words “in India” should be read into the relevant sections 4 and 5, as also sections 45 and 54. A detailed analysis has been made by the Ld CIT (DR), of the intent of legislature, and the reasons why the these words, when read into the relevant provisions alone can make the provisions workable, in the manner intended to. It is stated that the words “in India” could not be mentioned so as to keep them aligned to the main charging section, ie. Section 4, where the word’India’ does not appear.

10.6.1 We find that this issue that the words “in India” should be read into the charging sections has also been considered by the Hon’ble Gujarat High Court in the Leena Jugalkishore Shah case. It is possible that every argument taken now by the Revenue may not have been taken by either side before the High Court, or in such detail, but nonetheless, the decision is exactly on the point that we cannot read into the Act what was not written therein, before the amendment of 2014. Also, since the issue involved is a legal one and the law as it stood then has been interpreted in this decision, and not on facts, we are unable to find any ground for distinguishing the same from the case in hand.

10.6.2 It is also seen that this decision was reached after examining the arguments that, at the relevant time, the Act did not mention the words “in India”, such as is mentioned in the Exemption provisions for charitable trusts in section 11 of the Act, with regard to investment and application of income for charity. The intent of legislature in not only introducing the provisions of section 54 initially, ie. the un-amended section, as also the reasons for the amendment of 2014, as contained in the Explanatory Notes thereto, were also before the High Court when it considered and decided this matter in favour of the assessee. The High Court’s refusal to accept that the words “in India” should be read into the charging sections cannot be ignored as being on distinguishable, incomplete or erroneous facts. It cannot be assumed that in giving this finding, the High Court would not have been aware of the construction of the charging sections, especially with regard to capital gains.

After a detailed discussion, the Hon’ble High Court held as under:

“Moreover, when the language of the taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt the interpretation that favours the assessee. Section 54F of the Act before its amendment was clear that the assessee should invest in a residential house. The language of the 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 opinion that benefit of section 54F before its amendment can be extended to a residential house purchased outside India.”

We have already stated that the provisions of section 54 and 54F are pari material, in that both relate to the eligibility of a benefit on account of investment in house property in or outside India. The above decision is therefore squarely applicable to the facts of the Applicant’s case.

10.7 As a corollary to the above is the issue as to whether the amendment made in 2014 would have retrospective effect or prospective. This issue was also considered by the honourable High Court in the above case, and it was held that:

“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 assessee should restrict her investment within India or outside India. The only condition was that the assessee should invest in a residential house………… . When the section 54F of the Income-tax Act was clear and unambiguous, there is no scope for importing into the statute the words which are not there. Such importation would be not to construe but to amend the statute. If there is any defect in the Act, it can be remedied only by the legislation and not by judicial interpretation.”

As this issue has also been squarely dealt with by the High Court, Revenue’s argument that the amendment made in 2014 was only clarificatory in nature and hence had retrospective effect cannot be accepted.

10.8 The Revenue has also submitted that if the investment was allowed to be made outside India, the section would become unworkable. We are unable to agree. Firstly, this is a situation that will depend on the facts of each case, and this Ruling is given on the facts of the instant case only. In the Applicant’s case this discussion is academic, since he has a PAN, is assessed to tax and has been holding the property for more than 3 years. In his case recourse was taken to section 148 of the Act, and the Applicant is being assessed to tax and has made a claim of refund. This demonstrates that the provision is workable. Both residents and non-residents are filing returns of Income in India, wherein the incomes are disclosed and benefits claimed. For the reason that there may be some noncompliant assessees, the taxability of and the benefits under the Act cannot be taken away. Whether an assessee is resident or non-resident, he is obliged to make a full and true disclosure of his total income. The income in the present cases arises under the Income-tax Act, 1961, and is chargeable to tax under sections 4 and 5, read with sections 45 and 54. Any income arising under the Act even under the roll over provision, would be chargeable to tax in India since the benefit is provided by the Act in India. Once, the Hon’ble High Court has held in the Leena J Shah case that the provision, as existed prior to the amendment, is applicable for investments outside India also, any such situation as apprehended by the Revenue cannot have the effect of discarding the provision as a whole.

10.9 The Revenue has also submitted that if the provisions of the Act are ambiguous, the same should be construed in favour of the assessee, is a principal not applicable to the construction of an exempting provision, but rather should be construed strictly, as held in the case of Essar Oil. (supra) Since we are in agreement with the decision in the case of Leena Jugalkishore Shah, wherein it is held that there was no ambiguity in the provisions contained in section 54/54F, this argument given by the Revenue fails. Even otherwise, the Revenue has argued that sections 45 and 54 of the Act are not sections for granting any exemption or deduction, but are rather charging sections, and hence the Revenue’s argument in any case cannot be accepted.

10.10 As regards the Revenue’ s plea made with the help of various cases on the construction and harmonious interpretation of the statute, we have to again say that this issue also was adequately considered by the honourable High Court and no adverse view was taken since it did not find any ambiguity in the provisions of the Act under consideration, prior to its amendment.

10.11 The Revenue has mentioned the case of Rameshwarlal Sanwarmal to state that a case can be reviewed and a different conclusion reached, and that an incorrect decision need not be continued to be followed if another correct decision has been given in the intervening period. In the instant case we find that, firstly, the only decision on the issue decided by any High Court in the country is the one cited by the applicant, namely that of Leena Jugalkishore Shah, and with this case, any ambiguity on the subject came to an end and this case has attained finality. There is no other decision of any High Court or the Hon’ble Apex Court, that could be considered for reviewing the findings of the above case. If at all, it could only be another High Court or the Hon’ble Apex Court, that could consider and give a different decision on the same facts and provisions of law.

10.12 As we find that the provisions of sections 54 and 54F are pari material, and that the decision of the Gujarat Hight Court was applicable to the facts of the case in hand, we find no reason to disagree with the same or distinguish it on facts and give a different opinion in the form of a Ruling. In the case of Kamalakshi Finance Corpn. Ltd. (supra) the Hon’ble Supreme Court held that:

“The principles of judicial discipline require that the order of the higher appellate authorities be followed unreservedly by the subordinate authorities. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of tax laws.”

10.12.1 Further, in CIT v. Smt. Godavari Devi Saraf[1978] 113 ITR 589 (Bom.), the Hon’ble HC held that until contrary decision is given by any other competent High Court, which is binding on a Tribunal in the relevant State, it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land. This means that once a decision is given by any of the High Courts in the country and there is no contrary decision by any other HC on the same issue then such decision of HC will be binding on all the administrative authorities and Tribunals throughout India.In Jain Exports v. UOI [1998] 3 SCC 579, it was laid down that in a tier system, decision of higher authorities are binding on lower authorities and quasi judicial Tribunals are also bound by this discipline.

10.12.2 In this view of the matter, we would respectfully follow the decision of the Gujarat High Court in Leena Jugalkishore Shah and rule that the Applicant was entitled to the benefit provided by section 54, on account of his investment in a residential house in London, out of the capital gains arisen in India.

11. Coming to question no. 2, we find that with the decision in the case of Leena Jugalkishore Shah as delivered by the Hon’ble Gujarat High Court, this question becomes redundant since the orders of different ITATs stand superseded to the extent of common issues comprised therein.

12. Question no. 3 relates to valuation/computation of the cost of acquisition in the hands of the Applicant, for determining the method for computing Long term capital gains. We do not to get into the details of the valuation done by the Applicant through an accountant firm, or the correctness of the figures therein. This examination will be done by the Assessing Officer. We shall only deal with the provisions in the act that would govern such computation.

12.1 The Applicant states that in the instant case, the capital asset in question was originally acquired by the previous owner (father) on 24.04.1971 and the same was acquired by the assessee under a Will dated 30.01.1985, without incurring any cost. The assessee sold the said capital asset on 29.04.2011. In view of Explanation 1(i)(b) to section 2(42A) which provides that in determining the period for which any asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner shall be included, the assessee is deemed to have held theasset as a long term capital asset and, accordingly, liable for long term capital gains tax. Thus, by applying the deeming provision contained in the Explanation 1(i)(b) to section 2(42A) of the Act, the assessee is deemed to have held the asset from 24.04.1971 to 29.01.2011 (by including the period for which the said asset was held by the previous owner) and, accordingly, held liable for long term capital gains tax.

12.2 Section 49(1)(ii) provides that in the case of an assessee acquiring an asset under a gift or will, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. Benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gain tax on the “real” or actual ‘gain’ and not on the increase in the capital value of the property due to inflation. This is the object or purpose in allowing benefit of indexed cost of improvement, even if the improvement was by the previous owner in cases covered by Section 49. Accordingly the applicant will be allowed the benefit of indexation to the fair market value of the asset on 01.04.1981 and the cost of improvement incurred by the applicant. However, the exact computation of Capital Gains and valuation would have to be examined by the Assessing Officer, and is not for this Authority to go into.

13. In conclusion, the questions referred to us for our Ruling, are answered as under:

Question no. 1:Yes. The applicant would be eligible for the benefit available under the provisions of section 54 of the Act, on utilisation of and to the extent of the amount reinvested in residential property in London.

Question no. 2: Not required to be adjudicated.

Question no. 3: The period of holding will be determined from the period from which property was held by the applicant’s father. Further the applicant will be allowed the benefit of indexation to the fair market value of the asset on 01.04.1981 and the cost of improvement incurred by the applicant. However, the Assessing Officer would verify the correctness of the valuation furnished by the Applicant with his application, as also all material figures required for computing the taxable capital gains in the hands of the Applicant.

[Citation : 401 ITR 129]