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October 22, 2020

Exemption u/s 54F for investment in house property outside India is available if the property was purchased before 01.04.2015

by shivam jaiswal in Income Tax

Exemption u/s 54F for investment in house property outside India is available if the property was purchased before 01.04.2015

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

What is Section 54F of the Income Tax Act?

The income tax law provides for certain situations where such capital gains will not be subject to tax. Section 54F provides one such exemption. In the case of an assessee being an individual or a HUF, if the capital gain arises from the transfer of any long-term capital asset, not being a residential house (original asset) and the assessee has within a period of 1 year before or 2 years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, one residential house in India (new asset), the capital gain shall be dealt with in accordance with the following provisions of this section:

  • if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45
  • if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45

Let us refer to the case of CIT Vs. Vinay Mishra (Karnataka High Court) where the issue under consideration is whether the assessee is entitled to claim exemption u/s 54F of the Income Tax Act in respect of investment made in the house property in USA?

Facts of the Case:

  • Assessee was a Director of M/s Marketics Technologies (India) Pvt Ltd Bangalore.
  • The Assessing Officer (AO) denied the exemption with regard to investment made in residential property holding that exemption is not available for investment in property made outside India.
  • Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], who held that investment should be made in India for claiming the benefit of exemption under Section 54(1).
  • The appeal was dismissed by CIT(A).
  • The assessee thereupon filed an appeal before Income Tax Appellate Tribunal (ITAT).
  • The ITAT held that the assessee entitled to exemption under Section 54F and allowed the appeal preferred by the assessee.
  • Aggrieved with the order of ITAT, Revenue filed an appeal before the High Court (HC).

Submissions before the High Court (HC) by Revenue

  • Revenue submitted that the subject matter of the appeal was prior to amendment by Finance Act, 2014 w.e.f. 01.04.2015.
  • It was submitted that the assessee was not entitled to exemption as the assessee had not fulfilled the condition prescribed under Section 54, as he had not purchased the house in India.
  • It was also urged that if there was an ambiguity in an exemption provision, like Section 54, the benefit should go in favour of the revenue and not in favour of the assessee.
  • The amendment incorporated by Finance Act, 2014 w.e.f. 01.04.2015 was clarificatory in nature.

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Submissions before the High Court (HC) by Assessee

  • In the matter of interpretation of a charging section of a taxation statute, strict rule of interpretation was mandatory and if there were two views possible in the matter of interpretation of charging section, the one favourable to the assessee needs to be applied.
  • Amendment to Section 54F made by Finance Act, 2014 w.e.f. 01.04.2015 was prospective in nature and hence exemption under Section 54F should be made available to the assessee.

Observations of the High Court (HC) on amendment of Section 54F by the Finance Act, 2014

  • The dispute pertained to AY 2009-10 which was prior to amendment of Section 54F by the Finance Act, 2014 w.e.f. 01.04.2015.
  • The issue, which arose for consideration in this appeal was whether an assessee was required to purchase a residential house within India for the purposes of claiming exemption under Section 54F.
  • Prior to 01.04.2015, as per Section 54F(1), where the capital gain arises from the transfer of any long-term capital asset, not being a residential house, and the assessee has, within 1 year before or 2 years after the date on which the transfer took place purchased, or has within 3 years after that date constructed, a residential house, the capital gain shall be dealt with in accordance with the provisions of this section.
  • Post 01.04.2015, as per Section 54F(1), where the capital gain arises from the transfer of any long-term capital asset, not being a residential house and the assessee has within 1 year before or 2 years after the date on which the transfer took place purchased, or has within 3 years after that date constructed, one residential house in India, the capital gain shall be dealt within in accordance with the following provisions of this section.
  • Thus, it is evident, that requirement of construction of a residential house in India in order to claim exemption under Section 54F(1)  was incorporated w.e.f. 01.04.2015.

Observations of the High Court (HC) on earlier cases

  • The Supreme Court in Govind Das vs. ITO (1976) held that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure.
  • The general rule as stated by Halsbury in Vol. 36 of the Laws of England (3rd Edition) and reiterated in several decisions was that all statutes other than those which were merely declaratory or which related only to matters of procedure or of evidence are prima facie prospective and retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment.
  • If the enactment was expressed in language which was fairly capable of either interpretation, it should be construed as prospective only.
  • The aforesaid principle was quoted with approval by the Supreme Court in ‘Vatika Township P. Ltd.’, supra.
  • The CBDT Circular No.1/2015 dated 21.01.2015 stated that the amendments took effect from 1st April, 2015 and will accordingly apply in relation to Assessment year 2015-16 and subsequent Assessment years.

Conclusion by the High Court (HC)

  • Thus, it was undeniable that residential property, for which investment was made had to be situated in India for the purpose of claiming exemption under Section 54F from Assessment year 2015-16 only and not prior to that period.
  • In the instant case, the investment in a residential house was made in USA prior to 01.04.2015, whereas, the requirement of making an investment in a residential house, which was incorporated by way of amendment, came into force w.e.f. 01.04.2015.
  • In the light of aforesaid well settled legal principles as well as the memorandum of objects of Finance Act, 2014, which clearly provided that amendments would take effect from 01.04.2015 and will apply to Assessment year 2015-16 onwards as well as the CBDT’s Circular dated 21.01.2015, it was evident that amendment incorporated in Section 54F(1) of the Act is prospective in nature.

Therefore, assessee was entitled to claim exemption u/s 54F of the Income Tax Act in respect of investment made in the house property in USA as the property was purchased before 01.04.2015. If the property was purchased outside India after 01.04.2015, then the said exemption would not be available.

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