Section 24 of General Clause Act, 1897- Applicable even when Repeal is by Implication: SC

M/s. Fibre Boards (P) Ltd. Bangalore Vs. CIT (Supreme Court), Civil Appeal Nos. 5525-5526 of 2005,  Dated- 11^th August 2015

BACKGROUND

Prior to 01.04.1988

Section 280ZA of the Income Tax Act, 1961 (‘Act’) provided that any company owning an industrial undertaking situated in an urban area, is entitled for a tax credit certificate with reference to the amount of the tax payable on capital gains arising from the transfer of its machinery, plant, etc., to any other area.

Section 280Y of the Act provided definition for the Chapter XII-B of the Act. Section 280Y(d) of the Act provided the definition of the term ‘urban area’ which means any area which the Central Government by general or special order declare to be an urban area for the purposes of Chapter XII-B of the Act.

After 01.04.1988

With effect from 01.04.1988, Section 280ZA was omitted and Section 54G was inserted. However, the provisions of Section 280Y of the Act were repealed in the year 1990. Section 54G of the Act read as under:

“SECTION 54G. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situate in an urban area, effected in the course of, or in consequence of, the shifting of such industrial undertaking (hereafter in this section referred to as the original asset) to any area (other than an urban area) and the assessee has within a period of one year before or three years after the date on which the transfer took place,—

(a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted;

(b) acquired building or land or constructed building for the purposes of his business in the said area;

(c) shifted the original asset and transferred the establishment of such undertaking to such area; and

(d) incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; 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 being purchased, acquired, constructed or transferred, as the case may be, the cost shall be nil; or

(ii) if the amount of the 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 being purchased, acquired, constructed or transferred, as the case may be, the cost shall be reduced by the amount of the capital gain.

Explanation.—In this sub-section, “urban area” means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section.

(2) The amount of capital gain which is not appropriated by the assessee towards the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for all or any of the purposes aforesaid 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 accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for all or any of the purposes aforesaid together with the amount, so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within the period specified in that sub-section, then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.”

Relevant Provision of the General Clauses Act, 1897

Section 24 of the General Clauses Act, 1897 is applicable in cases where one enactment is repealed and re-enacted. In the present case, w.e.f. 01.04.1988 Section 280ZA of the Act was omitted and Section 54G of the Act was enacted. Section 24 of the General Clauses Act, 1897 reads as under:

“24. Continuation of orders, etc., issued under enactments repealed and re-enacted. —Where any Central Act or Regulation, is, after the commencement of this Act, repealed and re-enacted with or without modification, then, unless it is otherwise expressly provided any appointment notification, order, scheme, rule, form or bye-law, made or issued under the repealed Act or Regulation, shall, so far as it is not inconsistent with the provisions re-enacted, continue in force, and be deemed to have been made or issued under the provisions so re-enacted, unless and until it is superseded by any appointment notification, order, scheme, rule, form or bye-law, made or issued under the provisions so re-enacted and when any Central Act or Regulation, which, by a notification under section 5 or 5A of the Scheduled Districts Act, 1874, or any like law, has been extended to any local area, has, by a subsequent notification, been withdrawn from the re-extended to such area or any part thereof, the provisions of such Act or Regulation shall be deemed to have been repealed and re-enacted in such area or part within the meaning of this section.” 

FACTS 

M/s Fibre Boards (P) Ltd. (hereinafter referred to as the ‘Appellant’) sold land, building, plant and machinery etc. of its Industrial unit located in Thane for INR 1,20,00,000/-. The Appellant earned INR 1,08,33,044/- as Capital Gain from the said transaction.

Thane was declared as an urban area, vide Notification dated 22.09.1967, under Section 280Y(d) of the Act.

Appellant intended to shift its industrial undertaking from an urban area to a non-urban area and paid advances of INR 1,11,42,973/- for purchase of land, plant and machinery, construction of factory building etc.

Accordingly, the Appellant claimed exemption under Section 54G of the Act on the entire Capital Gain earned, in view of the advances so made being more than the Capital Gain itself.

Order of the Assessing Officer

However, the Assessing Officer denied the exemption to the Appellant on the Capital Gains earned from the transaction for the following reasons:

• the Central Government has not issued any general or special order declaring any area as urban or non-urban. Therefore, it cannot be accepted that the Appellant has shifted the undertaking to a non-urban area;
• Advances do not amount utilization of capital gains for acquiring the assets. Therefore, the Appellant is not entitled for deduction under Section 54G of the Act.

Commissioner (Appeals)

The Appellant, aggrieved with the order of the Assessing Officer, challenged the same before the Commissioner (Appeals). However, the Commissioner (Appeals) upheld the order of the Assessing Officer.

Income Tax Appellate Tribunal (‘ITAT’)

The Appellant, aggrieved with the order of the Commissioner (Appeals), challenged the same before the ITAT.   The ITAT allowed the Appellant’s appeal for the reason that even an agreement to purchase is good enough and that the explanation to Section 54G of the Act being declaratory in nature would be retrospective.

High Court of Karnataka

The Revenue Department challenged the order of the ITAT before the Hon’ble High Court of Karnataka. The Hon’ble High Court over turned the decision of the ITAT for the following reasons:

• the Appellant did not satisfy the basic condition necessary to attract Section 54G, of the Act namely that a transfer had to be made from an urban area to a non-urban area because the notification declaring Thane to be an urban area stood repealed with the repeal of the Section under which it was made;
• the expression “purchase” in Section 54G of the Act cannot be equated with the expression “towards purchase”

Being aggrieved with the above decision of the Hon’ble High Court, the Appellant filed an appeal before the Hon’ble Supreme Court.

ISSUES BEFORE THE SUPREME COURT

1. Whether Section 24 of the General Clauses Act, 1897 will be applicable to the present case?

2. Whether advance paid for acquiring land, plant and machinery, construction of building etc., can be considered for exemption under Section 54G of the Act?

CONTENTIONS OF THE APPELLANT 

The Appellant contended that Section 54G of the Act was inserted on 1.4.1988 at the same time that Section 280ZA of the Act was omitted. Thus, Section 280ZA of the Act is repealed and re-enacted in the form of Section 54G of the Act. Therefore, Section 24 of the General Clauses Act, 1897 would be attracted to the facts of this case. That being the case, the notification dated 22.09.1967 declaring Thane as an urban area shall be deemed to be issued under Section 54G of the Act and would ensure to the benefit of the Appellant for the purpose of claiming exemption from Capital Gain tax under Section 54G of the Act.

Further, in order to avail the benefit of Section 54G of the Act all that the assessee has to do in the assessment year in question is to “utilize” the amount of capital gain for the purposes to purchase new plant and machinery, and acquire land or construct building before the date of furnishing the return of income under Section 139 of the Act.

CONTENTIONS OF THE REVENUE 

The Revenue contended that Section 24 of the General Clauses Act, 1897 had no application to the facts of the present case as it only applied to `repeals’ and not ‘omissions’. In support of the said submissions, the reliance was placed upon the judgments of the Hon’ble Supreme Court in the case of Rayala Corporation (P) Ltd. and M.R. Pratap v. Director of Enforcement, New Delhi, (1969) 2 SCC 412 and Kolhapur Canesugar Works Ltd. & Anr. v. Union of India & Ors., (2000) 2 SCC 536.

Further, it was contended that Section 24 of the General Clauses Act, 1897 saved rights that were given by subordinate legislation, and as the notification dated 22.9.1967 did not by itself confer any right on the Appellant, Section 24 of the General Clauses Act, 1897 would not be attracted.

At last, it was contended that the conditions precedent for the applicability of Section 54G of the Act were not met as no purchase of plant and machinery and/or acquisition of land or building or construction of building had actually taken place in the assessment year in question.

DISCUSSION AND FINDINGS

Section 24 of the General Clauses Act, 1897 is applicable only in such cases where one enactment is repealed and re-enacted. In the present case, the applicability of Section 24 of the General Clauses Act, 1987 came into issue due the Notification dated 22.09.1967 which was issued under Section 280Y(d) of the Act, declaring Thane as an urban area. However, w.e.f. 01.04.1988 Section 280ZA was omitted and Section 54G was enacted whereas Section 280Y was repealed in the year 1990. So, the Supreme Court before deciding the applicability of Section 24 of the General Clauses Act, 1897 decided whether Section 54G of the Act can be considered as re-enactment of 280Y of the Act before it being actually repealed.

Repeal by Implication

The Supreme Court, referring to the Budget Speech, notes on clauses and memorandum explaining the Finance Bill of 1987, observed that the idea of omitting Section 280ZA of the Act and introducing on the same date Section 54G of the Act was to substitute the tax credit certificate scheme with the new scheme contained in Section 54G of the Act. Once Section 280ZA of the Act had been omitted, Section 280Y(d) of the Act would be practically dead as it was a definition Section defining “urban area” for the purpose of Section 280ZA of the Act only and had no independent existence.

Further, it was observed that the explanation to Section 54G(1) of the Act repeals by implication Section 280Y(d) of the Act as the explanation to Section 54G(1) of the Act introduces the very definition contained in Section 280Y(d) in the same terms and both the provisions are not expected to operate simultaneously.

The Supreme Court, referring to notes on clauses and the Memorandum of the Finance Bill, 1990, observed as under:

“15. From a reading of the notes on clauses and the Memorandum of the Finance Bill, 1990, it is clear that Section 280Y(d) which was omitted with effect from 1.4.1990 was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of Section 280ZA which had been omitted with effect from the very date that Section 54G was inserted, namely, 1.4.1988.”

In view of the observation, the Supreme Court concluded that therefore, the High Court has made an error in its decision by not referring to Section 24 of the General Clauses Act, 1897.

Applicability of Section 24 of the General Clauses Act

The Supreme Court, referring to its decisions in the case of Poonjabhai Vanmalidas v. Commissioner of Income Tax, Ahmedabad, 1992 Supp. (1) SCC 182 and State of Punjab v. Harnek Singh, (2002) 3 SCC 481, observed that the purpose of Section 24 of the General Clause Act, 1897 is to uninterruptedly continue the subordinate legislation that may be made under a Central Act that is repealed and re-enacted with or without modification.

The Supreme Court, referred to its decision in the case of Rayala Corporation (P) Ltd. (Supra) and Kolhapur Canesugar Works Ltd. (Supra) upon which reliance was placed by the Revenue to content that Section 24 of the General Clauses Act, 1897 is applicable to ‘repeal’ and not the ‘omission’.

The Court observed that both the decisions are not applicable and binding to the present case for the following reasons:

• In both the case the Court therein held that the Section 6 of the General Clause Act, 1897 is not applicable to that case and once it is found that Section 6 itself would not apply, it would be wholly superfluous to further state that on an interpretation of the word “repeal”, an “omission” would not be included.
• Absence of any reference to Section 6A of the General Clauses Act, 1897. In terms of Section 6A of the General Clauses Act, 1897, a repeal can be by way of an express omission and therefore, the word “repeal” in both Section 6 and Section 24 would, include repeals by express omission.
• The judgments did not have the benefit of the exposition of the law settled by this Court in the case of State of Orissa v. M.A. Tulloch & Co., (1964) 4 SCR 461 wherein it was held that even an implied repeal of a statue would fall within the expression “repeal” in Section 6 of the General Clauses Act. Referring to the said decision, the Supreme Court observed that obliteration of statue or its part would be covered by the expression “repeal” in Section 6 of the General Clauses Act, 1897.

At last, the Supreme Court referred to its decision in the case of CIT v. Venkateswara Hatcheries (P) Ltd., (1999) 3 SCC 632 wherein Section 24 of the General Clause Act, 1897 was applied when two section of the Act were repealed and re-enacted.

In view of the above observations the court held as under:

“35. For all the aforesaid reasons, we are therefore of the view that on omission of Section 280ZA and its re-enactment with modification in Section 54G, Section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of Section 54G.”

Exemption under Section 54G against Advance Payment

The Supreme Court referred to the provisions of Section 54G of the Act and observed that Section 54G(1) of the Act gives three years window to the assessee to purchase the new plant or machinery or acquire building or land. If any amount of Capital is not utilized in the Assessment Year in which the transfer took place, then such amount same is required to be deposited in terms of Section 54G(2) of the Act.

The Court observed that to avail of the exemption contained in the Section 54G of the Act the assessee is required to “utilize” the amount of Capital Gains towards the purchase and acquisition of new machinery or plant and building or land.

The Supreme Court, referring to the impugned order of the High Court, observed as under:

“38. We are of the view that the aforesaid construction of Section 54G would render nugatory a vital part of the said Section so far as the assessee is concerned. Under sub-section (1), the assessee is given a period of three years after the date on which the transfer takes place to purchase new machinery or plant and acquire building or land or construct building for the purpose of his business in the said area. If the High Court is right, the assessee has to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court has missed the key words “not utilized” in sub-section (2) which would show that it is enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building”

In view of the above observations the Supreme Court held that:

“38. …  the Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilization by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets.” 

ANALYSIS

This Judgment of the Supreme Court settled the law with respect to the applicability of Section 24 of the General Clauses Act, 1897 on the provisions which are repealed by implications. Further, the Supreme Court ruled that term ‘repeal’ in the Section 6 and Section 24 of the General Clauses Act, 1897 includes ‘omission’.

The Supreme Court also settled the law with respect to exemption available under Section 54G of the Act. The assessees can claim exemption under Section 54G of the Act to the extent of Capital Gains is utilized for making advance payment towards purchase of the new plant or machinery or acquire building or land.

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