V Swaminathan B.Sc., B.L., FCA

Implications of Sec 54 F – A Critical Study

PROLOGUE

The case law chosen for an analytical study of the subject is the reported Bom. HC Judgment in the case of Humayun Suleman Merchant vs. CCIT

This will go down, in the history of inconsistent court decisions ,  as one more instance, to illustrate that such inconsistency has alarmingly assumed the proportions of  a convention, rather than as an odd one.

2. The point of dispute relates to taxpayer’s entitlement to tax exemption as claimed under sec. 54F (of the IT Act), on the so- called ‘roll over investment’. This marks an instance being the latest in the long series of such disputes taken up for adjudication by courts in the recent past. Earlier, more or less a similar dispute that arose has been covered in a judgment of the Karnataka HC deciding the issue in taxpayer’s favor.

On the contrary, the Bom. HC judgment has turned out to be adverse; and the reasoning given has to be found in the paragraphs reproduced herein:

2.1.  (vii) The submission that the issue now stands concluded in favour of the Appellant by the decision of the Karnataka High Court in Commissioner of Income Tax Vs. K. Ramchandra Rao (2015) 277 CTR 0522 wherein an identical question came up for consideration and it was held that even where the assessee had not deposited the un-utilized Capital Gain in an account which was duly notified by the Central Government in terms of Section 54F(4) of the Act, the benefit of Section 54F(1) of the Act would still be available. The Court held that if the intention was not to retain the capital gains but was to invest it in construction of property within the period stipulated in Sub Section (1) of Section 54(F) of the Act then Section 54F(4) of the Act is not at all attracted. We are with respect unable to accept the reasoning adopted by Karnataka High Court in K. Ramchandra Rao (supra). The mandate of Section 54F(4) of the Act is clear that amount which has not been utilized in construction and/or purchase of property before filing the return of income, must necessarily be deposited in an account duly notified by the Central Government, so as to be exempted.

(viii) Further, Section 54F(4) of the Act specifically provides that the amounts which have not been invested either in purchase / construction of house have to be deposited in the specified accounts before the due date of filing of return of income under Section 139(1) of the Act. The aforesaid aspect it appears was not noticed by the Karnataka High Court. In any case, the entire basis of the decision of the Karnataka High Court in K. Ramchandra Rao (supra) is the intent of the parties. In interpreting a fiscal statute one must have regard to the strict letter of law and intent can never override the plain and unambiguous letter of the law. It is true that normally while construing an all India Statute like the Income Tax Act, we would not easily depart from a view taken by another High Court on an issue arising for our consideration. This on consideration of certainty and consistency in law. However, the view of the other High Courts are not binding upon us unlike a decision of the Apex Court or of Larger or a Co-ordinate Bench of this Court. Thus if on an examination of the decisions of the other High Court we are unable to accept the same, we are not bound to follow/accept the interpretation of the other High Courts leading to a particular conclusion. IN THIS CASE WE FIND THAT THE DECISION OF THE KARNATAKA HIGH COURT IN K. RAMCHANDRA RAO (SUPRA) WAS RENDERED SUB-SILENTIO I.E. NO ARGUMENT WAS MADE WITH REGARD TO THE REQUIREMENT OF DEPOSIT IN NOTIFIED BANK ACCOUNT IN TERMS OF SECTION 54F(4) OF THE ACT BEFORE THE DUE DATE AS PROVIDED IN SECTION 139(1) OF THE ACT. AS OBSERVED IN SALMOND’S JURISPRUDENCE 12TH EDITION : “THE RULE THAT A PRECEDENT SUB SILENTIO IS NOT AUTHORITATIVE GOES BACK AT LEAST TO 1661(M) WHEN COUNSEL SAID : ‘AN HUNDRED PRECEDENTS SUBSILENTIO ARE NOT MATERIAL’; AND TWISDEN J AGREED : ‘PRECEDENTS SUB-SILENTIO AND WITHOUT ARGUMENT ARE OF NO MOMENT’. THIS RULE HAS EVER SINCE BEEN FOLLOWED.”

The court’s related observations in another related paragraph read:

In interpreting a fiscal statute one must have regard to the strict letter of law and intent can never override the plain and unambiguous letter of the law. It is true that normally while construing an all India Statute like the Income Tax Act, we would not easily depart from a view taken by another High Court on an issue arising for our consideration. This on consideration of certainty and consistency in law. However, the view of the other High Courts are not binding upon us unlike a decision of the Apex Court or of Larger or a Co-ordinate Bench of this Court. Thus if on an examination of the decisions of the other High Court we are unable to accept the same, we are not bound to follow/accept the interpretation of the other High Courts leading to a particular conclusion.

2.2. It is thus seen that the view the court has taken is on the premise that ‘the letter’ (of the relevant enactment in sec 54F) is unambiguous hence leaves no scope for a second but contrary view.

OWN OBSERVATIONS /VIEWPOINTS

1. General

The propositions requiring to be principally addressed:

A) Not merely ‘the letter’ of any enactment but also the spirit of it ought not to be over sighted, if so warranted in a given case.

B)The letter of any enactment could, if at all ever,  be taken to be the only guiding factor, as divorced from ‘the spirit’, and a ‘safe bet’ so to say; but regard must be had to not just the enactment but also the larger setting in which that finds its place.

C)Any interpretation preferred must serve the purpose / object of the enactment; certainly, not to defeat.

Aside:

The principles of interpretation as enunciated by case law hence expected to be ideally followed may be summed up thus:

The Income-tax Act, 1961 (‘the Act’) embodying the law of income-tax is a comprehensive and complete code in itself. As such, anything done, or purported to be done, under the Act has to be necessarily in accordance with its general and/or special provisions. For ensuring that it is so, basically, one should have sufficient familiarity with the general scheme as well as the applicable special provisions of the Act; also, have a proper understanding and appreciation in the right perspective of the scheme and the provisions. As ruled by the Courts, the Act must be read as a whole; thereafter the same should be considered Chapter-by-Chapter, then section-by-section, and ultimately word-by-word. Further, the provisions should be so construed as to make a consistent enactment of the whole statute.

For a proper compliance, it is essential that the taxpayers should have knowledge, in the true sense of the term, of the law. And, for a proper implementation, it is all the more essential that the officers and authorities appointed/empowered under the Act should equip themselves with a thorough and intimate knowledge of/familiarity with the law, more so of the case law, so as to properly discharge their respective duties and responsibilities of implementation, enforcement and administration. For evaluating as to how far the concerned authorities are really committed or disposed to live up to such expectations of them as aforesaid, a close review of the eminently decided court cases should be of help as an eye-opener.

In dealing with any issue arising in a given case in regard to which a particular enactment (s) is /needs to be considered as of relevance, it is important to closely study and examine it in all its ramifications, so as to reach an understanding in the proper perspective. More importantly, in construing any provision, due regard must be had to the well settled and established principles and rules as enunciated by the case law, which are useful aids for understanding and/or interpretation of any enactment. As otherwise, the inevitable consequence would be chaos and confusion in the minds of one and all really concerned; so also, in the income-tax regime. To be precise, for ascertaining and coming to a conclusion with regard to the legal position on any issue/point of dispute, it is imperative to make an insightful study, in order to have, as far as possible, a clear understanding / reasonably good grasp of, – the basic scheme, as also the relevant provisions, of the Act; besides, of course, the host of case law, as also the Departmental circulars, should they have a direct relevance to and cover on all fours any given issue.

> Our people, like any other, fall into three segments – honest, dishonest, and basically not dishonest but the nature of whose response to the law is conditioned by the quality of the law. Our tax legislation ignores the first, is preoccupied with the second and alienates the third.

> In the matter of the nation’s economy and social welfare, by its very nature, the possibility of oneness in thoughts or views, or a uniform or unanimous conclusion, is a far cry, rather is almost extinct.

Nonetheless, for the particular cross section of the people, howsoever limited in number they are, but who have the will and time to spare for thoughts or deliberations on matters of general interest- to be precise, public or social interests in its literal sense, the above excerpts from the incisive thoughts shared by a towering legal luminary for the common good  may be found to make every sense and be of significant guidance all the time. Needless to add that, even in today’s scenario, most of them are bound to provide the requisite clues, positive or otherwise; in particular, for an intelligent appraisal of any one or set of given propositions.

II. Specific

To share own perspective:

In handing down the view adverse to the taxpayer, the HC is seen to have, in its wisdom, preferred to go by a very rigid reading and interpretation of ‘the letter’ of the law; as opposed to the liberal interpretation courts, including the SC, have often resorted to, in several earlier decided cases, going by rather also ‘the spirit’ of the admittedly beneficial enactments such as the one on hand.
Going by the line of reasoning, not without substance, as canvassed for, on previous occasions, in one’s conviction, all such related disputes need to be given a quietus, once for all, by appropriate amendments of the law, by plugging in the necessary correctives of such areas which have been giving rise to such controversies with no scope for resolution ever.

For a close study and sincere suggestion on the point why the scheme of the provisions of sec 54, 54 F, etc., require to be given a liberal interpretation having regard also to ‘the spirit’- ought not merely to ‘the letter ‘, – the critical /analytical study as personally attempted through certain published articles may be found useful; for instance, lately in (2014) 226 TAXMAN 143.

To Dilate

Extracts (selectively supplied):

(a) On 29th April, 1995, the appellant sold a plot of land in Mumbai for a consideration of Rs.85,33,250/-.

(b) On 16th July, 1996, the appellant entered into an agreement to purchase a flat for a consideration of Rs.69,60,000/-.
….

(e) On 4th November, 1996 the appellant filed his return of income for the Assessment year 1996-97. This was after the due date of filing the return of income.

(f) On 13th March, 2001, the Assessing Officer passed an Assessment Order under Section 143(3) read with Section 147 of the Act. The Assessment Order determined the net consideration at Rs.75.39 lakhs.

(g) Being aggrieved, the appellant-assessee filed an appeal to the Commissioner of Income Tax (Appeals) (CIT(A)). By order dated19th October, 2001, the CIT(A) did record the fact that the appellant had obtained possession of the new flat on 27th January, 1997. However, the order of the Assessing Officer dated 13th March, 2001 was not disturbed.

…….In interpreting a fiscal statute one must have regard to the strict letter of law and intent can never override the plain and unambiguous letter of the law. It is true that normally while construing an all India Statute like the Income Tax Act, we would not easily depart from a view taken by another High Court on an issue arising for our consideration. This on consideration of certainty and consistency in law. However, the view of the other High Courts are not binding upon us unlike a decision of the Apex Court or of Larger or a Co-ordinate Bench of this Court. Thus if on an examination of the decisions of the other High Court we are unable to accept the same, we are not bound to follow/accept the interpretation of the other High Courts leading to a particular conclusion.

Facts, etc., calling for a special Focus:

1. The relevant dates of chronological events, as per the text of the judgment, – see above

29th April    1995 – sale of (land) , the old asset

27th January 1997 – possession taken of flat, the new asset

Thus, the purchase has been made within the prescribed time limit of 2 years; hence the primary condition for tax exemption, as unequivocally provided in terms of sub-sec (1) of sec 54F has been satisfied.

2. The impugned assessment year is 1996-97 (relevant for the previous year in which the old asset was ‘transferred’ (sold)). However, if were to have been reckoned on the basis of the prescribed 2 year time limit for rollover investment, it is the assessment year1997-98 that would have been relevant.

These aspects do not seem to have been highlighted and pinpointed; hence not been gone into.

3. Notice u/s 143 (3) / sec 147 has been issued and assessment made for the assessment year 1996-97. While no mention has been made, it is obvious that taxpayer has not questioned the validity of the said assessment. May be, had the taxpayer done so, and challenged , the validity of the assessment made ,- for the assessment year 1996-97, instead of 1997-98,- would have been gone into. And consequently, the dispute could possibly have been considered and decided, differently, but in taxpayer’s favor.

For a better appreciation of such a proposition, attention may be invited to the already obtaining controversy but yet remaining to be resolved, as given publicity in public domain.

4, Last but not least, the implications of sec 155 have not even been touched upon or urged, as should have been done; hence not considered. This, however, calls for a critical study and incisive examination, for identifying any helpful points.

KEY Note (GREY areas):

However much tried, and in all seriousness, there could be experienced irresolute doubts/problems in understanding and reconciling the provisions of sec 54, sec 54 F, (so also the sub-sec (s)) on the one hand, and sec 155 , on the other. In one’s well-considered perspective, unless and until those provisions, – which prima facie require to be read , hence so read , as one composite scheme governing the exemption of CGT as intended, – make foolproof / complete sense, so as to render those being implemented with no hassle/hardship, whatsoever in all conceivable circumstances, the legislation cannot be made to work even by the judiciary made responsible for ‘interpretation’ of the enactment (s).

To Illustrate, –

Consider and attempt to reconcile the wording of the portion of the Proviso (i) to sub-section (4) of sec 54F, which reads: ..”shall be charged under sec 45 as income of THE PREVIOUS YEAR IN WHICH THE PERIOD OF THREE YEARS FROM THE DATE OF THE TRANSFER OF THE ORIGINAL ASSET EXPIRES; AND..”

Spot light:

Among the several other observations, on the grounds of which the court has persuaded itself to hold the point of issue against the taxpayer, the following require to be looked through:

“…….

As observed in Salmond’s Jurisprudence 12th Edition : “The rule that a precedent sub silentio is not authoritative goes back at least to 1661(m) when Counsel said : ‘An hundred precedents subsilentio are not material’; and Twisden J agreed : ‘precedents sub-silentio and without argument are of no moment’. This rule has ever since been followed.”
 ….

“……the decision of Karnataka High Court in K. Ramchandra Rao (supra) has been rendered sub-silentio. Therefore, we cannot place any reliance upon it to conclude the issue on the basis of that decision….”

<>The point of poser calling for a deep consideration is this:

Could the court have been urged to apply, as warranted in the context, the overriding principle of interpretation, – “Updating Construction”?

And, had it been so done, relying upon inter alia the two SC Judgments (in re. Podar and Sanjeev Lal) (cited in the published Article –226 TAXMAN (pg. 150, 151) , the issue could, as envisaged, have been decided in taxpayer’s favour, by the HC taking likewise a liberal view going by the spirit of the law.

In assisting the court to adjudicate, it appears, the pointed anomaly in the Proviso (i) to the sub-section (4) of sec 54F has not been addressed, hence not been made a note of and considered.

Besides, in one’s perspective, the issue has not been focused on from all angles. For thoughts shared, see the posted comments on the itatonline website.

As regards other angles not focused on, -albeit, in one’s conviction, are so essential, rather vital as to have influenced the adjudication by court in proper light:

A) Despite the mandate by law (as embodied in the sub-section (4)) of sec 54F, like in sec 54 and 54 EC) to take the route of a special deposit account – as may be noted, there are instances in which dispute has been settled by taking a liberal, nay pragmatic, view in favour of taxpayer by relaxing, and condoning the delay, etc., in compliance.

B) Pending suitable amendments of the law , and plugging in appropriate correctives, in the interests of justice and as a matter of judicial prudence, courts need to be urged to better, as far as possible, not disturb but follow the court decision, relied on, in one’s conviction rightly so, as Precedent; that is, stick to abide by the age-old doctrine of STARE DECISIS . This is an aspect which is noted to have been gone into, at some length, by the apex court in the leading case of Azadi  Bachao Andolan; and own viewpoints have been shared in published articles-ref. (2008)166 TAXMAN 72.

C) Besides, just as it happened in the instant case, strong reliance was placed by taxpayer on the earlier Kar HC Judgment,- more or less a similar issue but only with a slightly varying facts. Even so, the Bom HC has, in the instant case, rejected the taxpayer’s submissions, with certain observations (look up the Judgment).

Again, the HC has in its wisdom, done so, on the ground of its independent reasoning that compliance with the mandate of sec 54 F (4) is a must; and in the event of failure to do so, the consequence of dis-entitlement to tax exemption has to necessarily follow.

Obviously, in one’s personal conviction, addressing intelligently, rather eminently, by covering all possible angles, the court could have been persuaded to hold differently, and in taxpayer’s favour.

To be precise, one of the vital angles open but not addressed is as under:

Taxpayer has substantially complied with the primary condition of rollover investment being made within the stipulated period of 2 years as applicable.

No doubt, the sub-section (4) (of sec 54F) requires opening of a special account and routing through that account all further payments – that is, of all / balance left after the specified due date for the tax return filing, for appropriation (or utilisation- being the other term interchangeably used)  towards the dues to the seller. But, so far as could be seen, the law nowhere provides that failure to comply, as in the instant case, would warrant denial of tax exemption.

It may be pinpointed that, the view of the Bom. HC has the inevitable effect / consequence of the entitlement to tax exemption being denied even to a taxpayer, as in the instant case, despite qualifying for the exemption by meeting the attendant conditions as specified in sub-section (1) of the same section (sec 54F).  To put it differently, the said view has ignored the very vital fact that, had that been the intention, in sub-sec (4) a ‘non-obstante’ clause would have been prefixed. Further, the opening words “Subject to the provions of sub-sec (4)….”as later inserted/substituted could be urged not to negate the other angles sought to be canvassed, in any case unequivocally.  As such, at best, the mandate of sub-sec (4) is of a purely technical nature, -and non-compliance is rather a venial or technical one- hence not of such a serious nature as to lend legitimate scope for denial of the exemption in any instance such as herein.

KEY NOTE: Besides, on the premise of the view the HC has taken, it appears, there could be immense difficulty in reconciling the same with what , sub-secs. (2) and (3) provide , and in giving effect thereto in situations as specified /envisaged therein. This again is an altogether different or additional angle, which calls for a separate in-depth study .

In any view, the Revenue’s stance, as upheld by the HC has the unintended consequence of rewriting , or overwriting, in effect /essence, the sub-sec (1) and curtailing the specified period of 2/3 years laid down for rollover investment . 

Extracts  (for ready Read) :

Bombay high court in CIT v Dr Parishca INCOME TAX APPEAL NO. 1825 OF 2009 where in it is held that if a new house is purchased from borrowed funds even then the deduction u/s 54 of the act is allowable. Honourabel high court has held that :-

2. Having seen the finding of fact recorded by the Tribunal in paragraph No. 9, that the assessee had initially utilized the sale proceeds of sale of his residential flat for purchase of commercial properties and later on he purchased two residential flats within a period specified in sub section (2) of Section 54 of the Act. In this view of the matter, the view taken by the Tribunal cannot be faulted. The appeal is without any substance. Hence, the same stands dismissed in limine with no order as to costs.”

And, the Revenue’s pleas and  HC’s reasoning set out in paragraphs  (see Below)…of the judgment seem to deal with another area of controversy- being, matching of ‘net consideration’ for transfer of old asset, with appropriation / utilization for investment in a new asset, on a one-to-one basis -; which, again, the Revenue appears to have obstinately been stuck to and pursuing despite the issue having been settled by case-law, against the Revenue.

< (xii) The contention that the word “appropriation” used in Section 54F(4) of the Act would also apply in the present case where the capital asset has been sold and sale proceeds are earmarked to be invested in construction of house is also not acceptable. A plain reading of Section 54F(4) of the Act militates against it. As pointed out by Mr.Malhotra, learned Counsel appearing for the revenue, Section 54F(4) of the Act deals with two classes of cases, one where purchase of new residential house is within a period of one year before the date on which capital asset is sold by assessee and second class of cases where the amount subjected to capital gains are utilized for purchase/ constructing a flat, post the sale of the capital asset. In the present facts we are concerned with the second class i.e. purchase post the sale of the capital asset.

(xiii) Parliament has used the word “appropriated” in the first class of cases i.e. where property has already been purchased prior to the sale of capital asset and the amount received on sale of capital asset is appropriated towards consideration which has been paid for purchase of the flat. In this case we are concerned with the purchase / construction of residential housing, after the sale of capital asset. This requires the amount -which is to be subjected to capital gain has to be utilized before the date of filing of return of Income under Section 139 of the Act by the assessee. Section 54F(4) of the Act itself clearly states that the amount not utilized in purchase / construction of flat / house should be deposited in the specified Bank notified by the Government. Thus the plain language employed in Section 54F(4) of the Act makes a clear distinction between cases of appropriation (purchase prior to sale of capital asset) and utilization (purchase/construction after the sale of capital asset). Therefore the word “appropriated” would have no application in cases of purchase / construction of a house after the sale of capital asset with which we are concerned. >

See (Also Related Case Law)

https://indiankanoon.org/doc/1749400/

https://indiankanoon.org/doc/105021376/

Over to eminent experts for further deliberation, if so realized and thought fit!

Disclaimer: The foregoing discussion is solely intended to convey own thoughts and viewpoints, based on an independent study of the covered aspects. Welcome to share, should anyone, especially a well informed and competent law expert, infield practice, entertain any doubt or has a better view to offer after an independent study, so as to serve the altruistic object of the common good.

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