Introduction

Allowability of the exemption under Sec 54 and 54 F for investment in residential house without depositing in the capital gains account scheme has been subject matter of litigation for a considerable length of time. The conflicting judgments of various high courts has kept this issue alive. An attempt has been made to justify the reasons for allowing the exemption u/s 54/54 F in such cases .

Scheme of Section 54 and Section 54F:

The legislative intent behind Section 54 as well as Section 54F of the Income Tax Act, 1961 is to promote housing . Both the sections allow exemption to an Individual / HUF, who reinvest the capital gains arising from sale of a Residential house (under Section 54) or net consideration arising from transfer of any other capital asset ( other than Residential house (under Section 54F), into the purchase or construction of a Residential House.

The purchase of the new Residential house can be made either one year before (or) two years after the sale of the residential house under Section 54(1) and from the date of transfer of any other capital asset ( other than Residential house under Section 54F(1). However, if the assessee chooses to construct the new residential house , then he has to construct the same within three years from the date of transfer of the asset under Section 54(1) and Section 54F(1) as the case may be.

The Finance Act 1987, with effect from AY 1988 -89 , inserted , one further condition in Sec in Sec 54 and 54F whereby any amount which is not appropriated by the assessee towards the purchase of the new asset within one year of transfer of the old asset or any amount that has not been utilized for either purchase or construction before the date of filing of returns has to be deposited in any account as per the Capital Gains Accounts Scheme 1988. Para 30 of the memorandum sets out the reason behind the introduction of the Capital gains account scheme. The para 30 reads as under ;

Under the existing provision of Sec 54 etc., long term capital gains arising from transfer of any immovable property used for residence etc., are exempt from tax if such capital gains are reinvested in a new asset corresponding to the old within the time allowed for that purpose. The original assessment needs rectification whenever the tax payer fails to acquire the corresponding new asset. With a view to dispense with such rectification of assessment the bill seeks to provide a new scheme for deposit of amount for reinvestment of the new asset.

Thus, the substantial question of law sought to be interpreted in this case is whether amounts not deposited into any account as per the Capital Gains Accounts Scheme but however has bonafide been utilized towards purchase or construction of new asset is eligible for exemption or not?

Two Judicial Approaches Taken by Various High Courts:

There have broadly been two distinct approaches taken by various High Courts

The first precedent in this regard was the decision of the Division Bench of the Karnataka High Court in Commissioner of Income Tax, Banglore v. K Ramachandra Rao [TS-5578-HC-2014(Karnataka )-O]

The Court took a lenient view of the statutory requirement and held that the conditions given under Section 54F(4) [Which is substantially similar to Section 54(2)] would only apply if the intention of the Assessee was to retain the cash arising out of the transfer of the Capital asset and not if such investment has actually been made within the time stipulated under the Section. Where the intention was to invest the money in either the purchase or construction of a residential house then it was held that the conditions under Section 54F and Section 54 relating to the deposit of the money to be utilized in any bank account as per the Capital Gains Scheme Account would not be required and thus ought to be accepted by the Revenue without demur.

This view has found favour with the Madras High Court, which in Venkata Dilip Kumar v. Commissioner of Income-Tax, Chennai [TS-5937-HC-2019(Madras)-O] followed the decision given in Ramachandra Rao and held that any amount utilized towards the purchase or construction of a new asset would be eligible for exemption even if it has not been deposited into any account as per the Capital Gains Account scheme. In this case however, it must be noted that the petitioners therein did create an account but the expenses incurred were more than what was estimated and deposited into the account and thus it was held that the expenses incurred over and above the amount deposited would also be eligible for exemption.

The Bombay High Court, however, in Humayun Suleman Merchant v. Chief Commissioner of Income-tax, Mumbai [TS-5731-HC-2016(Bombay)-O] did not ascribe the views taken by the Karnataka and Madras High Courts and held that the words of the statute ring plain and clear and thus strict compliance with the conditions specified in the legislation is necessary for availing the exemption benefit.

Thus, one view is that exemption can be granted irrespective of depositing the amount into any bank as per the Capital Gains Accounts Scheme as the intention of the legislature is to promote residential house and to ensure that the proceeds from the sale of the old asset is actually utilized towards the purchase of the new asset. Hence, the view taken was that, as long as the requirements under Section 54(1) and Section 54F(1) are fulfilled and the amount was actually utilized towards the purchase or construction of the new asset within the time limit prescribed will be eligible for exemption. Per Contra, the opposing view is that any exemption benefit requires strict compliance with the conditions specified therein and the words of the statute are plain and clear that unutilized or unappropriated amounts must be deposited in a bank account as per the Scheme without which no benefit ought to be approved.

One key point of difference is the treatment of the conditions given in Section 54(2). The court in Venkata Dilip Kumar(Supra) laid down that the conditions given in Section 54(1) are the mandatory conditions that ought to be fulfilled while the conditions given under Section 54(2) are merely procedural requirements which need to be strictly complied with. It was stated that fulfilling the conditions under Section 54(1) would amount to substantial compliance which would be enough to warrant the exemption. Quite refreshingly, the court also noted that the non-compliance under Section 54(2) can be used as ground to verify whether the amount has actually been utilized towards the new asset or not and then the assessee has to provide material details and particulars in relation to prove his claim under Section 54. Whereas, in Humayun Suleman Merchant(Supra) it was felt that the conditions under Section 54(2) and Section 54F(4) would also be mandatory conditions as any assessee seeking to enjoy the benefit of any exemption ought to satisfy all conditions specified therein.

Principles of Statutory Interpretation

Thus, the entire exercise of determining which of the divergent views ought to be considered more appropriate essentially becomes an exercise of culling out the relevant principle of interpretation. There can be no doubt that the view taken in Humayun Suleman Merchant(Supra) by the Bombay High Court is grounded largely upon the adoption of a pragmatic or strict interpretation of the fiscal statute and thus, it must largely be seen as whether only a strict interpretation can be taken in the present case or if there is possibility for a more purposive or equitable interpretation. It has to however be noted that interpretation of Fiscal Statutes is not entirely analogous to interpretation of Exemptions in Fiscal Statutes so we must thus find out whether such purposive interpretation is possible both with regards to the Fiscal Statute itself, as well with regards to the Exemptions contained thereunder.
In general, Fiscal Laws ought to be subject to be Strict interpretation but however, this is not universal. The Supreme Court in CIT, Agri. v. Keshab Chandra Mandal, [TS-5000-SC-1950-O] has made it clear that mere "Hardship or inconvenience cannot alter the meaning of the language employed by the Legislature if such meaning is clear on the face of the statute" however, constructions of such nature which leads to defeating the purpose of a statue, if possible, must be avoided, on the principle expressed in the maxim ut res magis valeat quam pereat.

Thus, where Strict interpretation leads to absurdity or unintended results, a purposive interpretation maybe taken. Equity is not completely alien to Taxation or Fiscal statutes, and it was held in CIT v. J.H. Gotla Yadgiri, (1985) 4 SCC 343 if a construction that would lead to equity as opposed to Injustice is possible then such construction ought to be preferred as against literal construction. Additionally, in Commissioner of Income Tax v. Thana Electricity Supply Ltd [TS-5310-HC-1993(Bombay)-O] it was held, with respect to taxing statues, if there are more than one possible method of interpretation or construction, then the benefit of the ambiguity must go towards the Assessee.

When it comes to Exceptions, however, the established principle, as held in Commissioner of Customs v. Dilip Kumar and Co. [TS-5418-SC-2018-O], is that a person claiming under an exemption ought to establish that he fulfils all requirements and conditions contained therein. Thus, there seems to be a tendency to adopt a strict interpretation when it comes to Exemptions in taxing statutes as held in State of Gujarat v. Essar Oil Ltd [(2012) 3 SCC 522 p. 547.]. There is however a general exception to this rule, which is in cases involving the interpretation of exemptions made with a beneficial object. In Commissioner of Central Excise, Surat - I vs Favourite Industries, (2012) 7 SCC 153, p. 169. It was held that any Beneficial Exemption having their purpose as encouragement or promotion of certain activity ought to be liberally interpreted. In connection thereto it would be proper to rely on a judgement of the Delhi High Court in Commissioner of Income-tax v. Ravinder Kumar Arora [TS-675-HC-2011(Delhi)-O] wherein it was held that the main purpose or object behind Section 54 and Section 54F is to encourage housing and thus would come within the ambit of a Beneficial Exemption.

Thus, its amply clear that in the present case, there is no impetus to stick to a strict interpretation and the main object of interpretation ought to be to ensure that the Beneficial Object with which the exemption was carved out is met for which a lenient or purposive interpretation maybe undertaken.

Conclusion and Authors Remarks:

There is a considerable rationale behind the view in Humayun Suleman Merchant(Supra) but however we find ourselves agreeing more with the liberal interpretation adopted in the cases of Ramachandra Rao (Supra) and Venkata Dilip Kumar (Supra) owing largely to the underlying objective behind the enactment. Additionally, the nature of the provision is such that, in most cases, the assessee is not aware that he has to deposit the amount into a specific fund to avail the benefit. It is not a case of wilful disobedience but ,more often than not, just an issue of ignorance of the law. Although ignorance of law is no excuse, keeping in mind the underlying objective of the provision and the Bona Fide nature of the assessee, a reasonable interpretation like the one taken by the Karnataka and Madras High Courts seems preferable.

Conversely, it must also be noted that the requirement under Section 54(2) cannot be completely done away with as it would render legislative enactment entirely obsolete. As stated in Venkata Dilip Kumar (Supra) the failure to comply with the aforementioned condition can be taken to be material unless the Assessee is able to prove bonafide nature of his action and also show records as to the fact that the amount was genuinely utilized towards the purchase or construction of the new asset. This would both give force to the legislative sanction while best keeping true to the underlying objective behind the exception itself.