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Purposive interpretation of clauses u/s 54F entails that deposits in capital gains a/c not fully or partly utilised for purchase or construction of new asset is taxable u/s 45 after expiry of 3 years from date of sale of asset: HC

2019-TIOL-1579-HC-KAR-IT

IN THE HIGH COURT OF KARNATAKA

AT BENGALURU

Writ Petition No.13541/2018 (T-IT)

PROF P N SHETTY
S/o LATE NARAYANA SHETTY, AGED ABOUT 79 YEARS
204-B, SAI RADHA PALACE
BRAHMAGIRI, UDUPI – 576103

Vs

OFFICE OF THE INCOME TAX OFFICER
WARD-1, AYAKARABHAVAN, ADI UDUPI
AMBALPADY, UDUPI – 576103

S Sujatha, J

Dated: July 18, 2019

Appellant Rep by: Sri P N Shetty
Respondent Rep by: 
Sri K V Arvind, Adv.

Income Tax – Writ – Sections 45 & 54F(4)

Keywords – Capital gain account scheme – Proviso to section 54F(4) – Unutilised deposit -Unutilized income – Wholly or partly

THE issue involve in this case arose form the interpretation of interpretation of the phrase ‘wholly or partly’ employed in the proviso of Section 54F(4). The assessee, in the relevant AY, sold two properties and deposited the gains accrued in the Capital Gain Account Scheme, 1988 with Syndicate Bank.The assessee, then invested a portion of total capital gain received in purchasing another flat within the stipulated time of 3 years. Upon filing the return, the assessee claimed exemption u/s 54F. The AO, during the assessment proceeding, brought the proportionate unutilised deposit in capital gain account scheme to tax as per sub-section (4) of section 54F r/w 45.

In writ petition, the High Court held that,

Whether by giving purposive interpretation to the clauses & provisos of section 54F, means that the deposit in capital gain account which is not utilised wholly or partly for the purchase/construction of new asset has to be charged u/s 45 after the expiry of 3 years from the date of sale of the asset – YES: HC

++ Section 54F contemplates the AY in which the liability of the assessee to offer the unutilized capital gain would arise. The phrase ‘wholly or partly’ employed in Section 54F(4) is in pari materia with Section 54(2) & 54 B(2). The assessee is provided with the benefit of payment of tax of capital gains either by purchasing a house or constructing a house within the specified period provided as per Section 54 F(1). Section 54F(4) do not waive payment of tax u/s 45, if the amount deposited is not utilized wholly or partly for the purchase or construction of the new asset. The words employed in the proviso are “not utilized wholly or partly” and not “utilized wholly or partly”. The negation clause ‘not’ in the construction of the sentence makes the difference. The phrase “not utilized wholly or partly” refers to two eventualities. The consequences set out follows is that the unutilized income of shall be liable to tax u/s 45 after the expiry of period of 3 years from the date of transfer of the capital asset. The purposive interpretation has to be given to the provision to achieve the object of the Act. To ascertain the intention of the legislature, the provision has to be read as a whole not in isolation;

Whether by partial utilisation of deposit in capital gain account scheme within three years for the purchase or construction of new asset, the assessee would be able to get total exemption from the provision of section 45 on unutilized deposit – NO: HC

++ on reading of the provision as a whole along with Clauses (a) and (b) to the proviso, the intention of the Legislature would be gathered that the unutilized capital gain amount u/s 54F(4) has to be charged u/s 45 as income of the previous year, after the expiry of three years from the date of sale of the capital asset which in the present case is the AY 2016-17. Thus, the assessee is entitled to the withdrawal of the amount deposited under Sub-Section (4) of Section 54F under the capital gain account subject to deduction of tax applicable to the case on hand.

Assessee’s writ petition dismissed

Cases followed:

Reserve Bank of India V/s. Peerless General Finance and Investment Co. Ltd. – 2002-TIOL-670-SC-MISC

Ranjit Narang Vs. Commissioner of Income Tax – (2009) 317 ITR 332

CIT Vs. Khoobchand M. Makhija – (2014) 223 ITR 189

JUDGEMENT

Per: S Sujatha:

The petitioner has claimed the following reliefs:

a. Order the respondent to submit his claim made in Annexure-A1 to the Memorandum of writ petition under oath before Hon’ble Court.

b. Order the respondent to approve petitioner’s application in Form-G submitted in the year 2015 and stop harassing the petitioner forthwith if the respondent cannot establish the legitimacy of the claim in Annexure A1 to the Memorandum of writ petition.

c. Order the respondent to pay the petitioner exemplary compensation as may be decided by the Hon’ble Court, for the damage and losses caused to the petitioner already.

d. Allow the writ petition with cost and such other relief/s as the Hon’ble Court may deem appropriate.

2. The petitioner has filed return of income relating to the assessment year 2016-2017. On verification of the same, show-cause notice under Section 142(3) of the Income Tax Act 1961 (for short ‘the Act’) dated 28.2.2018 has been issued to subject the proportionate unutilised deposit in capital gain account scheme, of Rs.91,89,609/- to taxation as the income of the petitioner for the assessment year 2016-17. Being aggrieved by the same, the petitioner is before this court.

3. The petitioner had sold two properties i.e.,

1) Land in 61-C, Marthahalli, ITI Employees Housing Society Layout, Bangalore 560 056 in May 2012 for Rs.1,19,20,000/-

2) Land situated in Yerlapdy, Udupi in January 2013 for Rs.4,00,000/-.

4. Out of the aforesaid sale consideration amount, Rs.1,15,00,000/- was deposited by the petitioner in the Capital Gain Account Scheme, 1988, with Syndicate Bank, Brahmagiri Branch, Udupi and Vijaya Bank Main Branch, Udupi. The return of income for the Assessment year 2013-14 was filed on 14.7.2013 and exemption was claimed under Section 54F of the Act. In the meantime, the petitioner had purchased a flat for Rs.21,32,470/- (including stamp duty and registration) on 20.08.2013 before the expiry of three years from the date of the transfer of the capital asset. The revenue issued the notice impugned, to bring the unutilized capital gain to tax as per Section 54 F(4) of the Act. In other words, the unutilized amount (Rs.1,15,00,000-Rs.21,32,470 deducting exemption) after the expiry of three years from the date of transfer of the original capital is proposed to be subjected to tax under Section 45 of the Act.

5. The petitioner argued that the scope of Section 54F(4) of the Act and the proviso thereof is not properly appreciated by the respondent. The petitioner had deposited the sale consideration received on transfer of certain capital assets in the capital gain account scheme with the bankers and utilized Rs.21,32,470/- out of Rs.1,15,00,000/- capital gain amount deposited which squarely falls under the proviso to section 54F(4) of the Act. The respondent failed to interpret the phrase ‘wholly or partly’ enumerated in the proviso in a right perspective. According to the petitioner, the amount deposited under Section 54F (4) of the Act if utilized partly for the purchase or construction of the new asset within three years, then the unutilized amount shall not be liable to tax under Section 45 of the Act.

6. Learned counsel Sri. K.V.Aravind appearing for the Revenue justifying the impugned notice submitted that the reasoning of the respondent is in conformity with Section 54F(4) of the Act and the proviso thereof. It was submitted that the amount of capital gain unutilized under Section 54F(4) of the Act has to be charged under Section 45 of the Act as income of the previous year after the expiry of three years from the date of the sale of the capital asset. In support of his contentions, reliance was placed on the ruling of the High Court of Allahabad in the case of Ranjit Narang Vs. Commissioner of Income Tax reported in (2009) 317 ITR 332.

7. The epicenter of the case revolves around the interpretation of Section 54F(4) of the Act and the proviso thereof more particularly, the interpretation of the phrase ‘wholly or partly’ employed in the proviso.

8. Section 54F(4) of the Act and the proviso reads thus:

“54F(4) – The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset 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 subsection (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 utilized by the assessee for the purchase or construction of the new asset 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 utilized wholly or partly for the purchase or construction of the new asset within the period specified in subsection (1), then,- (i) the amount by which-

(a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds

(b) the amount that would not have been so charged had the amount actually utilized by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset,

shall be charged under section 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

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

(emphasis supplied)

9. The issue involved herein is similar to the subject matter of the case R.S. Sharma Vs. Income Tax Officer, Bangalore considered by this Court in ITA No. 223/2009. This Court placing reliance on the judgment of this Court in the case of CIT Vs. Khoobchand M. Makhija (2014) 223 ITR 189 observed that when the statute prescribes expressly when the capital gain is to be offered to tax, it shall be treated accordingly. If the said amount is deposited in a Nationalized Bank as required under law, in capital gain account the deposit is construed as investment in new asset. Subsequently, if the amount deposited is not utilized, the entire capital gain or the unutilized capital gain chargeable under Section 45 of the Act is to be offered for tax only in the previous year in which the period of three years from the date of transfer of the original asset expires.

10. It is desirable to excerpt the relevant paragraph of Ranjit Narang, supra, which reads thus:

“10. From a plain reading of section 54F of the Act we are of the considered opinion that the amount of capital gains which has not been utilized under Section 54F has to be charged under Section 45 as income of the previous year, after the expiry of three years from the date of sale of the asset which in the present case is for the assessment year 1993-94.”

11. In the light of the said judgments, it is clear that sub-Section(4) of Section 54F of the Act contemplates the Assessment year in which the liability of the assessee to offer the unutilized capital gain would arise. The phrase ‘wholly or partly’ employed in Section 54F[4] is in pari materia with Section 54(2), 54 B(2) of the Act. Section 54(1) of the Act reads thus:

“54 (1) – Subject to the provisions of subsection (2), where, in the case of an assesse being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset, xxxxxxxx’

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset 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 utilized by the assessee for the purchase or construction of the new asset 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 utilized wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-

(i) the amount not so utilized 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.

54-B (2) The amount of the capital gain which is not utilized by the assessee for the purchase of the new asset 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 utilized 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 utilized by the assessee for the purchase of the new asset 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 utilized wholly or partly for the purchase of the new asset within the period specified in sub-section (1),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 two 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.

12. A reading of these provisions makes it clear that the assessee is provided with the benefit of payment of tax of capital gains either by purchasing a house or constructing a house within the specified period provided as per Section 54 F(1). Section 54F[4] do not waive of the payment of tax under Section 45 if the amount deposited under the said section is not utilized wholly or partly for the purchase or construction of the new asset. The words employed in the proviso are “not utilized wholly or partly” not “utilized wholly or partly”, the negation clause ‘not’ in the construction of the sentence makes the difference. The interpretation suggested by the petitioner would have been countenanced if the language employed is ‘utilised wholly or partly’ For eg., If the amount deposited under Section 54 F(4) is Rupees one crore in the capital gain account scheme, an amount of Rupees Forty lakhs is utilized for the purchase of the new asset, unutilized amount would be Rupees Sixty lakhs. ‘Not utilised partly’ applies to the said Sixty lakhs. The reasonable interpretation is ‘not utilized partly’ means the balance amount available in the capital gain deposit scheme after the expiry of the period of three years from the date of the transfer of the original asset.

13. The phrase “not utilized wholly or partly” refers to two eventualities. In the aforesaid given example, (i) the entire amount of Rupees one crore – not utilized wholly (ii) un-utilized amount of Rupees Sixty lakhs remaining in the capital gain deposit account. Then, the consequences set out therein follows. The unutilized income of Rupees Sixty Lakhs shall be liable to tax under Section 45 of the Act after the expiry of period of three years from the date of transfer of the capital asset.

14. The purposive interpretation has to be given to the provision to achieve the object of the Act. To ascertain the intention of the legislature, the provision has to be read as a whole not in isolation.

15. It is apt to refer to S.Sundaram Pillai etc., V/s. V.R.Pattabiraman AIR 1985 SC 582 wherein, scope of proviso is analysed. The Hon’ble Apex Court has held thus:

“A proviso may have three separate functions. Normally, a proviso is meant to be an exception to something within the main enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. In other words, a proviso cannot be torn apart from the main enactment nor can it be used to nullify or set at naught the real object of the main enactment. While interpreting a proviso care must be taken that it is used to remove special cases from the general enactment and provide for them separately. In short, generally speaking, a proviso is intended to limit the enacted provision so as to except something which would have otherwise been within it or in some measure to modify the enacting clause. Sometimes a proviso may be embedded in the main provision and becomes an integral part of it so as to amount to a substantive provision itself. To sum up, a proviso may serve four different purpose:

1] qualifying or excepting certain provisions from he main enactment;

2] it may entirely change the very concept or the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment worktable;

3] it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and

4] it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision. [Case law discussed.]”

16. In State of West Bengal V/s. Union of India MANU/SC/0086/1962 : [(1964) 1 SCR 371], the Hon’ble Apex Court has held thus:

“The Court must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with the other parts of the law, and the setting in which the clause to be interpreted occurs.”

17. In Reserve Bank of India V/s. Peerless General Finance and Investment Co. Ltd. [1987] 2 SCR 1 = 2002-TIOL-670-SC-MISC, the Hon’ble Apex Court has held thus:

“Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place…”

18. In the light of the aforesaid judgments, it is clear that the proviso appended to Section 58[4][f] has to be read as a whole along with the Clauses [a] and [b] therein which would explain the real intendment of the phrase “not utilized wholly or partly”. In the context, the proviso to Section 54 F[4] becomes an integral part of the enactment acquiring the tenor and colour of the main provision. To make the provision workable, the arguments of the petitioner that the Clauses [a] and [b] of the proviso need not be addressed to, cannot be countenanced for the reasons aforesaid. Thus, it can be held that on reading of the provision as a whole along with Clauses [a] and [b] to the proviso, the intention of the Legislature would be gathered that the unutilized capital gain amount under Section 54 F[4] has to be charged under Section 45 as income of the previous year, after the expiry of three years from the date of sale of the capital asset which in the present case is the assessment year 2016-17.

19. In the circumstances, the assessee is entitled to the withdrawal of the amount deposited under Sub-Section (4) of Section 54F of the Act under the capital gain account subject to deduction of tax applicable to the case on hand. The respondent shall consider the petitioner’s application in Form–G submitted in terms of the observations made here-in-above.

With the aforesaid observations and directions, writ petition stands disposed of.

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