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Purchasing house property by availing bank loan make capital gain exemption invalid?
Income Tax Appellate Tribunal – Mumbai
Mrs. Prema P. Shah And Sanjiv P. … vs Income-Tax Officer on 29 November, 2005
Equivalent citations: 2006 100 ITD 60 Mum, 2006 282 ITR 211 Mum, (2006) 101 TTJ Mum 849
Bench: K Thangal, Vice-, D Srivastava
ORDER K.P.T. Thangal, Vice President
- These appeals are by the assessees for the assessment year 1993-94.
- I.T.A. No. 2707/Mumbai of 1997 : The interesting question before us is whether the exemption contemplated under Section 54(1) could be extended to a property purchased in a foreign country after selling the property situated in India.
- The brief facts narrated by the Assessing Officer are as under:
The assessee filed the return showing the taxable income of Rs. 33,570 on December 31, 1993. During the previous year relevant to the assessment year 1993-94, the assessee sold residential property for Rs. 60. lakhs. It was jointly owned by the assessee and Mrs. Prema P. Shah. It was purchased for Rs. 14.00 lakhs on March 29, 1983, and sold on April 4, 1992, for the aforementioned price. The assessee claimed exemption under Section 54, showing long-term capital gains as nil. The assessee filed a xerox copy of the agreement made in London giving particulars such as date of lease, name of lessor and the lessee. On going through the agreement, the Assessing Officer noted that it was an agreement for leasing of the property by the lessor, viz., Higgs and Hill Homes Ltd., which has been made effective from January 1, 1988. The assessee is described as a lessee. In this agreement the lessor is a resident company. Many restrictions are also imposed, including certain restrictions on the payment of lease rent, restrictions on utilisation of the property, which is claimed by the assessee as acquired residential property, against which the assessee claims the exemption.
- The Assessing Officer held Section 54of the Income-tax Act speaks of purchase of residential property or construction thereof within a stipulated period, so that long-term capital gains would be exempted from tax. In the instant case, the assessee has purchased only the tenancy rights. Hence the assessee’s claim for exemption under Section 54was rejected. Aggrieved by the above order, the assessee approached the first appellate authority.
- It was submitted before the Commissioner of Income-tax (Appeals) that selling the Juhu property for Rs. 60.00 lakhs on April 4, 1992, and also explained the amount of Rs. 1,59,855 and further Rs. 1,38,000, the assessee invested the balance sum of US$ 1,20,000 in a residential property at London on February 20, 1992. It was submitted on the basis of the legal opinion that the property though termed as lease, has extended period of 150 years and as such, the assessee was entitled for the benefit of Section 54. The assessee further objected that the Assessing Officer was not justified in holding that to claim exemption the investment again should be made in India itself. It was further submitted that the Assessing Officer was not justified in holding that the sale proceeds were not invested in the residential property purchased in London, for the reason that the assessee has invested Rs. 50.00 lakhs in shares and deposits with private parties. It was further the case of the assessee that the Assessing Officer was not justified in denying the benefit also on the ground that it was for the purpose of purchasing the property and not the consideration received out of the sale of Juhu property.
- It was contended, as long as there was a sale of house property and purchase and consideration of a house property within the time specified under Section 54, the conditions laid down under Section 54are satisfied. It was contended that not necessarily the same sale consideration is to be invested in the new residential premises. It was further submitted that there is no stipulation in Section 54that the residential premises must be purchased in India itself. If it is purchased outside India, but for residential purposes, it would satisfy the condition of Section 54and the claim of the assessee cannot be rejected. It was further submitted that where the assessee borrowed for the purpose of acquiring the new property, the conditions are satisfied.
- The learned Commissioner of Income-tax (Appeals) did not approve the view canvassed by the assessee. While disallowing the assessee’s claim, the Commissioner of Income-tax (Appeals) observed : (a) the assessee had taken loan from Barclays Bank and used the assessee’s foreign earning to purchase/lease the property. In other words, the receipts, which gave rise to capital gains, were not utilised for the purchase of the property, (b) The assessee has not purchased the property in India and the Income-tax Actextends to the “whole of India” only, (c) The lease deed dated February 20, 1992, but effective from January 1, 1988 for 150 years, it is perpetual. This does not entitle the assessee the right of occupation infinitum and it does amount to purchase itself. It is not purchase of a right only. The provision of lease as obtainable in UK is not the same as in India. Therefore the benefit of long-term lease obtained in UK cannot be treated as per Indian laws for the purpose of income-tax law. (d) The assessee is a non-resident Indian and provisions of Chapter XII-A are special provisions relating to certain income of non-residents. Section 115Dis a special provision for computation of total income of non-residents. As per Section 115D(2)(a), in the case of an assessee, being a non-resident Indian-(a) the gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee under Sub-section (2) of Section 48 or under Chapter VI-A. Hence the Commissioner of Income-tax (Appeals) held, the assessee being a non-resident Indian, is not entitled to any deduction in respect of expenditure or allowance under the provisions of the Income-tax Act and if the income of the non-resident consists only of investment income or income by way of long-term capital gain or both, tax payable by him on his total income shall be the amount of income-tax calculated on such total income at 20 per cent. of such income in view of the provisions of Sub-section (1) of Section 115E. In the light of the above discussion, the Commissioner of Income-tax (Appeals) held that the assessee was not entitled to claim relief under Section 54 and the Assessing Officer was directed to recompute the capital gain as per the provisions of Section 115D of Chapter XII-A. Aggrieved by the above order, the assessee is in appeal before the Tribunal.
- The preliminary fact that the assessee has not purchased the property after selling the Juhu property is disputed by learned Counsel for the assessee on the ground that in U.K., the property belongs to the Sovereign and the subjects have only the right to enjoy it in perpetuity. Learned Counsel for the assessee first submitted that Chapter XII-A does not apply to the assessee at all, by virtue of definition of Section 115C(d), which reads as under:
115C. In this Chapter, unless the context otherwise requires-…
(d) ‘long-term capital gains’ means income chargeable under the head ‘Capital gains’ relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset.
- Secondly, learned Counsel for the assessee submitted, the reasoning of the Assessing Officer and the Commissioner of Income-tax (Appeals) that the assessee is not entitled for the benefit under Section 54Ebecause the assessee had utilised the borrowed funds for investment in property is also not tenable. For this proposition, he relied upon the decisions of Bombay Housing Corporation v. Asst. CIT  81 ITD 545 (Bom); ITO v. K.C. Gopalan 107 Taxman 591 (Ker) and Ajit Vaswanit v. Deputy CIT  117 Taxman 123 (Delhi) (Mag). Thirdly, learned Counsel submitted that there is nothing in the statute to show that the property purchased should also exist in India, so as to claim the benefit contemplated under Section 54E. Only stipulation is that the income should arise in India and not necessarily it should also be invested in India. For the above proposition, learned Counsel drew our attention to Section 11 of the Income-tax Act, 1961. Learned Counsel submitted that if the Legislature had such an intention, it would have been definitely and specifically mentioned, as it has been mentioned in Section 11. Learned Counsel submitted that any income from property held for charitable or religious purposes is exempt from tax net under Section 11(1)(a) only to the extent it applied to such purpose in India. If the Legislature wants to invest capital gains in India itself for exception under Section 54D, the Legislature would have specifically stated so in the section itself. The lease is for 150 years, i.e., in perpetuity. In UK, the King is the owner of the property and the assessee is enjoying all the rights. The assessee is not paying the rent. The rent fixed is “rent of a peppercorn” and that too, if demanded. Learned Counsel further submitted that the assessee can transfer the property; in fact no rent is virtually paid. In the light of the above facts, learned Counsel further submitted that the Revenue authorities were not justified in denying the assessee exemption under Section 54(1) of Rs. 15,07,561, being 50 per cent. of the capital gain.
- It was further submitted, in the assessee’s case the lease is for a longer period of 150 years, which cannot be terminated, except under very limited circumstances provided under the deed. Secondly, no rent is payable and only premium is paid. Learned Counsel contended, thereby it is clear that premium is nothing but purchase price and as far as rent is concerned, it shall be peppercorn, if demanded. Learned Counsel further contended, “peppercorn” means negligible, and of no value, that too, is payable on demand. It is only to keep the facade of lease. The property under the agreement is freely transferable without any restrictions. The property is for the enjoyment of the person to whom it is given. Learned Counsel further submitted, for all purposes, it is similar to the co-operative society flats in India. To such flat benefit of Section 54is made available by the decisions of the court as well as by Circular of the Department No. 471 dated October 15, 1986 in Chaturvedi and Pithisaria Income-tax Law, Fifth Edition of Volume 2, page 2886, wherein the Board considered the flat allotment under the Self-financing Scheme of the Delhi Development Authority is similar to a co-operative society in Mumbai and it was held that it was entitled to the benefit under Section 54. Learned Counsel further submitted, similarly, vide Circular No. 672, dated December 16, 1993, in Chatruvedi and Pithisaria Income-tax Law (supra), page 2887, it was held that in the case of a co-operative society flat, benefit of Section 54is available.
- Learned Counsel further submitted that it has been held that the expression “house property” for the purpose of Section 54(1)has the same meaning as the concept of house property under Sections 22to 27. It takes into account all residential units, particularly in these days multi-storey flats have become the order of the day. For the above proposition, learned Counsel relied upon the decision of the hon’ble Delhi High Court in the case of Addl. CIT v. Vidya Prakash Talwar and the decision of the hon’ble Gujarat High Court in the case of CIT v. Kodandas Chanchlomal . Learned Counsel submitted, under Section 27, it is clearly provided that co-operative society flats would be covered for the purpose of Section 22 and also property taken on lease for more than twelve years is ownership property for the purpose of Section 22.
- Learned Counsel further submitted, it is similar to a co-operative society flat. As it is for a lease of 150 years, it is a house property for the purpose of Section 22, and, therefore, for the purpose of Section 54, from whichever angle one considers that it is similar to a co-operative society flat or it is a long-term lease, in either case, it falls within the scope of Section 54read with Sections 22to 27. Learned Counsel invited our attention to the decision of the hon’ble Supreme Court in the case of CIT v. Podar Cement P. Ltd. , wherein it was held that though under the common law “owner” means a person who has got valid title legally conveyed to him after complying with the requirements of law, such as the Transfer of Property Act. Registration Act, etc., in the context of the Income-tax Act, 1961, having regard to the ground realities and further having regard to the object of the Income-tax Act, viz., to tax the income from the property in his own right. The hon’ble Supreme Court held that if one is enjoying all the rights of ownership, he is the owner whether technically he is the owner or not is immaterial consideration. In this case the hon’ble Supreme Court also referred to Sections 22 to 27 and held that Section 27 includes certain kinds of transactions of ownership and held that this provision is only explanatory and that amendments introduced by the Finance Bill, 1987 was declaratory/clarificatory in nature in so far as it relates to Sections 27(iii), (iiia) and (iiib). Consequently, these provisions are retrospective in operation. Hence, learned Counsel submitted as the concept of house property is similar under Sections 22 and 54, it is clear that in respect of the property acquired by the assessee, it is a house property purchased within the meaning of Section 54.
- Relying upon the decision of the hon’ble jurisdictional High Court in the case of Mrs. Amy F. Cama (Trustee of the Estate of Late M.R. Adenwalla) v. CIT, learned Counsel also submitted that the benefits of Section 54are made available to a beneficiary of a trust in respect of the property owned by the trust. Learned Counsel further added, similarly, the hon’ble Madras High Court in the case of CIT v. M.K. Chandrakanth , held that the benefit of investment under Section 54 is available in the case of partner of a partnership firm. Learned Counsel further submitted, all these issues consider the purchase and ownership in substance and if one applies the test laid down by the hon’ble Supreme Court, of effective enjoyment of property, the assessee enjoys all the benefits of the premises in question and, therefore, the objection that it is only a lessee and not purchase is not sustainable.
- Coming to the plea that part of the sale proceeds not invested, learned Counsel submitted, the capital gain, which is part of the sale proceeds is not used for the purpose of purchasing the property. The assessee borrowed funds for the purpose of investment, as such, according to the Department, it is not an investment of capital gain arising out of the sale consideration and, therefore, benefit of Section 54is not available. Learned Counsel further submitted, on the face of it, the said objections are not sustainable. The section itself provides that purchase of the new asset may be one year before the sale. In the nature of things, if the property is purchased before the sale, the same cannot be out of the sale consideration receivable. To such purchase before the sale, benefit under Section 54is made available. As such, the provisions of purchase before the sale clearly contemplates that it need not be out of the sale consideration, contended learned Counsel.
- Again, learned Counsel reiterated that Section 54provides for appropriation. The section itself provides that the amount of capital gain, which is not appropriated by the assessee towards purchase of a new asset, made within one year before the date on which the transfer takes place or which is not utilised by him for the purchase of a new asset. Therefore, it clearly provides for appropriation of the capital gain in respect of the purchase price paid before the sale has taken place. As such, when appropriation of the capital gain against the property purchased before is provided, it cannot be said that the actual capital gain arising after the sale alone could be used for the purpose of Section 54, contended learned Counsel. He further submitted : the section provides that if the amount of capital gain is greater than the cost of residential house etc., it means that one is comparing the cost of new premises and capital gain. The section does not say that to the extent that capital gain is not utilised for purchasing the property. Hence, learned Counsel submitted, it only provides the comparison of two amounts-the capital gain and the amount invested in purchase of house property, which clearly means that such investment need not be out of the actual capital gain arising out of the sale. Learned Counsel further submitted, it is also clear that the provisions of Section 54would be equally applicable not only by way of purchase date but acquisition by way of exchange also. If the test is that house property should be acquired out of the actual capital gain arising, it is not possible in the case of exchange. As such, he submitted, it cannot be said that the actual capital gain must be utilised for the purpose of acquiring the house property under Section 54.
- Learned Counsel brought our attention to the following observations of the hon’ble Supreme Court in the case of CIT v. T.N. Aravinda Reddy:
We find no reason to divorce the ordinary meaning of the word ‘purchase’ as buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration from the legal meaning of that word in Section 54(1). If you sell your house and make a profit, pay Caesar what is due to him. But if you buy or build another subject to the conditions of Section 54(1) you are exempt. The purpose is plain; the symmetry is simple, the language is plain. Why mutilate the meaning by lexical legalism. We see no stress in the section on ‘cash and carry’. The point pressed must, therefore, be negatived. We have declined to hear Sri S.T. Desai’s artillery fire although he was armed cap a pie with Mitakshara lore and law. A point of suffocating scholarship sometimes arrives in court when one nostalgically remembers the escapist verse:
‘Where ignorance is bliss, Tis folly to be wise’.
- Learned Counsel further submitted that the following decisions clearly establish that the investment may not be out of the actual sale consideration or out of the actual capital gain arising on such sales:
(1) ITO v. K.C. Gopalan  107 Taxman 591 (Ker);
(2) Bombay Housing Corporation v. Asst. CIT  81 ITD 545 (Bom); and (3) Ajit Vaswanit v. Deputy CIT  117 Taxman 123 (Delhi) (Mag).
- Learned Counsel again objected the Department’s stand that the assessee being non-resident Indian is governed by the provisions of Chapter XII-A and hence, not entitled to benefit under Section 54, is clearly unsustainable. He submitted, the provisions of Chapter XII-A are applied in the case of specified foreign exchange assets. Immovable property is not one of specified asset. As such, house property not being a specified asset; special provisions of Chapter XII-A are not applicable. Reference was also made to the definition of “specified asset” and “long-term capital gain” under the provisions of Section 115C. Learned Counsel further submitted, in any case, the assessee has opted out of the application of Chapter XII-A by specifying to that effect in the return filed, as such, for that reason also provisions of Chapter XII-A are not applicable.
- Learned Counsel further submitted, Section 115only provides that in the case of such specified gain, provisions of Sub-section (2) to Section 48will not be applicable, i.e., one is not entitled to indexation. Section 54 is not part of Sub-section (2) to Section 48. As such, if provisions of Sub-section (2) to Section 48 are not applicable, it does not follow that the provision of Section 54 will not be applicable. Sub-section (2) deals only with indexation and nothing else contended learned Counsel.
- For all these reasons, learned Counsel concluded, that the Assessing Officer and the Commissioner of Income-tax (Appeals) were clearly wrong in denying the benefit of investment under Section 54of the Act.
- Replying to the above, the learned Departmental Representative submitted, the assessee has not utilised the gains he got out of the transaction. The cases relied on by the assessee are distinguishable on facts. The assessee sold Juhu property for Rs. 60.00 lakhs on April 4, 1992. Out of the total sale proceeds, Rs. 50.00 lakhs was invested in purchase of shares. In other words, the assessee had not used the proceeds from the sale of property for purchase of property abroad. There is no correlation between the assets purchased and the sale of the old Juhu property. The source is in India. The learned Departmental Representative further submitted that Section 54Eis very clear. The change brought in the section by the Finance Act, 1979, with effect from April 1, 1979, which reads as “whole or any part of the net consideration” clearly indicates that it should be the whole or part of the consideration received out of the sale proceeds. He submitted, if the intention was otherwise, nothing prevented the Legislature in saying the amount as equal to or any part of the net consideration. Hence he submitted, the order of the Assessing Officer is to be restored. He further submitted, so far as the provisions of Section 54are concerned, Section 54(1) is subject to the provisions of Sub-section (2) and Sub-section (2) stipulates that “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”, if not deposited, then the assessee will not have the benefit contemplated under Section 54.
- The learned Departmental Representative further submitted that in the agreement, the evidence at paper book pages 1 to 32, the assessee is described as the “lessee”. There is no purchase of land/building and as such the section itself does not apply to the assessee. He further submitted that the assessee is prevented by Clause (4) from assigning, transferring, sub-letting or parting with the occupation of part of the premises. If the assessee is the owner of the property, the learned Departmental Representative submitted, there cannot be any restriction put on the assessee from transferring, sub-letting or parting with the property. Hence, the learned Departmental Representative submitted, the orders of the Revenue authorities are to be upheld.
- We have heard the rival submissions. Coming to the first argument of the Revenue that the same amount should have been utilised for the acquisition of new asset, the same cannot be accepted in view of the decision of the Tribunal, Mumbai Bench, in the case of Bombay Housing Corporation v. Asst. CIT reported in  81 ITD 545. In this case, the Tribunal held, even if an assessee borrows required funds and satisfies conditions relating to investment in specified assets, he is entitled to exemption.
- The next argument of the Revenue is that in fact the assessee has not acquired any property in the strict sense, the assessee had taken the property on lease and for the leased property the benefit of Section 54cannot be extended to. For the above proposition, as already noted hereinabove, the learned Departmental Representative heavily relied on the deed agreement itself. In this it is mentioned-the date of lease is February 20, 1992, the lessor is Higgs and Hill Homes Limited, whose registered office is at Crown House, Kingston Road, New Maiden Surrey; and the lessee’s name is that of the assessee. It is the case of the Revenue that the Juhu property was sold for Rs. 60.00 lakhs on April 4, 1992, whereas the lease deed is effective from January 1, 1988, i.e., four years prior to the sale of the very property. The rent is also fixed, according to the Revenue and it is a “peppercorn”. However, we do not find much credence in this argument as well. It is the case of the assessee that in the United Kingdom the property belongs to the Sovereign. The subjects enjoy it. Of course absolutely. In the instant case of the assessee the lease is valid for 150 years, which is in perpetuity and as such, the assessee is as good as absolute owner of the property.
- Secondly, coming to the plea that the assessee is to pay rent as per the deed, as such in any case the assessee cannot be treated as the owner of the property, is also to be rejected. In Black’s Law Dictionary, “peppercorn” is mentioned as “a small or insignificant thing or amount”. In the agreement, where the rent is fixed as “peppercorn”, it is also mentioned, “if demanded” on the first day of January every year. It also means, the assessee as a matter of duty, not bound to pay but it is only on demand insignificant rent is to be paid.
- Coming to Section 54, the learned Departmental Representative particularly brought our attention to Sub-section (2) of Section 54, which reads : “the amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset”. He particularly stressed the word “appropriated”, which indicates that the amount of the capital gain should be appropriated or should not be appropriated for the purchase of the new asset, to come into play this section. If the amount of capital gain is not appropriated, the assessee is not entitled for any benefit. If appropriated, then the assessee is entitled for the benefit. The learned Departmental Representative stressed that the appropriation can be only the amount the assessee gained from the alienation of the capital asset. However, we are not inclined to accept the way canvassed by the learned Departmental Representative because the issue has already been concluded by the decision of the Tribunal, Mumbai Bench, in the case Bombay Housing Corporation v. Asst. CIT reported in  81 ITD 545.
- It is not disputed that the assessee is a non-resident Indian. For a nonresident Indian, Chapter XII-A applies, being special provisions relating to certain incomes of non-resident Indians. The long-term capital gains, as far as a non-resident Indian, is defined in Chapter XII-A, Section 115C(d)which has been reproduced hereinabove in para. 8. It is defined as income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset. The “foreign exchange asset” is again defined under Section 115C(b), which reads : “foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange”. Again the “specified asset” is defined under Section 115C(f). The property sold by the assessee does not fall within any of the definition given in Section 115C(f).
- In short, we are of the considered view, for the reasons stated herein-above, the assessee is entitled to the benefit under Section 54of the Act. It does not exclude the right of the assessee to claim the property purchased in a foreign country, if all other conditions laid down in the section are satisfied, merely because the property acquired is in a foreign country.
- Coming to the direction of the Commissioner of Income-tax (Appeals), regarding applicability of the provisions of Section 115Dpertaining to special provisions relating to certain incomes of non-residents, we are of the view, it is not applicable. The “long-term capital gains” is defined as a capital gain relating to a capital asset, being a foreign exchange asset. In the case of the assessee, there is no doubt that this is not a foreign exchange asset. As such, the provision of Section 115Dis not applicable.
- For the same reasons, the appeal by the assessee with regard to remaining 50 per cent. of the share is to be accepted.
- I.T.A. No. 2706/Mumbai of 1997 : Facts being identical, for the same reasons mentioned hereinabove in the case of Mr. Sanjiv P. Shah, in I.T.A. No. 2707/Mumbai of 1997, we allow the appeal of the assessee.
- In the result, appeals of the assessee stand allowed.