Where the plain literal expression of the statutory provisions produces manifestly unjust results, which could never have been intended by the legislature, the Court can modify the language to achieve the intention of the legislature and produce a rational construction.

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Where the plain literal expression of the statutory provisions produces manifestly unjust results, which could never have been intended by the legislature, the Court can modify the language to achieve the intention of the legislature and produce a rational construction.

 

Calcutta High Court in the case of CIT Vs. Smt. Bharati C. Kothari has held that the basic requirement for claiming relief under s. 54(1) that the assessee should invest the sale proceeds in the construction of another residential house. Whether assessee himself constructs the house or gets it constructed by a contractor or a third party is immaterial

In this case, Assessee has entered into agreement within one year for purchase of a residential flat and the flat was under construction. The amount was paid in instalments, but all the instalments are paid within three years from the date of sale of his flat, i.e., on 30th April, 1981. The provisions of s. 54(1) permit the assessee in case assessee invests the sale proceeds in the construction of house within three years, the assessee is exempted from the capital gain tax arising out of the sale of the earlier house. Here no doubt, assessee has not constructed herself the house, but she purchased the flat which was being constructed and within three years, she paid the entire amount against that flat which was being constructed. If the assessee has invested that sale proceeds in a house, which is being constructed by the third party for her, that entitles the assessee for the benefit of the exemption under s. 54(1). If the benefit is not given to the assessee, though she has invested the sale proceeds in the house which is being constructed for her, that view may not be in conformity with object behind the provision. The purpose behind the exemption under s. 54(1) is that if any assessee sells his residential house and purchases a new house against those sale considerations that capital gain tax arising out of the sale of the earlier house should not be taxed. Whether assessee himself constructs the house or he gets it constructed by a contractor or third party that does not make any difference. The basic requirement for purpose of relief under s. 54(1) is that the assessee should invest the sale proceeds in the construction of residential house, which has been constructed for assessee.

The court concluded that if Assessee having entered into an agreement for purchase of residential flat within one year from the date of sale of old flat and paid the entire amount within three years from the said date she could not be denied benefit of exemption under s. 54 on the ground that the house was constructed by a third party (builder) and not by assessee herself.

The court further held that Where the plain literal expression of the statutory provisions produces manifestly unjust result, which could never have been intended by the legislature the Court can modify the language to achieve the intention of the legislature and produce a rational construction—CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) : TC 45R.115 applied.

 

The copy of the order is as under:

COMMISSIONER OF INCOME TAX vs. SMT. BHARATI C. KOTHARI

HIGH COURT OF CALCUTTA

Y.R. Meena & Ranjan Kumar Mazumdar, JJ.

IT Ref. No. 156 of 1993

6th March, 2000

(2000) 68 CCH 0153 KolHC

(2000) 160 CTR 0165 : (2000) 244 ITR 0352 : (2001) 117 TAXMAN 0538

Legislation Referred to

S 54

Case pertains to

Asst. Year –

Decision in favour of:

Assessee

Capital gains—Exemption under s. 54—Hous

Cases referred:

CIT vs. Mrs. Shahzada Begum (1988) 73 CTR (AP) 229 : (1988) 173 ITR 397 (AP) : TC 22R.250

Judgment

Y.R. MEENA, J.

Judgment

On an application under s. 256(1) of the IT Act, 1961, the following question, set out at p. 2 of the application, has been referred by the Tribunal for our opinion :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to exemption under s. 54(1) since the agreement of purchase was made within one year from the date of sale and since substantial parts of instalments were paid within 2 years from the date of sale and thereby treating the date of agreement as the date of purchase ?”

  1. The assessee has sold her flat at Rs. 1,40,000 on 30th April, 1981. The assessee thereupon entered into an agreement on 29th April, 1982, for purchase of ownership flat from M/s Akash Deep Corporation for a sum of Rs. 1,40,000. As per the agreement, she had to pay Rs. 10,000 on or before the execution of the agreement and the balance amount he has to pay as under :
Date of payment Amount (Rs.)
22-4-1982 10,000
25-3-1983 10,000
25-4-1983 10,000
4-6-1983 10,000
5-7-1983 10,000
27-7-1983 10,000
14-11-1983 50,000
21-1-1984 20,000
3-3-1984 10,000

The assessee claimed the benefit of exemption under s. 54(1) of the IT Act. According to the AO, the assessee is entitled to only benefit to the extent of Rs. 30,000 which she has invested during two years from the date of sale.

In appeal before the Dy. CIT(A), the Dy. CIT(A) dismissed the appeal of the assessee.

In appeal before the Tribunal, the Tribunal has considered the decision of the Andhra Pradesh High Court in the case of CIT vs. Mrs. Shahzada Begum (1988) 73 CTR (AP) 229 : (1988) 173 ITR 397 (AP) : TC 22R.250 and also considered the decision of the apex Court in the case of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) : TC 45R.115 and allowed the claim of the assessee. When the assessee has invested the entire amount within 3 years, she is entitled for exemption under s. 54(1) of the Act.

  1. The facts are not in dispute that after sale of her flat on 30th April, 1981, she entered into an agreement for purchase of an ownership flat on 29th April, 1982, and the entire amount of the flat, that is, Rs. 1,40,000, has been paid within 3 years from the date of sale of her flat.
  2. In Mrs. Shahzada Begum (supra), the Andhra Pradesh High Court has taken the view that the expression “purchased” would undoubtedly connote the domain and control of the property given into the assessee’s hands. Therefore, registration is not necessary. If money is paid and possession has been taken within the stipulated period under s. 54(1), assessee is entitled for benefit under s. 54(1).
  3. Provisions of s. 54(1) of the Act provides that subject to the provisions of s. (2), the capital gain arises from the transfer of a long-term capital assets, the income of which is chargeable under the head “Income from the house property” and the assessee has within a period of one year before or after the date on which a transfer took place purchased or has within a period of three years after that date constructed the residential house, then instead of 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 provisions in the section.
  4. The admitted facts are that the assessee has entered into agreement within two years (one year) for purchase of a residential flat and the flat was under construction. The amount was paid in instalments, but all the instalments are paid within three years from the date of sale of his flat, i.e., on 30th April, 1981. The provisions of s. 54(1) permits the assessee in case assessee invests the sale proceeds in the construction of house within three years, the assessee is exempted from the capital gain tax arising out of the sale of the earlier house. Here no doubt, assessee has not constructed herself the house, but she purchased the flat which was being constructed and within three years, she paid the entire amount against that flat which was being constructed. Therefore, the question does arise, where the sale proceeds which she has invested in the flat which was under construction amount to an investment of the sale proceeds under s. 54(1)—whether it is necessary that she should herself construct a house, then only she is entitled for exemption under s. 54(1) of the Act.
  5. If the assessee has invested that sale proceeds in a house, which is being constructed by the third party for her, in our considered view, entitles the assessee for the benefit or the exemption under s. 54(1). If the benefit is not given to the assessee, though she was invested the sale proceeds in the house which is being constructed for her, that view may not be in conformity with object behind the provision. The purpose behind this exemption is that when assessee sells her residential house and if she purchased any new house or acquired the new house from that sale proceeds, the assessee is exempted from the capital gain tax.
  6. In J.H. Gotla (supra), their Lordship at p. 339 has observed as under :

“Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The task of interpretation of a statutory provision is used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.”

Keeping in view of the above observations of the apex Court, where the plain literal expression of the statutory provisions produces manifestly unjust result, which could never have been intended by the legislature, the Court can modify the language to achieve the intention of the legislature and produce a rational construction.

  1. The purpose behind the exemption under s. 54(1) is that if any assessee sells his residential house and purchases a new house against those sale considerations that capital gain tax arising out of the sale of the earlier house should not be taxed. Whether assessee himself constructs the house or he gets it constructed by a contractor or 3rd party that does not make any difference. The basic requirement for purpose of relief under s. 54(1), assessee should invest the sale proceeds in the construction of residential house, which has been constructed for assessee. Keeping in view of the above observations and reasons given by the Tribunal, no case is made out for interference.

In the result, we answer the question in affirmative, i.e., in favour of the assessee and against the Revenue.

The application in thus disposed of.

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