Kerala High Court
Commissioner Of Income-Tax vs P.K. Raghavan Nair on 5 September, 1996
Equivalent citations: [1997]224ITR404(KER)
JUDGMENT V. V. Kamat, J.
1. The following question expects our answer : " Whether, on the facts and in the circumstances of the case,
(i) the manner and method of computing capital gain and the fixation of the quantum is in accordance with law ?
(ii) the assessment of capital gain as long-term capital gain is valid and in accordance with law?
(iii) the assessee is entitled to the benefit of Section 80T of the Income-tax Act, 1961 ?"
2. The facts are in a narrow compass and there is no dispute. The assessee is concerned with the assessment year 1983-84 and as seen from the question it relates to the manner and method of computation of capital gains and the fixation of the quantum in regard thereto, along with application of Section 80T of the Income-tax Act.
3. The assessee had a residential house at Trivandrum. It was sold on December 29, 1980. At Madras by a sale deed dated May 17, 1981, another property was purchased for an amount of Rs. 1,75,000. This was again sold by sale deed dated February 25, 1983, for an amount of Rs. 2,30,000. The question was of the assessability of the capital gains with reference to these transactions.
4. In the proceedings before the tax authorities--Income-tax Officer, Salary Circle, Trivandrum, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, Cochin Bench--the claims of the assessee with regard to the particulars such as expenses, improvements, came to be modified both by the first appellate authority as well as by the Tribunal.
5. However, the factual undisputed and final matrix is available in the order of the Tribunal in the following manner by way of a tabulation :
Rs.
Rs.
A. Sale proceeds of Trivandrum house 1,60,000 Less : Cost of acquisition 54,250 Cost of improvements as determined by us 40,000 94,250 Long-term capital gains 65,750 B. Sale proceeds of Madras property 2,30,000 Less : Expenses on sale 6,000 2,24,000 Less : Cost of acquisition and improvement :
As per assessment order 2,15,000 Add : Further deduction allowed for cost of improvements 5,000 2,20,000 Less : Long-term capital gains on Trivandrum property adjusted against cost in terms of section 54(1)(ii) of the Income-tax Act as in (A) 65,750 1,54,250 Capital gains 69,750
6. From the above tabulation it would be seen that an amount of Rs. 65,750 is the amount of capital gains with regard to the sale of the Trivandrum property arid purchase of the Madras property that was adjusted in terms of Section 54(1)(ii) of the Income-tax Act, 1961.
7. To illustrate the above situation, reference to the above tabulation would show that the sale proceeds of the Trivandrum property are Rs. 1,60,000. The amount of Rs. 65,750 is after deduction of the cost of acquisition--Rs. 54,250 and also the cost of improvements determined by the Department at Rs. 40,000. It would also be seen by reference to column (B) of the above tabulation that the sale proceeds of the Madras property get determined at Rs. 2,24,000.
8. The question before us, on the basis of consideration of the statutory provisions, is whether this amount of Rs. 65,750 in regard to which on adjustment in terms of the provisions of Section 54 of the Act, the benefit of capital gains had already enured to the benefit of the assessee, would get forfeited by reason of the sale of the Madras property on February 25, 1983, admittedly within a period of three years from its purchase for Rs. 1,75,000 on May 17, 1981.
9. The Income-tax Officer took the view that since the Madras property has been sold within 36 months from the date of purchase, the capital gains in regard thereto being in respect of a short-term capital asset, no deduction under Section 80T of the Act can be allowed.
10. The first appellate authority--the Commissioner of Income-tax (Appeals), Trivandrum, endorsed the said view that since the property was not held by the appellant for a period of 36 months or more, there will not be any deduction under Section 80T of the Act. The first appellate authority considered the provisions of Section 54 of the Act and took the view that the concept of capital gain would have to be understood as relatable to the old asset and could be considered only as a process in the computation of capital gains relatable to the old asset only. The first appellate authority reached the conclusion that if the new property was sold after three years of its acquisition, then and then alone no capital gains either of the old or of the new property would come up for computation. The Trivandrum property was acquired in 1966 and was sold in 1980.
11. The Income-tax Appellate Tribunal considered the same question and in fact if the reasoning of the Tribunal in paragraphs 9 and 10 of its order are seen, the Tribunal also did not find difficulty in regard thereto.
12. The Tribunal has considered the provisions of Section 54 of the Act as dealing with the question of profit on the sale of property used for residence. The reasoning proceeds further to note the first condition as the requirement of the capital gains in question necessary to be arising from the transfer of a long-term capital asset. For the purpose of benefit of Section 54 of the Act, the second condition requires that the assessee has, within a period of one year before or after the date on which the transfer took place, either purchased or constructed a residential house in regard thereto and, if it is constructed, it has to be within a period of three years after the date of purchase. On satisfaction of the above two conditions, the question of dealing with the capital gain is to be answered by following the provisions of Clauses (i) and (ii) thereof. The Tribunal has taken up for consideration Sub-clause (ii) of Section 54 of the Act after quoting the same ad verbatim. The Tribunal took the view that if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45 of the Act.
The Tribunal observed that normally capital gains arise in the year in which the transfer is effected ; but in a case where the capital gains arising from the transfer of the new asset within the specified period and Such new asset is sold within a period of three years of the date of purchase or construction, the capital gain on the previous asset shall not be charged to tax in the year of its transfer, but should be computed in a particular manner. In reaching this conclusion, the Tribunal has also considered the provisions of Section 45 of the Act. The Tribunal took the view that in such situation it is the capital gain of the old asset that is being singled out for special treatment which is provided by Section 54(1)(ii) of the Act. The special treatment, according to the Tribunal, is such that capital gains will not be taxed in the year in which the transfer took place, but it will be reckoned for the purpose of taxation only when the new asset which was acquired with the amount of capital gains arising on the sale of the old asset was subsequently sold within a period of three years from the date of its purchase or construction.
13. The Tribunal has paraphrased the above position by specifying that the initial exemption granted under the first limb of Section 54(1)(ii) will be understood as forfeited. The character of the capital gain gets related back to the capital gains arising from the sale of the old asset reckoned in the context of sale of the new asset within 36 months.
14. The Tribunal has emphasised that admittedly in this case the assessee held the Trivandrum property for more than 36 months and, therefore, whatever capital gain was available by resort to Section 54(1)(ii) of the Act does not lose the character of it being a long-term capital gain. The Tribunal has observed on the basis of the above tabulation that Rs. 65,750 are the capital gains that were available and would have to be treated in the process of logic as liable to forfeiture.
15. However, even after reaching the above conclusion, the new asset having been sold within 36 months being a short-term capital gain, the Tribunal proceeds that when this new asset at Madras is sold within 36 months, the original exemption in relation to the capital gains of the old asset cannot be understood as could be brought to tax because the long-term capital gains--its character--cannot stand obliterated. In other words, although the Tribunal proceeded in the right direction at the end, the sale of the Madras asset within 36 months of its purchase is considered by the Tribunal as a short-term capital gain, not to be controllable by the provisions of Section 54 of the Act. The question is as to whether this last somersault is correct and legal.
16. The assessee had not engaged any advocate. Learned senior tax counsel stated before us that this provision has not come up for consideration hitherto either in this court or any other court. Counsel submitted before us that the statutory provision speaks of a situation of forfeiture of a benefit earned by an assessee, which is the direct and plain statutory meaning of the provision. Since the assessee was properly served and had not chosen to represent himself before us, taking into consideration the importance of the question involved, by the order dated August 16, 1996, passed by the earlier Bench that included myself, Shri Pathrose Mathai, who has ably argued many tax matters, was requested to assist us as amicus curiae. The matter was, therefore, adjourned. We have heard not only learned senior tax counsel for the Revenue, but also learned counsel appearing as amicus curiae to assist us. In the process of hearing of this reference we were taken through the statutory provisions of Sections 45, 48, 54 and 80T of the Income-tax Act, 1961. Since counsel could not lay their hands on any reported decision, they adopted as their submissions extracts from the commentaries on the concerned provisions. In fact, learned counsel placed on record relevant photostat copies of the portions of the commentaries of -
(1) Chaturvedi and Pithisaria's income Tax Law, Fourth edition, Vol. 2, (2) Law of Income Tax in India by V. S. Sundaram, (3) The Law and Practice of Income Tax, Seventh edition - Kanga and Palkhivala, (4) Income-tax Act, 1961, Second edition, 1978-A. N. Aiyar, (5) Sampath lyengar's Law of Income-tax, Eighth edition, and (6) Jindal's Income-tax - Past and Present, Third edition, 1972. We have been taken through the relevant portions also,
17. Learned senior tax counsel, after taking us through the three orders, submitted that the Tribunal had correctly approached the question except the last portion of paragraph 10 of its order to the effect that when the new asset is sold within 36 months, the original exemption in relation to the capital gains of the old asset is withdrawn and brought to tax, in which case its character as long-term capital gains cannot stand obliterated. Learned counsel submitted that it is this part of the reasoning which is erroneous in law and if the plain statutory provisions are taken into consideration, Section 54 of the Act would have to be read as a whole dealing with the situations relating to the grant and determination of the exemption in regard to the capital gains.
18. Learned counsel for the assessee, amicus curiae, took us through the relevant statutory provisions to contend that the last part of Section 54(1)(ii) of the Act--"the cost shall be reduced by the amount of the capital gain"--will have to be read only in the event of the new asset being of the character of a long-term capital asset only. Learned counsel relied on the Explanation to Section 54 in the light of the definition of "short-term capital asset" as available in Section 2(42A) of the Act meaning that if any capital asset is held by an assessee for not more than 36 months immediately preceding the date of its transfer, it would be a short-term capital asset. Learned counsel for the assessee contended that the sale transaction of the Madras property dated February 25, 1983, satisfying the requirements would have to be understood as a short-term capital asset taking the situation out of the clutches and rigor of Section 54 of the Act. Learned counsel for the assessee also made submissions on the above basis with regard to the question of direction as available under the provisions of Section 80T of the Act.
19. The question of capital gains is understandable by reference to its initial introduction of Section 45 of the Act. "Capital gains" would mean "any profits or gains arising from the transfer of a capital asset effected in the previous year" and becoming chargeable to income-tax under the head "Capital gains". Section 48 of the Act speaks of the mode of computation and deductions. It enacts that capital gains are to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, certain aspects enacted therein such as expenditure incurred in connection with the transfer, and the cost of acquisition of the capital asset and the cost of any improvement in regard thereto. The said group of Sections speaks of statutory provisions relating to the computation of such costs and expenditure liable to deduction as enacted in Section 48 of the Act. For our purpose it would be seen that capital gains are exempt from the tax which is provided in Section 53 of the Act. In this subject dealing with the question of exemption, Section 54 of the Act appears thereafter. We already know that a capital asset which is not a "short-term capital asset" is to be understood as the "long-term capital asset". Section 54 of the Act in its Sub-section (1) deals with the question of exemption of the capital assets arising from the transfer of a long-term capital asset. It is also enacted that the provisions of Section 54 of the Act would apply only to situations to which the provisions of Section 53 would not be applicable. Section 54(1) provides further as a requirement that the assessee has within a period of one year before or after the date on which the transfer took place purchased, or has within a period of three years constructed a residential house, then and then only the question of exemption would be considered in accordance with the provisions of Clauses (i) and (ii) of the said statutory provision.
20. Therefore, with regard to the application of the provisions of Section 54 of the Act, the requirements specified by us hereinbefore have to be present as a situation. It is, thereafter, in addition, certain situations get enacted as requirements firstly in Sub-section (1) of the Act and alternatively as would appear from the conjunction "or" in between Sub-clauses (i) and (ii) of Section 54(1) of the Act.
21. Although it is unnecessary, Sub-clause 54(1)(i) of the Act postulates situations arising out of the difference between the capital gains and the cost of the new assets in a situation of a transfer arising within a period of three years. A perusal of Section 54(1)(i) of the Act would show that it would arise for consideration and consequent operation only in a situation relating to a transfer within a period of three years as specified therein and when the conditions stated therein are applicable as governing the situation.
22. Section 54(1)(ii) of the Act provides another and independent consequence with reference to a situation relating to the transfer within a period of three years of its purchase or the construction of a residential house as it is. It is specifically enacted that in a situation if the amount of a capital gain is equal to or less than the cost of the new asset, obviously the capital gain shall not be charged under Section 45. It is in this context the latter part of the statutory provision provides a situation. This latter part of the statutory provision is as follows :
"..... and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain."
23. In the event of any capital gains relatable to a transfer within a period of three years of its purchase or construction, the statutory provision under consideration enacts further that the cost shall be reduced by the amount of the capital gains. In other words, it means and speaks of a situation of forfeiture of whatever has been available to the benefit of the assessee with regard to the earlier transaction.
24. Reading the provision it is clear that it relates to the transfer of a new asset within a period of three years of its purchase or construction and in such a situation Section 54(1)(i) enacts that the cost of the new asset would be "nil" if the situations that are spoken to are satisfied. By an inevitable logic if Clause (ii) is taken up for consideration, the consequences that normally follow would show that the cost of the new asset would naturally get reduced by the amount of the capital gains arising from the transfer of the original asset. This would inevitably mean that the exemption attachable to the earlier transaction would have to be understood as forfeited. Although we are not really concerned with the language which presents no difficulty to us, the reason for bringing the capital gains with reference to the original transaction of transfer being brought for the purpose of taxation, may be for the purpose of preventing avoidance of tax on capital gains or capital gains tax referable to speculative sales and purchases which are not infrequent in experience and practice. The plain language of the section presents no difficulty to reach a conclusion that in such a situation, the benefit with regard to the earlier transaction would suffer the situation of forfeiture. In other words, if the capital gains arising from the original transfer is equal to or less than the cost of the new asset, the cost of the new asset less the capital gains on the original transfer will be taken to be its cost and accordingly capital gains tax will be levied.
25. In the process, reading the statutory provisions of Section 54 of the Income-tax Act, 1961, it is not possible to draw the distinction as to whether the capital asset could be understood as a short-term capital asset because an occasion to consider exemption would come under consideration only when the capital asset in question is a long-term capital asset only, and consequently in a situation in respect of the new asset, any capital gain arising from its transfer within a period of three years of its purchase or construction, the said statutory provision provides that the cost shall be reduced by the amount of the capital gains.
26. In the process, reading the statutory provisions of Section 80T of the Act, it will be seen that the provision also is referable to capital assets other than short-term capital assets. The above process of reasoning makes it more than difficult to appreciate the reasoning of the Tribunal in the context, in an effort to have harmonious construction. In our judgment, the plain statutory language presents no difficulty. The factual consequence is that the amount of Rs. 65,750 would get revived as a result of the forfeiture. The factual matrix discussed and specified hereinbefore as undisputedly appearing in paragraph 10 of the order of the Tribunal reproduced at the outset would show that the Madras property was purchased for an amount of Rs. 1,75,000 by the document dated May 17, 1981. The Tribunal has computed the sale proceeds of the Madras property at Rs. 2,24,000, thus obviously leaving a difference of Rs. 49,000 arising therefrom as capital gains out of the transaction. This amount of Rs. 49,000 as capital gains out of the transaction dated February 25, 1983, would have to be considered in addition to Rs. 65,750 making a total of Rs. 1,14,750 for the purpose of calculation of capital gains tax under the provisions of Section 80T of the Income-tax Act.
27. For the above reasons, we answer the above question in all its threefold aspects in the negative, in favour of the Revenue and against the assessee.
28. Before parting with this judgment we must record our appreciation for the efforts and sincerity with which Sri Pathrose Mathai, counsel appearing amicus curiae, assisted us in the process of reaching our conclusion. We thank him, if not anything else. However, we feel that we should recommend the Revenue to make a token payment of Rs. 1,000 to Sri Pathrose Mathai who has assisted as an advocate amicus curiae.
29. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.