Section 54(F) Of IT Act| Amendment To Capital Gain Tax Does Not Have Retrospective Effect As It Alters Scope Of Original Provision: Bombay HC

The Bombay High Court has held that the amendment to Section 54 (f) of the Income Tax Act (Act) does not have retrospective effect as it alters the scope of the original provision.

The Court allowed a Petition challenging the order of the Commissioner of Income Tax, wherein his revision application under Section 264 of the Income Tax Act, 1961 (Act) was rejected. The Court noted that the insertion of the condition that the sale proceeds from a capital asset sale must be invested in a residential property located "in India" within a specific timeframe was a substantive change in the provision.

The Bench comprising Justice K.R. Shriram and Justice N.K. Gokhale noted, “Furthermore, the unamended Section 54(F) of the Act was not at all ambiguous. It expressly and specifically excluded the words ‘in India’. The amended provision also does not refer to Section 5(2) of the Act to even remotely suggest it to be a mere clarification. The statute also does not contain any statement that the amendment is merely declaratory or clarificatory or "for removal of doubts". In this perspective the amendment in Section 54(F) can be said to be neither clarificatory nor merely explanatory giving it retrospective operation”.

Advocate Devendra Jain appeared for the Petitioner and Advocate Akhileshwar Sharma appeared for the Respondent.

The Petitioner was an Indian citizen working in the United States and filed his income tax return for the year 2014-15, with no taxable income as his status as a non-resident Indian meant that his income was not taxable in India. The Centralized Processing Centre (Centre) processed his return, under Section 143(1) of the Act. The Petitioner claimed that he was entitled to a refund of Rs. 72,370, as the tax deducted at source (TDS) on his salary and interest was Rs. 2,34,220, and the tax payable on his income was Rs. 1,61,855. Additionally, he claimed that he had sold a residential flat in India for Rs. 54,12,760 and purchased another in the USA for an amount exceeding the Long Term Capital Gain (LTCG) within the time period prescribed by Section 54 of the Act.

However, he mistakenly deposited an amount greater than the LTCG into a Capital Gain Account Scheme. The Petitioner applied for a receipt of sale proceeds without TDS under Section 197 read with Section 195 of the Act and was granted the same by the Income Tax Officer concerned. Later, he filed a rectification application accompanied by a correct return of income with the Centre and requested a revision of the intimation under Section 143(1) of the Act. He informed Respondent No.1 of the situation and requested a certificate from the bank for the release of Rs. 75,00,000 deposited in the CGAS. However, the Respondent rejected his claim because the Petitioner was not eligible for deduction under Section 54 of the Act since the investment was made in a house property located outside India. The Writ Petition was filed challenging the order of the Respondent (Commissioner of Income Tax), whereby the petition under Section 264 of the Income Tax Act, 1961 (Act) was rejected.

The issue dealt with by the Court was:

“Whether, in the facts and circumstances of the case, the benefits of Section 54(F) of the Act are available to Petitioner having transferred his residential house in India and purchased another house property in the United States of America, in view of the Amendment in Sections 54 and 54(F) of the Act by the Finance (No.2) Act of 2014”.

The Court emphasized the importance of identifying whether the amendment is substantive or clarificatory in order to determine its nature. If the pre-amended law was vague or ambiguous, an amendment could be considered clarificatory or curative, and thus be applied retrospectively. However, the Court noted that if the amendment alters the scope of the original provision, it is substantive and should be applied prospectively.

The bench noted, “It is settled position of law that if a statute is curative or merely clarificatory of the previous law, a retrospective operation thereof is permitted. In order for an amendment to be considered as clarificatory of the previous provision, the pre-amended law ought to have been vague or ambiguous. It is only when it would be impossible to reasonably interpret a provision unless an amendment is read into it, that the amendment is considered to be a clarification or declaration of the previous law and therefore applied retrospectively. Moreover, an explanation/clarification does not expand or alter the scope of the original provision”.

Additionally, the Court noted that the Petitioner had not filed revised returns under Section 139(5) of the Act but did admit to an error in declaring total income as Nil through a rectification application. The Court held that the Petitioner is entitled to a refund for an excess tax deduction, and the sale deed on record shows the exact amount of consideration.

Accordingly, the Court allowed the Petition and set aside the impugned order.

Cause Title: Hemant Dinkar Kandlur v Commissioner of Income Tax

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