Capital gains on sale of an asset other than a residential house, in the hands of an individual or a Hindu Undivided Family, is eligible for an exemption u/s.54F on purchase or construction of a residential house within the specified period, subject to fulfilment of other conditions. The assessee enjoys a complete exemption from tax where the cost of the new asset is equal or more than the net consideration of the asset transferred and he will get a pro-rated exemption where the cost of the new asset is less than the net consideration.

The issue first came up before the Lucknow Bench of the Tribunal in the case of Mohd. Shoib v. Dy. CIT, 1 ITR (Trib.) 452.

In this case, the assessee sold 7 plots of land, which had been subdivided from a larger plot of land, for a total consideration of Rs.1.47 crore. In respect of 4 plots of land sold for Rs.83 lakh, the consideration was lower than the valuation adopted by the stamp duty valuation authorities, such valuation being Rs.1,00,61,773. The assessee had purchased a residential house out of a part of the total sale consideration, and claimed exemption u/s.54F which was calculated with reference to the consideration recorded in the documents of transfer by ignoring the difference of Rs.17,61,773 between the stamp duty value and the recorded consideration.

The Assessing Officer enhanced the returned capital gains by Rs.17,61,773, by invoking the provisions of section 50C. In appeal before the Commissioner (Appeals), the assessee challenged the applicability of the provisions of section 50C, which was rejected by the Commissioner (Appeals).

On behalf of the Department, it was argued that neither section 45 nor section 50C would fail if the assessee had made investment in exempted assets as per section 54, 54F, etc. According to the Department, section 54F only provided the method of computation of capital gains and did not provide exemption from the charging section 45. It was submitted that if an assessee did not invest the full consideration into a new asset, then he would be required to compute the capital gains in the manner laid down in sections 48 by applying the provisions of section 50C, and the exemption from capital gains was available only to the extent of investment made by the assessee in the new asset. Where a part investment was made in the new asset, then capital gains would be charged with respect to the sale consideration not invested. It was argued that the provisions of section 54, 54F, etc. followed the charging section 45, and that the charging section 45 did not follow the exemption provisions. It was submitted that merely because the assessee did not get an opportunity to invest the difference between the notional sale consideration as per section 50C and sale consideration shown by the assessee, the charging of capital gains on the basis of notional sale consideration as per section 50C could not be waived. According to the Department, there were many provisions where a notional income is taxed without giving any occasion to the assessee to make investment out of such notional income and claim deductions under Chapter VIA, etc. It was thus claimed that the charging section could not be made otiose merely because the assessee did not get an opportunity to claim deduction or make investments for claiming deduction in respect of additional income assessed.

While upholding the applicability of section 50C to the facts of the case, the Tribunal observed that section 45 provided a general rule that profits or gains arising from the transfer of a capital asset would be chargeable to income-tax under the head capital gains, except as provided in section 54, 54F, etc. According to the Tribunal while charging capital gains on profits and gains arising from the transfer of a capital asset, one had to see and take into account section 54F, and to the extent provided in section 54F and other similar sections, capital gains would not be chargeable. The moment there was a profit or gain on transfer of a capital asset, capital gains would be chargeable within the meaning of section 45, except and to the extent it was saved by section 54F and like sections.

Analysing the provisions of section 54F, the Tribunal noted that it was not the case that merely because provisions of section 54F were applicable to an assessee, that the entire capital gains would be saved and that no capital gains be chargeable. Saving u/s.54F depended upon investment in new asset of net consideration received by the assessee on sale of old asset. The quantum of net consideration was the result of transfer of the old asset, charge of the capital gain was only on the old asset, and investment in new asset did not and could not nullify or take away the case from the charging section 45. According to the Tribunal, first it was section 45 which came into operation, then it was section 48 which provided computation of capital gains, and thereafter it was section 54F which saved the capital gains to the extent of investment in the new asset.

The Tribunal also rejected the argument that where no capital gains was chargeable on account of entire sale consideration being invested in new asset, provisions of section 50C could not be invoked. The Tribunal observed that there were various provisions under the Income-tax Act for taxation of deemed income, such as sections 68, 69, 69A, 69B and 69C. In such cases also, there was no occasion to the assessee to claim any exemption or deduction by investing such notional addition to the total income in specified assets or items. According to the Tribunal, estimation of income was a statutory phenomenon under the Incometax Act, and such estimation could be resorted to irrespective of the fact whether real money flowed to the assessee or not in respect of such additional income assessed. The Tribunal was of the view that if such interpretation as advanced by the assessee were adopted, then deeming provisions of section 50C and other similar sections would become otiose.

The Tribunal therefore held that provisions of section 50C were attracted and capital gains would be taxable to the extent of the difference in valuation between the stamp duty valuation and the sale consideration as per the assessee, even in a case where the entire sale consideration was invested in a new asset.

A similar issue came up before the Bangalore Bench of the Tribunal in the case of Gouli Mahadevappa v. ITO, 135 TTJ (Bang.) 489. In that case, the plot of land was sold for Rs.20 lakhs, while the valuation for stamp duty purposes was Rs.36 lakhs, and a new residential house was acquired for Rs.24 lakhs. While the Assessing Officer invoked the provisions of section 50C, he allowed exemption u/s.54F of only two-thirds of the capital gains so computed. The assessee claimed that the entire actual sale consideration had been reinvested in a residential house, and therefore the entire capital gains should have been allowed as an exemption u/s.54F. The Tribunal rejected the assessee’s argument, holding that if such an exemption were to be allowed, the very purpose of introducing section 50C would be defeated, because whatever may be the capital gain arrived at by imposing section 50C would be exempt, if the net consideration, however meagre it may be, is invested in the new asset.

The issue again recently came up before the Jaipur Bench of the Tribunal in the case of Gyan Chand Batra v. ITO, 133 TTJ (Jp) 482.

In this case, the assessee sold a plot of land for a consideration of Rs.10.81 lakh, and computed his capital gains at Rs.5,558. The Assessing Officer invoked the provisions of section 50C, and took the full value of the consideration at Rs.19.25 lakh in place of Rs.10.81 lakh. No exemption was allowed u/s.54F, since no claim was made by the assessee for such exemption for purchase of the residential house of Rs.21.15 lakh.

Before the Commissioner (Appeals), the assessee claimed that he should be allowed exemption u/s.54F, since he had acquired a residential house for Rs.21.15 lakh within a period of 2 years from the date of sale of the plot of land, and had made payment of Rs.16.74 lakh for purchase of such house before the due date of filing of the return of income. The Commissioner (Appeals) rejected the assessee’s claim for exemption u/s.54F.

Before the Tribunal, on behalf of the assessee it was argued that the investment in the new residential house exceeded even the notional sale consideration adopted u/s.50C, and that the lapse of not depositing the balance amount before the due date of filing of the return in capital gains account scheme was procedural in nature. Since the substantive requirement of section 54F regarding the total investment in new house exceeding the full value adopted for stamp duty was complied with, it was argued that exemption u/s.54F should not be denied. Alternatively, it was claimed that exemption u/s.54F should be allowed at least to the extent of the payment of Rs.16.74 lakh actually made within the permissible time, before the due date of the filing of the return.

Noting the provisions of section 50C, the Tribunal observed that it was a deeming provision for considering the full value of consideration as the value adopted for stamp duty purposes. Thus, an artificial meaning of ‘full value of the consideration’ had been given in section 50C for the purposes of section 48. According to the Tribunal, it was necessary to ascertain the purpose for creating a statutory fiction, and thereafter full effect must be given to the statutory fiction, which should be carried to its logical conclusion. For that purpose, according to the Tribunal, it would be proper and even necessary to assume all those facts on which alone the fiction could operate. In its wisdom, the Legislature had referred to section 48 in section 50C, and therefore the deeming fiction of section 50C was to be applied only for section 48.

The Tribunal expressed the view that the words ‘full value of consideration’ as mentioned in other provisions of the act were not governed by the meaning of ‘full value of consideration’ contained in section 50C. Relying on the Delhi High Court decision in the case of CIT v. Nilofer I. Singh, 309 ITR 233 and the decision of the Supreme Court in the case of CIT v. George Henderson & Co Ltd., 66 ITR 622, the Tribunal noted that the natural meaning of the full value of consideration was the consideration that was specified in the sale deed. The Tribunal was therefore of the view that for interpretation of the various provisions of the Income-tax Act other than section 48, one would have to consider the consideration as specified in the sale deed as the full value of consideration.

The Tribunal also referred to the decision of the Bombay High Court in the case of CIT v. Ace Builders (P) Ltd., 281 ITR 210, where the Bombay High Court had an occasion to consider the overriding effect of the provisions of section 50 over section 54E. In that case, the Bombay High Court held thatthe deeming fiction contained in one section did not automatically apply to all other provisions of the Act, and that the deeming fiction of section 50 that capital gains on sale of depreciable assets was to be deemed as short-term capital gains would not apply to other sections, such as section 54E. The Tribunal relying on the aforesaid decision held that the deeming provisions contained in section 50C would not be applicable to section 54F, so far as the meaning of full value of consideration was concerned, since the deeming fiction of section 50C was only limited for the specific purpose of section 48.

Since, in the case before it, the assessee had invested more than the actual sale consideration specified in the sale deed in the new residential house before the due date of filing of the return, the Tribunal held that the entire capital gains was eligible for exemption u/s.54F.

The term ‘net consideration’ has been defined by the Explanation section 54F as “ ‘net consideration’, in relation to the transfer of a capital asset, means the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.” The Legislature has provided a special meaning to the net consideration for the purposes of section 54F which meaning is independent of section 48 and therefore of section 50C, also. A plain reading of the Explanation reveals that in computing the exemption u/s.54F, one has to take in to consideration the full value of consideration and reduce the same by the prescribed expenditure. The term ‘full value of consideration’ has been anlaysed by the Apex Court, time and again, to mean that it represents that consideration which is recorded in the agreement, i.e., the agreement value, unless otherwise specified or established with the help of evidences. In the circumstances, it appears that there is no or little scope for reading the provisions of section 50C in to the provisions of section 54F.

This line of thinking is clearly accepted even by the Bangalore Tribunal in Gouli Mahadevappa v. ITO, 135 TTJ (Bang.) 489’s case, when in paragraphs 8.17 to 8.19, the Tribunal accepts that section 54F is a complete code by itself and further that the deeming fiction contained in any other provision cannot be breathed in to section 54F, being an exemption provision. Once this is accepted, there is little scope for denying the benefit of exemption or reducing the quantum of the benefit, by application of clause (a) of sub-section (1) of section 54F, at least in cases where the value of investment in new premises exceeds the net consideration or is equivalent to the same. It is significant to note that no capital gains is required to be computed at all, in cases where clause (a) applies which has the effect of exempting the gains, if any, in entirety by virtue of investment of the net consideration which in turn is unrelated and independent of any computation requirement. The provisions of section 54F are a complete code in itself, which specifies the extent of the modification to section 45(1). Section 54F requires ascertainment of only two criteria — the cost of the new asset and the net consideration for the transfer. This is to be applied to the capital gains as computed u/s.45(1), to determine the extent of the exemption.

The law cannot demand of an assessee to do an impossible thing. This requirement is taken full care by the provisions of section 54F by defining the term ‘net consideration’. The use of the term ‘net consideration’ in section 54F is to determine the extent of money available with the assessee on the transfer of the asset. An assessee would have funds from the sale of the asset after incurring expenses in connection with the transfer. It is only the extent of such funds as are available with the assessee that is expected to be invested by him for availing the exemption, as he cannot be expected to invest funds exceeding the amount of net consideration. If the entire funds so available are used, full exemption is available, and if only a part of the funds available is used, proportionate exemption is allowed. It would be impossible to expect an assessee to invest the entire deemed consideration u/s.50C, beyond the resources available with the assessee. It is for this specific purpose that the deeming fiction of section 50C has not been extended to the entire chapter.

It is a trite law that the specific provision overrides a general provision. Needless to say that section 54F is a specific provision in question at least for the purposes of computing the exemption. As discussed earlier, in cases where no capital gains is required to be computed, at all, the preference of application of section 54F should not be questioned. The courts have applied the maxim ‘generalia specialibus non derogent’ in cases directly involving the issue of the order or the preference of application of the two provisions of the chapter IV-E dealing with capital gains taxation. Assam Petroleum Industries (P) Ltd., 262 ITR 587 (Gau.) and Ace Builders Pvt. Ltd., 281 ITR 210 (Bom.) which have been noted with approval by the Tribunal in Gouli Mahadevappa’s case. The decision of the Bombay High Court in the case of Ace Builders referred to above, also supports the view that the deeming fiction should not be extended beyond its purpose.

Again, it is an accepted position in law that there cannot be fiction on fiction, unless provided for by the law by the use of the specific language. No such super fiction exists in the context. In fact, the scope of the fiction of section 50C is specifically curtailed by restricting the same to the provisions of section 48, only. The question of deciding on the order of application, in cases where two special provisions are found to be applicable, has been pending before the Special Bench of the Tribunal, specifically in the context of section 50 vis-à-vis section 50C on account of the conflicting decisions delivered by the different Benches.

The Tribunal, even in deciding the later cases of Gyanchand Batra and Gouli Mahadevappa, discussed here, did not have the benefit of referring to the decided cases. Had that been made possible by the contesting parties, we would have had the benefit of identifying the conflicting views, appreciating the need for such views and addressing them.

The provisions of section 45 are subjected to the application of provisions of sections 54 to 54H and therefore it is fair to accept that the provisions would not apply where an assessee is found to be fully exempt under the respective provisions of the Act. It is only when some income is found to be taxable that the provisions of section 45 would come in force which in turn will require computation of the capital gains. No computation is required where the entire receipt is excluded from the ambit of capital gains taxation. The provisions are required to be construed under a harmonious interpretation to promote the benefit.

Section 54F is an incentive provision introduced for the benefit of the assessee and importantly for the purpose of housing an assessee. The provisions therefore requires to be construed in a manner which effectuates and implements the intention of the Legislature. A construction which defeats the stated objective of the legislature should be avoided. Incorporating the provision of section 50C in section 54F or reading the same in applying the exemption provisions, without there being any specific mandate to do so, amounts to defeating the legislative intent and is best avoided. It is well settled that exemption provisions are to be liberally construed. Given the fact that section 54F is an exemption provision, it should be construed in a liberal manner so as to achieve the object and intention of the Legislature of encouraging reinvestment in residential housing.

The Jaipur Bench of the Tribunal has rightly noted that the deeming fiction of section 50C, deeming the stamp duty valuation to be the full value of consideration, is only restricted to section 48, and is not for all purposes. Thus the fiction only applies to the computation of capital gains and does not extend to the charging section (section 45) or to the exceptions to the charging section, such as section 54F. It is well settled that fiction created by the Legislature has to be construed and applied only for the particular purpose for which the fiction has been created. The operation of the fiction cannot be extended to situations or circumstances for which the fiction has not been extended. The very fact that the Legislature did not use the expression ‘for the purposes of this chapter’ instead of ‘for the purposes of section 48’ clearly indicates that the Legislature did not intend to apply the fiction to the exemption provisions as well. Significantly, the Legislature while enacting the provisions of section 50C was aware of the provisions of section 54F and of the meaning of the term ‘net consideration’ defined therein and had it been desired they would have provided for overriding the meaning supplied by them. The have not done so with the specific intent to limit the application of the new provision to non-exemption provisions, only.