Capital Gain Tax, No Retrospective Applicability Of Amendment Restricting Investment In India: Bombay High Court

The Bombay High Court has held that the amendment restricting investment in house property in India has retrospective applicability.

The bench of Justice K. R. Shriram and Justice N. K. Gokhale has observed that the language of Section 54(F) of the Act before its amendment was that the assessee should invest capital gain in a residential house. It did not mention any boundaries. It is only after the amendment to Section 54(F) of the Act, which amendment came into effect on April 1, 2015, that the condition that the assessee should invest the sale proceeds arising out of a sale of a capital asset in a residential property situated "in India" within the stipulated period was imposed. The amendment is not merely a clarificatory or explanatory amendment, but a substantive one.

The petitioner/assessee is a non-resident Indian working in the USA. The petitioner filed a return of income for AY 2014–15, declaring NIL taxable income, under the assumption that, being an NRI, his income was not taxable in India.

It was processed by the Centralised Processing Centre (CPC) under Section 143(1). The tax payable on his income was Rs. 1,61,855, and the tax deducted at source (TDS) on his salary and interest was Rs. 2,34,220.

Thus, according to the petitioner, he was entitled to a refund of Rs. 72,370. They had sold a residential flat in India and purchased another residential flat in the USA for a consideration greater than the amount of long-term capital gain (LTCG) within the time limit prescribed by Section 54. Again, under a mistaken presumption, he deposited an amount higher than the amount of LTCG into a Capital Gain Account Scheme (CGAS).

The petitioner applied, under Section 197 read with Section 195 of the Act, for a receipt of sale proceeds without deduction of tax at source and was granted the same by the Income Tax Officer concerned. Upon learning the correct provisions of the law, he filed a rectification application accompanied by a correct return of income with the CPC, Bangalore. He then filed an application seeking a revision of the intimation under Section 143(1) of the Act, dated June 30, 2016.

The department considered his application but rejected his claim on the ground that the petitioner was not eligible for deduction under Section 54 as the investment was made in a house property situated outside India. The department relied upon an amendment in Section 54(1) of the Finance (No. 2) Act, 2014, which inserted the words 'in India' in the provision.

The department relied on Section 5(2) to suggest that the amendment was merely clarificatory because of the words ‘in India’ contained therein and observes that the provisions of Section 5(2) would always operate subject to the other provisions of the Act, including Section 54F.

The department argued that the assessee’s revised return was non-est for being filed beyond the due date by observing that the assessee has not filed the revised return under Section 139(5) but has admitted to an inadvertent error in declaring total income as nil via a rectification application.

The court held that pre-amended Section 54F only provided for the investment of the capital gain in a residential house by the assessee without mentioning any boundary; however, the amendment to Section 54F by the Finance (No. 2) Act, 2014, which came into effect on April 1, 2015, introduced the condition that the assessee should invest the capital gains in a residential property situated ‘in India’.

The court directed the CIT to accept the rectified return on or before December 31, 2023, and decide the same in accordance with the law.

Counsel For Petitioner: Devendra Jain

Counsel For Respondent: Akhileshwar Sharma

Case Title: Hemant Dinkar Kandlur Versus Commissioner of Income Tax

Case No.: 12/09/2023

Click Here To Read The Order