Capital gains briefanalysis-residentsnonresidents.-09-07-13

CAPITAL GAINS- A BRIEF ANALYSIS FOR RESIDENTS AND NON-RESIDENTS

A.INTRODUCTION

As there has been lot queries with regard to sale of immovable properties

and resultant saving of tax by investing mostly in purchase of new residential properties and partly by way of investment in capital gain bonds this write-up has covered various issues arising out of such activities. The issues pertaining to Non-resident Indians (NRIs) / Persons of Indian Origin (PIOs) and Indian residents are covered in this write-up. The write-up also touches Joint Development of Property (JDA).Wherever a reference is made to NRIs it covers PIOs also.

This write-up is split into various parts. Certain issues are common for a resident and non-resident person and wherever the procedure to be adopted in respect of these two entities is common the discussion has centered around keeping this in mind and wherever a different approach has to be adopted in respect of these entities the same is mentioned clearly. Section 55 of the Direct Taxes Code 2010 (DTC) dealing with “relief for rollover of investment asset” has also been covered. DTC is proposed to be introduced shortly (?).As per the proposed section 55 of DTC there is no corresponding beneficial provision like relief for investment in capital gain bonds as per section 54EC of the Income-tax Act. Moreover as per section 55 of DTC if the assessee owns more than one residential house other than the new investment asset on the date of the date of transfer of the original investment asset then there would be no relief for rollover of investment asset. This restriction is highlighted in the relevant place where section 55 of DTC has been extracted. This new provision has to be kept in mind and it would be better if the transfer transactions are concluded before introduction of DTC in cases where more than one residential property is owned by the assessee on the date of transfer of the original asset.

Common issues:- 1. Computation of Capital Gains 2. Does the transfer of property come under section 54 or section 54F? 3. Whether investment in more than one residential property is possible? 4. When does the capital gains tax arise? 5. What should be the year of acquisition in case of properties acquired

through Will, Settlement etc., and hence indexation value to be adopted for working out capital gains?

6. What are the avenues that are available to save capital gains tax apart from investing in residential property?

With regard to NRIs 1. Applicability of section 195 read with section 197 regarding tax

deducted at source 2. Applicability of Chapter XIIA of the Income-tax Act. 3. Facilities available to NRIs, PIO for investment in India

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4. Procedure for remittance / repatriation of funds by Non Residents.

B.RELEVANT PROVISIONS OF INCOME-TAX ACT

The following sections are relevant for this discussion. (a). SECTION 2(47) (v) OF THE INCOME-TAX ACT Definitions.--In this Act, unless the context otherwise requires,- 2(47)(v)-"transfer", in relation to a capital asset, includes,-

any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; Explanation - For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA. (b). SECTION 45.(1) OF THE INCOME-TAX ACT

Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA. 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (c) SECTIONS 2(29A), 2(29B), 2(42A) and 2(42B) OF THE ACT (29A) “long-term capital asset” means a capital asset which is not a short-term capital asset; (29B) “long-term capital gain” means capital gain arising from the transfer of a long-term capital asset; (42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer: (42B) “short-term capital gain” means capital gain arising from the transfer of a short-term capital asset. However in the case of shares and securities the period of holding need only be twelve months as against thirty-six months for other capital assets.

(d) SECTION 48 OF THE INCOME-TAX ACT Mode of computation -The income chargeable under the head "Capital

gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:--

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of

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capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company:

Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted:

Provided also that nothing contained in the second proviso shall apply to the long-term capital gains arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government.

Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section.

Provided also that no deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. Explanation.--For the purposes of this section,-- (i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973); (ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf; (iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; (iv) "indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place; (v)‘‘Cost Inflation Index’’, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent. of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

(e) SECTION 49 (only relevant portions) OF THE INCOME-TAX ACT (1) Where the capital asset became the property of the assessee—

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;

(ii) under a gift or will; (iii) (a) by succession, inheritance or devolution the cost of acquisition of

the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

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Explanation.—In this sub-section the expression “previous owner of the property” in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section.

(f) SECTION 54 OF THE INCOME-TAX ACT Profit on sale of property used for residence.--(1) Subject to the provisions

of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family the capital gain arises from the transfer of a long-term capital asset being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then instead of the 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 following provisions of this section, that is to say,-- (i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; 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 nil; or (ii) 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; 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.

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new assets made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,--

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(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires ; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

(g) SECTION 54F OF THE INCOME-TAX ACT Capital gain on transfer of certain capital assets not to be charged in case of

investment in residential house.--(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-- (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45: (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:

Provided that nothing contained in this sub-section shall apply where— (a) the assessee,—

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset ; or

(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset ; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and (b) the income from such residential house, other than the one residential

house owned on the date of transfer of the original asset, is chargeable under the head ‘‘Income from house property’’. Explanation.--For the purposes of this section,-- "net consideration", in relation to the transfer of a capital asset, means the full value of the 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.

(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.

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(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred.

(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised, wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-- (i) the amount by which-- (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1),

exceeds (b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset,

shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.

(h) SECTION 54EC OF THE INCOME-TAX ACT Capital gain not to be charged on investment in certain bonds - (1) Where

the capital gain arises from the transfer of a long-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, -

(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45 ;

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(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45.

Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees.

(2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head ‘‘Capital gains’’ relating to long-term capital asset of the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money. Explanation.- In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.

(3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1),—

(a) a deduction from the amount of income-tax with reference to such cost shall not be allowed under section 88 for any assessment year ending before the 1st day of April, 2006 ;

(b) “long-term specified asset” for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,—

(i) by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) ; or

(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit :

Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause;

“long-term specified asset” for making any investment under this section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority

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of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956)

(i) Insertion of new section 54GB with effect from assessment year 2013-14(Financial Year 2012-13)

'54GB. Capital gain on transfer of residential property not to be charged in certain cases.—(1) Where,—

(i) the capital gain arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee (herein referred to as the assessee); and

(ii) the assessee, before the due date of furnishing of return of income under sub-section (1) of section 139, utilises the net consideration for subscription in the equity shares of an eligible company (herein referred to as the company); and

(iii) the company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset,

then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer takes place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) if the amount of the net consideration is greater than the cost of the new asset, then, so much of the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 as the income of the previous year; or

(b) if the amount of the net consideration is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 as the income of the previous year.

(2) The amount of the net consideration, which has been received by the company for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made.

(3) For the purposes of sub-section (1), the amount, if any, already utilised by the company for the purchase of the new asset together with the amount

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deposited under sub-section (2) shall be deemed to be the cost of the new asset:

Provided that if the amount so deposited is not utilised, wholly or partly, for the purchase of the new asset within the period specified in sub-section (1), then,—

(i) the amount by which—

(a) the amount of capital gain arising from the transfer of the residential property not charged under section 45 on the basis of the cost of the new asset as provided in sub-section (1),

exceeds—

(b) the amount that would not have been so charged had the amount actually utilised for the purchase of the new asset within the period specified in sub-section (1) been the cost of the new asset,

shall be charged under section 45 as income of the assessee for the previous year in which the period of one year from the date of the subscription in equity shares by the assessee expires; and

(ii) the company shall be entitled to withdraw such amount in accordance with the scheme.

(4) If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property not charged under section 45 as provided in sub-section (1) shall be deemed to be the income of the assessee chargeable under the head "Capital gains" of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be.

(5) The provisions of this section shall not apply to any transfer of residential property made after the 31st day of March, 2017.

(6) For the purposes of this section,—

(a) "eligible assessee" means an individual or a Hindu undivided family;

(b) "eligible company" means a company which fulfils the following conditions, namely:—

(i) it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment

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year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;

(ii) it is engaged in the business of manufacture of an article or a thing;

(iii) it is a company in which the assessee has more than fifty per cent share capital or more than fifty per cent voting rights after the subscription in shares by the assessee; and

(iv) it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 (27 of 2006);

(c) "net consideration" shall have the meaning assigned to it in the Explanation to section 54F;

(d) "new asset" means new plant and machinery but does not include—

(i) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;

(ii) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;

(iii) any office appliances including computers or computer software;

(iv) any vehicle; or

(v) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any previous year.'.

(j) SECTION 50C OF THE INCOME TAX ACT Special provision for full value of consideration in certain cases.

(1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

(2) Without prejudice to the provisions of sub-section (1), where—

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(a) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer; (b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

Explanation 1 - For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).

Explanation 2 - For the purposes of this section, the expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.

(3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer. (k) SECTION 56 OF THE INCOME-TAX ACT

Income from other sources.--(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources" if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head "Income from other sources", namely:-- (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,— (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum ; (b) any immovable property,— (i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property ; (ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration ; (c) any property, other than immovable property,—

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(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property ; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :

Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections : Provided further that this clause shall not apply to any sum of money or any property received— (a) from any relative ; or (b) on the occasion of the marriage of the individual ; or (c) under a will or by way of inheritance ; or (d) in contemplation of death of the payer or donor, as the case may be ; or (e) from any local authority as defined in the Explanation to clause (20) of section 10 ; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 ; or (g) from any trust or institution registered under section 12AA. Explanation. — For the purposes of this clause, “relative” means— (i) spouse of the individual ; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual ; (iv) brother or sister of either of the parents of the individual; (v) any lineal ascendant or descendant of the individual; (vi) any lineal ascendant or descendant of the spouse of the individual; (vii) spouse of the person referred to in clauses (ii) to (vi). (l) SECTION 63 OF THE INCOME-TAX ACT For the purposes of sections 60, 61 and 62 and of this section,—

(a) a transfer shall be deemed to be revocable if— (i) it contains any provision for the re-transfer directly or indirectly of the

whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly

or indirectly over the whole or any part of the income or assets ; (b) “transfer” includes any settlement, trust, covenant, agreement or

arrangement.

(m) SECTION 112(1)(a) OF THE INCOME TAX ACT Tax on long-term capital gains

(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,—

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(a) in the case of an individual or a Hindu undivided family, being a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent ;

(n) SECTION 195 OF THE INCOME-TAX ACT Other sums.--(1) Any person responsible for paying to a non-resident, not

being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

Explanation.--For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under sub-section (5) any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom

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such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).

(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.

(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

(6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.

(o) SECTION 197 OF THE INCOME-TAX ACT Certificate for deduction at lower rate.--(1) Subject to rules made under

sub-section (2A), where, in the case of any income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K 1194L, 194LA and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.

(2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.

(2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

(p) Chapter XII A of the Income-tax Act contains special provisions relating to certain incomes of non-residents and the important sections so far this discussion is concerned are the following- 1. Section 115C. In this Chapter, unless the context otherwise requires,—

(a) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made there under;

(b) “foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;

(c) “investment income” means any income derived from a foreign exchange asset;

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(d) “long-term capital gains” means income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;

(e) “non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not a “resident”.

Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India;

(f) “specified asset” means any of the following assets, namely :— (i) shares in an Indian company; (ii) debentures issued by an Indian company which is not a private

company as defined in the Companies Act, 1956 (1 of 1956); (iii) deposits with an Indian company which is not a private company as

defined in the Companies Act, 1956 (1 of 1956); (iv) any security of the Central Government as defined in clause (2) of

section 2 of the Public Debt Act, 1944 (18 of 1944); (v) such other assets as the Central Government may specify in this

behalf by notification in the Official Gazette.

2. SECTION 115E. Where the total income of an assessee, being a non-resident Indian, includes—

(a) any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of— (i) the amount of income-tax calculated on the income in respect of

investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent;

(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and

(iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).]

3. Section 115-I.- A non-resident Indian may elect not to be governed by the provisions of this Chapter for any assessment year by furnishing [his return of income for that assessment year under section 139 declaring therein] that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act

(q) Code / Section55 of the Direct Taxes Code (proposed to be introduced shortly ?) reads as under-

55. Relief for rollover of investment asset.—(1) An individual or a Hindu undivided family shall be allowed a deduction, in respect of rollover of any original investment asset referred to in sub-section (3) of section 51, from the capital gain arising from the transfer of the asset in accordance with the provisions of this section.

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(2) The deduction referred to in sub-section (1) shall be computed in accordance with the formula –

Where,

A = the amount of capital gains arising from the transfer of the original investment asset

B = the amount invested for purchase or construction of the new asset referred to in sub-section (6) within a period of one year before the date of transfer of original investment asset

C = the amount invested for purchase or construction of the new asset referred to in sub-section (6) by the end of the financial year in which the transfer of the original investment asset is effected or six months from the date of transfer, whichever is later

D = the amount deposited in an account in any bank by the end of the financial year in which the transfer of original investment asset is effected or six months from the date of transfer, whichever is later in accordance with the Capital Gains Deposit Scheme framed by the Central Government in this behalf ;

E = the net consideration received as a result of the transfer of the original investment asset.

(3) The deduction computed under sub-section (2) shall not exceed the amount of capital gains arising from the transfer of the investment assets.

(4) Any amount withdrawn from an account under the Capital Gains Deposit Scheme shall be utilised within a period of one month from the end of the month in which the amount is withdrawn, for the purposes of purchase or construction of the new asset.

(5) The amount deposited in the account under the Capital Gains Deposit Scheme shall be utilised for the purposes of purchase or construction of the new asset within a period of three years from the end of the financial year in which the transfer of the original asset is effected.

(6) The deduction under this section in respect of capital gain arising from the transfer of an investment asset, specified in column (2) of the Table given below, shall be allowed with reference to the corresponding new investment asset referred to in column (3) of the said Table, subject to the fulfilment of conditions specified in column (4) thereof :

Table

Rollover Relief

Serial number

Description of the original investment asset

Description of the new investment asset

Conditions

(1) (2) (3) (4)

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1. Agricultural land One or more pieces of agricultural land

(1) The original investment asset was— (i) an agricultural land during two years immediately preceding the financial year in which the asset is transferred ; and (ii) acquired at least one year before the beginning of the financial year in which the transfer of the asset took place.

2. Any investment asset

Residential house

(2) The new asset shall not be transferred within one year from the end of the financial year in which the new asset is acquired— (i) the assessee does not own more than one residential house, other than the new investment asset, on the date of transfer of the original investment asset ; and (ii) the original investment asset was acquired at least one year before the beginning of the financial year in which the transfer of the asset took place ; (iii) the new asset shall not be transferred within one year from the end of the financial year in which the new asset is acquired or constructed.

(7) In this section, "net consideration" means the full value of consideration received or accruing as a result of the transfer of an investment asset as reduced by any expenditure incurred wholly or exclusively in connection with such transfer. C-1. COMPUTATION OF CAPITAL GAINS

(i) Capital gain is the difference between the selling price (total

consideration) and total sum up of indexed cost of acquisition and indexed cost of improvement. Any expenditure incurred wholly and exclusively in connection with transfer of asset can be added to the total figure of indexed cost of acquisition and indexed cost of improvement to arrive at the total cost. The nature of expenditure that can be claimed includes travelling, if any, advocate fees (paid for obtaining legal opinion, drafting of deeds etc) and consultancy charges paid for obtaining legal advice in respect of capital gains. The indexed

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cost of acquisition is ascertained by multiplying by purchase/construction cost or market value of the property as on 01-04-1981 whichever is later by cost inflation index pertaining to the year of sale and divide it by cost inflation index pertaining to the year of purchase/construction or if the purchase/construction is made prior to 01-04-1981 by 100. If there had been any improvement to the property then indexed cost of improvement can be calculated likewise and added to original indexed cost of acquisition / purchase to arrive at the total indexed cost of acquisition. The Supreme Court in the case of Arunachalam (Rm.) vs.CIT[1997] 227 ITR 222 has held that where property placed under mortgage by previous owner was acquired by the assessee(as the present owner) and the mortgage is discharged by the assessee then such sum paid by the assessee becomes part of cost of acquisition. The Madras High Court in the case of CIT vs. Bradford Trading Co. (P.) Ltd. [2003] 261 ITR 0222 had explained the decision of the Supreme Court in the case of Arunachalam (Rm) in the following words- “The distinction pointed by the Supreme Court in R.M. Arunachalam’s case (supra) is that where the assessee acquired property subject to mortgage and later on it was discharged at the time of transfer by vendee, then, it would become an expenditure incurred in connection with the transfer, and where the assessee himself created the mortgage after acquisition of capital asset, the amount would not go to reduce the full value of consideration received by the assessee”

The avenues by which capital gains / sale proceeds can be invested and exemption can be claimed are

1. Investing in residential house property 2. Investing in capital gain bonds.

The relevant provisions of section 54,54F, 54EC and 54GB have been extracted earlier.

(ii) Investment in purchase of a residential house can be made even one year prior to date of transfer which is defined in section 2(47)(v) of the Act. If investment in purchase of a residential house is made after the date of transfer then the time limit provided is 2 years within the date of transfer. In the case of construction of a residential house a time limit of 3 years has been fixed from the date of transfer for claiming exemption under section 54 of the Act.

The following decisions may be referred to in this regard. (a) COMMISSIONER OF INCOME TAX vs. R. SRINIVASAN (2010) 45

DTR (Mad) 208-Decision dated 12-04-2010

The catchwords run as under- Capital gains—Exemption under s. 54F—Investment out of sale proceeds

of original asset—AO rejected the claim of exemption on the ground that the investment in the new asset i.e., house property was not made from the sale consideration of the original asset—Not justified—Sec. 54F provides option to the assessee to invest even within a period of one year before the date on which the transfer takes place—There is no such pre-condition imposed by the provision to the effect that the property is to be purchased by the assessee out of consideration received on account of transfer of the capital asset—Sec. 54F is clear, unambiguous and plain—Sec. 54F encourages investment in residential house and the same is required to be interpreted in such a manner as not to nullify the object—Assessee having purchased the house within a period of one

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year before the sale of capital asset, was entitled to the relief under s. 54F—No substantial question of law arises

(b) The decision of the Hyderabad Bench of ITAT in the case of Muneer Khan vs. ITO (2010)-7 taxmann.com 30 (Hyd-ITAT) wherein it has been held as under-

“Since law itself permits investment in a new property even before sale of property covered by sections 54 and 54F, the law does not contemplate the identity of the funds on sale for its investment; since money has no colour, all that is required is compliance with the conditions of investment within the specified time “

(c) The Delhi High Court in the case of Commissioner of Income-tax Vs. Smt. Brinda Kumari [2002] 253 ITR 0343 has held that when amount was advanced to builder for specific purpose of construction of flats in new building and the Appellate Tribunal has also held that construction can be treated as construction by assessee that finding of fact is binding on the Court and the Tribunal was right in holding that the assessee was entitled to exemption under section 54(1) of the Act. The following observations were made by the High Court in the judgment –

We find substance in the assessee’s stand. The Tribunal has, inter alia, recorded a positive finding in the following terms:

“In the present case, on the facts, there is no dispute that the late Maharani advanced a sum of Rs. 5,25,000 for the specific purpose of constructing flats for her on third floor of the Akash Deep Building. The Akash Deep Building was constructed after demolishing 9, Hailey Road, which was sold by the late Maharani to Ansal and Sehgal Properties P. Ltd. If therefore the latter constructed the flats on behalf of the late Maharani with the funds advanced by her, there appears to be no difficulty in treating the construction as the construction made by her.”

As provisions of 54F are similar so far as investing in a house within one year prior to date of transfer is concerned, these decisions can be taken advantage of even in respect of issues arising under section 54.

It should also be noted that any additional facilities (to be) provided in the new residential property can be claimed as part of investment made under section 54 of the Income-tax Act.(at pages 25 to 27 infra) (iii) Sometimes it may so happen that the proceeds arising out of sale of residential/other property may have to be invested in lands not belonging to the assessee-seller and the question which would then arise is “whether it is possible to do so?” The following write-up provides an answer in the affirmative. LAND MAY BELONG TO ONE PERSON AND SUPER-STRUCTURE TO ANOTHER PERSON 1. The Madras High Court as early as 01-05-1934 vide its decision in CIT v. The Madras Cricket Club [1934] 2 ITR 209(Mad) held that that in order that a person may be assessed as the owner of a building under section 9 of the Indian Income-tax Act, 1922, it is not necessary that he should also be the owner of the land on which the building stands. In this case the assessee took on long lease a parcel of land from the Government and erected buildings thereon with a provision for permitting the removal of the buildings erected upon the land by the assessees at the expiration or upon the determination of the lease. The question

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which arose was whether the income arising out of letting out of letting out of such property was assessable under section 9 of the Indian Income Tax Act, 1922.which deals with income from house property and is akin to section 22 of the Income-tax Act 1961.This decision of the Madras High Court was followed in Sakarchand Chhaganlal v. CED [1969] 73 ITR 555 (Guj.) and Wealth-tax Officer vs. Hemlata Shukla/Sarla Shukla(1983)-6-ITD-750(All) 2. The Gujarat High Court in the case of Sakarchand Chhaganlal v. CED [1969] 73 ITR 555 (Guj.) made the following observations at page 560 of its judgment- “Now having regard to the observations of the Privy Council in Narayan Das v. Jatindra Nath [1927] LR 54 IA 218 ; AIR 1927 PC 135 and Vallabhdas Naranji v. Development Officer, Bandra [1929] LR 56 IA 259 ; AIR 1929 PC 163, and the decision of the Supreme Court in Dr. K.A. Dhairyawan v. J.R. Thakur AIR 1958 SC 789, it must be taken as well settled that the doctrine of English law embodied in the maxim quic quid plantatur solo, solo cedit, that is, what is annexed to the soil goes with the soil, has no application in this country. Unlike the English law, the law in India recognizes dual ownership, the land belonging to one person and the structure upon it belonging to another.” 3..The Calcutta High Court in the case of Ballygunge Bank Ltd. v. Commissioner of Income-tax (1946)-14-ITR-409(Cal) following its earlier decision in Commercial Properties Ltd., In re [1928] ILR 55 Cal. 1057 held as follows-Head note of ITR “Income derived from the ownership of buildings is chargeable to tax under Section 9 of the Indian Income-tax Act irrespective of whether an individual or a company is the owner and also irrespective of whether one of a company's objects, or its sole object, is to acquire and let out buildings at rents; ownership itself is the criterion of assessment under that section. The assessees, a limited company, which had as one of their objects to acquire land, build houses and let them to tenants, obtained a lease of a plot of land for a period of 40 years. The lease deed provided, inter alia, that the assessees should build houses on the land within a specified time by using the best materials that the lessors or their representatives would be entitled to supervise the building construction, and that after the expiration of 40 years the houses would belong to the lessors. Under the lease the assessees should pay the entire municipal tax in respect of the houses and a proportionate municipal tax in respect of the land. Upon acquisition of the land by the Government or by a public authority the lessors were entitled to all compensation in respect of the land but compensation in respect of the buildings was to be divided between the lessors and the assessees: Held, that the assessees were the owners of the buildings until the period of the lease expired and they were therefore assessable under Section 9 of the Indian Income-tax Act in respect of the rents derived from the buildings.” 4. The Rajasthan High Court in the case of Saiffuddin v CIT (1985)-156-ITR-127(Raj) observed as follows (head note of ITR) “Section 22 of the I.T. Act, 1961, brings to tax income from house property and not the interest of a person in the property. As a matter of fact what is taxed under s. 22 is the income from the annual value of the property of which the assessee is the owner. The owner is that person who can exercise the rights of an owner, not on behalf of the owner but in his own right. The assessee purchased a plot of land. A hotel was constructed on the land and the expenses of construction were borne by the assessee and two of his

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brothers. There was no written agreement regarding the construction and no mutation was made nor was a sale deed executed by the assessee in favour of his brothers. The ITO assessed the entire income from the property in the hands of the assessee and this was upheld by the Tribunal. On a reference: Held, that so far as the construction on the plot which was purchased by the assessee was concerned, as the expenses of the same were borne by the assessee and his two brothers in equal proportion, the assessee and his two brothers were joint owners, each having a 1/3rd share. The entire income from the property was not assessable in the hands of the assessee. CIT v. Madras Cricket Club [1934] 2 ITR 209 (Mad), CIT v. Fazalbhoy Investment Co. (P.) Ltd. [1977] 109 ITR 802 (Bom) and Kala Rani v. CIT [1981] 130 ITR 321 (P & H) followed.” The Rajasthan High Court referred to the decision of the Madras High Court in the case of CIT v. Madras Cricket Club [1934] 2 ITR 209.in the following words- “Before a Division Bench of the Madras High Court, the meaning of the word 'owner' as used in section 9(1) came up for consideration in CIT v. Madras Cricket Club [1934] 2 ITR 209. In that case, the construction on the plot was made by the lessee. The lessee was entitled to remove the building on the termination of the lease. It was held that in order that a person may be assessed as the owner of a building under section 9(1), it is not necessary that he should also be the owner of the land on which the building stands. While considering the question regarding the ownership, it was observed as under: ". . . The rule in India which is different from that in England, is that a person who builds a superstructure upon the land of another man remains the owner of the superstructure and can at the end of his term remove that superstructure from the land, whereas in England a person who erects a building on the land of another cannot do so as the building at the end of the lease becomes the property of the lessor. . . ." (p. 215) 5..The Calcutta High Court applying the principles laid down in Nawab Bahadur or Murshidabad v. Commissioner of Income-tax [1955] 28 I.T.R. 510 (Cal.) and Ballygunge Bank Ltd. v. Commissioner of Income-tax [1946] 14 I.T.R. 409 (Cal.) held in the case of Sri Ganesh Properties Ltd. Vs. Commissioner of Income-tax

[1962] 044 ITR 0606(Cal) as under (head note of ITR) “In the case of a building lease the presumption is that the lessor remains the owner of the subject-matter of the lease including the building. But, if the terms of the lease-deed show that the ownership of the super-structures is vested in the lessee while the ownership of the site remains in the lessor, the lessee can be assessed in respect of the income from the super-structures under section 9 of the Income-tax Act as income from property. The lessee cannot claim that such income should be assessed under section 12 of the Act.(section 12 of the 1922 Act deals with income from other sources) A person may be assessed as the owner of a property under section 9 of the Act even though he has no right to alienate the property or his full right of ownership is in some other way subject to contractual or other limitations.” In other words when the assessee claimed that the income should be assessed under section 12 under the head other sources it was held by the Tribunal and confirmed by the High Court that the correct head of income is income from house property.

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6. The Lucknow Bench of ITAT in the case of Ashok Kumar Agarwal v. Income-tax Officer, IV (4) Lucknow [2007] 13 SOT 321 (LUCK.) held as under (Catchwords) Section 22, read with section 26, of the Income-tax Act, 1961 - Income from house property - Chargeable as - Assessment year 2002-03 - Whether superstructure built on land owned by other person can be separately owned and assessed under section 22 - Held, yes - Whether ownership of superstructure is to be considered de hors ownership of land and there is no presumption, in law, that superstructure will be owned by same person who owns land - Held, yes - Assessee declared his income from house property let out to a bank at an amount which was one fourth of rental income from that property on ground that rest amount had been distributed among other three co-owners, viz., his wife, his son and his daughter-in-law - Assessee submitted that assessee had entered into agreement dated 3-5-1985 with other co-owners that total investment in construction of property was made by those four persons and assessments had been made since long in hands of those persons individually - Assessing Officer rejected assessee’s submission and held that it was a colourable device and claim of co-ownership of property and distribution of rental income was not, in any way, legitimate - Assessing Officer, therefore, assessed entire income from house property in hands of assessee holding that other co-owners could not be treated as owners of property within meaning of section 22 - Whether since agreement dated 3-5-1985 clearly provided that all co-owners were equally responsible for overall management of property and repayment of loan and this agreement had not been found to be sham as it had actually been acted upon by all parties in letter and spirit, assessee’s claim that income from house property was to be assessed individually in hands of all four persons as co-owners was to be accepted - Held, yes 7.. The Delhi Bench of ITAT in the case of Mrs.Kamlesh Bansal v.ITO (2008)-26-SOT-3(Delhi)(URO) has held that even though the assessee had only 50% in a land jointly owned with her husband she would be entitled to claim exemption under section 54F on amount of investment made in construction of residential house when she had built super-structure on such land. This goes to prove that the assessee need not be the full owner of the land on which super structure is built. The head note of this case runs as under- The assessee had built the structure for the residential house on the land owned by her husband as per agreement in terms of which she held 50 per cent share in the house. The claim of deduction under section 54F had been denied on the ground that the assessee did not hold the legal title of the property. That view was legally not tenable. In the context of the Act, it is not necessary for someone to hold the registered title in respect of a house property in order to become an owner. Merely because, in the instant case, the contract was between husband and wife, it could not be said that the assessee was not owner of the 50 per cent of the house. No case had been made by the revenue that the agreement between husband and wife was not genuine or that the investment in the super structure had not been made by the wife. It was an undisputed fact that the super structure had been built by the assessee. The only requirement of section 54F is that the assessee should have constructed a residential house. In the facts of the instant case, it could not be said that the assessee had not constructed a residential house. There is no requirement in section 54F that the

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assessee should be the exclusive owner of the house constructed by her. Further, as both the contracting parties were living together, division was immaterial. What was material was the ownership. The assessee was no doubt the owner of the 50 per cent of the house which had been built by her. Therefore, finding of the Commissioner (Appeals) could not be sustained; the same was to be set aside and the claim of the assessee was to be allowed 8..SImilar case - The Pune Bench of ITAT in the case of Mukesh Malhotra v. Deputy Commissioner of Income-tax [2000] 75 ITD 355 (Pune) has held as under(Catchwords)- Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house - Assessment year 1994-95 - On a land owned by assessee, company ‘W’ constructed a residential accommodation (super-structure) and later sold it to assessee - Assessee had made investment in said purchase, after selling another land, within specified period as per section 54F and he claimed proportionate deduction from capital gains under section 54F - Whether since concept of dual ownership, i.e., land belonging to one and super-structure belonging to another, is recognised in Indian law, it would be wrong to hold assessee as co-owner of super-structure which belonged to ‘W’ and on that ground to deny assessee’s claim for exemption of capital gains invested in purchase of super-structure - Held, yes 9. The Calcutta Bench of ITAT in the case of Assistant Commissioner of Wealth-tax v. Anupam Pictures (P.) Ltd. [1997] 60 ITD 640 (CAL.) held as under (Catchwords) Section 3 of the Wealth-tax Act, 1957, read with section 40 of the Finance Act, 1983 - Charge of tax - Assessment years 1988-89, 1989-90 and 1990-91 - Assessee-company entered into memorandum of agreement for lease for 30 years regarding roof portion of a premises, raised structure thereon, gave it on rent and after some years sold it - It contended that in absence of lease having not been registered, it was not owner of said structure and hence not assessable to wealth-tax - Whether, even though unregistered lease deed was void as a permanent lease, it could be deemed to be a monthly lease terminable by 15 days’ notice under section 106 of Transfer of Property Act - Held, yes - Whether, in view of clear provisions of section 108(h) of Transfer of Property Act, lessee who put up construction on leased land was owner thereof and hence, assessee being legal owner of aforesaid structure, was assessable to wealth-tax in respect of said asset - Held, yes - Whether assessee, not being engaged in buying/selling of flats and buildings, said structure put up by it could not constitute stock-in-trade in its hands - Held, yes This goes to show that not only separate ownership-land belonging to one person and super structure belonging to another person- is recognized in Income-tax Act but also liability to wealth-tax cannot be avoided merely because the assessee, without being owner of land, is only owner of super structure 10. In the case which arose before ITAT Hyderabad Bench in the case of PRAVINCHANDRA MODI (HUF) v. INCOME-TAX OFFICER [1986] 17 ITD 747 (HYD.) assessee purchased superstructure on land owned by trust GM, and GM effected additions to structure at its cost as requested by assessee and entire structure was leased out to company DR, and lease agreements provided that assessee would receive Rs, 6,500 per month as rent from DR, and would in turn pay rent of Rs. 3,250 to GM.It was held that net rental income of Rs.3,250

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received by assessee was assessable as ‘income from house property’ and not under ‘income from other sources 11. Similar cases on this issue are- (a) CIT v. Fazalbhoy Investment Co. (P.) Ltd. [1977] 109 ITR 802(Bom) (b). CIT v.Vimal Chand Golecha [1993] 201 ITR 442(Raj) (c).CITvs.Parthas Trust (2001)-249-ITR-520(Ker) 12. Land and building are 2 separate assets. This splitting of land and building into long-term capital asset and short-term capital asset based on the period of holding of the respective assets was recognized by the Madras High Court in the case of CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad) following the decision of the Rajasthan High Court in the case of CIT v. Vimal Chand Golecha [1993] 201 ITR 442 (Raj).The same view has been taken in a subsequent decision by the Madras High Court in the case of CIT v. T. C. Itty Ipe [2001] 249 ITR 591 (Mad).The Supreme Court as early as 1967 in the case of CIT v. Alps Theatres [1967] 65 ITR 377 has held that superstructure has to be treated distinctly from the land, even where such superstructure is married to the land. The decision of the Karnataka High Court in the case of CIT v. C. R. Subramanian [2000] 242 ITR 342 (Kar) has also fallen in tune with the decision of other High Courts. The need for treatment of land and superstructure as distinct assets was also recognized in CIT v. Citibank N. A. [2003] 261 ITR 570 (Bom) following the decision of the Madras High Court in CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad) 13.The Bombay High Court in the case of CIT Vs Hindustan Hotels Ltd. and ITAT(2010)-TMI-78206(Bombay High Court) has held at para.11 of its order as under- “It is well settled by now that, unlike in England, in India, the concept of dual ownership is recognised in the sense that the land may belong to one person and the building standing thereon may belong to another. Reference may be made in that connection to the decision of the Supreme Court in Dr. K. A. Dhairyawan V/s J. R. Thakur, AIR 1958 SC 789 and a decision of the Division Bench of this Court in CIT V/s Fazalbhoy Investment Co. Pvt. Ltd. (1977) 109 ITR 802.” From the detailed discussion arising out of various case laws the following points emerge- 1. There is no prohibition with regard to dual ownership 2. The super structure will be treated as a separate entity for taxation purposes. 3. It is better to have a Memorandum of Understanding between the assessee and the other person comprehensively covering all points such as payment of taxes on the property sharing of rental if the property is let out in future etc. (iv) Investment in cost of plot shall also form part of investment in new residential property- The ITAT Bangalore Bench in the case of M. Vijaya Kumar vs. Income-tax Officer, Ward 1(1), Bangalore [2010] 122 ITD 15 (BANG.) has held that when the assessee had demolished the old house and put up a new construction out of the sale proceeds of other assets the assessee was entitled to claim the demolition cost plus the cost of construction as the total cost of investment in purchase of a new residential property since assessee would not have constructed a house unless old building was demolished and moreover, it had constructed a residential house on same site where old building was

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demolished within stipulated period specified in section 54F.It therefore held that the lower authorities erred in restricting exemption to cost of land and building and not to cost of construction incurred on very site where old house stood demolished. The cost of plot can also be included in total cost of investment eligible under section 54 and section 54F of the Income-tax Act and the board circular issued in this regard and extracted below explains the position- Circular Number: 667 dated 18-10-1993[1993] 204 ITR (Stat) 0103 File Number: 207/3/93-ITA.II Topic: Interpretation of section 54 and 54F of the Income-tax Act, 1961--Regarding. Text: To All Chief Commissioners of Income-tax, All Directors-General of Income-tax. Sir, Sections 54 and 54F provide for a deduction in cases where an assessee has, within a period of one year before or two years after the date on which the transfer of a capital asset takes place, purchased, or has within a period of three years after that date constructed a residential house. The quantum of deduction is itself dependent upon the cost of such new asset. It has been represented to the Board that the cost of construction of the residential house should be taken to include the cost of the plot, as, in a situation of purchase of any house property, the consideration paid generally includes the consideration for the plot also. 2. The Board has examined the issue whether, in cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of the plot also. The Board are of the view that the cost of the land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the amount of capital gain for the purposes of section 54, and the net consideration for the purposes of section 54F, is appropriated towards purchase of a plot and also towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F, provided that the acquisition of plot and also the construction thereon are completed within the period specified in these sections. 3. This may be brought to the notice of all the Assessing Officers in your region. Yours faithfully, (Sd.) Ajay Kumar, Under Secretary, (v) The additional facilities provided in the new property will also add to the cost of the new asset.-See the note below- ADDITIONAL FACILITIES-REFURNISHING EXPENSES

The Kerala High Court in the case of Dr. P.A. Varghese vs. Commissioner of Income-tax [1971] 80 ITR 180 (KER.) has held that no building would be fit for habitation without some of the necessary amenities and that it is not possible to treat a building separate from the fittings therein which go along with it as part thereof. The High Court also observed that the extent of the amenities may vary, depending upon several considerations The facilities agreed to be provided in

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that case were partitions, lavatories, air-conditioners, closets, fluorescent tubes, water and electric metres etc.and the issue arose whether these fittings formed part of building and the court answered in the affirmative.

The Mumbai Bench of ITAT in the case of Saleem Fazelbhoy Vs. Deputy Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD-167(Mum) has held that investment in residential house would not only include the cost of purchase of the house but also the cost incurred in making the house inhabitable subject to the condition that the payment was made during the period specified in section 54F. The beneficial provisions of section 54F and section 54 are similar except that under section 54F the assessee should not hold more than one residential property other than the one transferred and the entire sale consideration (and not the capital gains alone unlike under section 54) will have to be invested. Hence as exemption under section 54 is broader in perspective when compared to section 54F the benefit of this decision can also be extended to issues arising under section 54 of the Income-tax Act.

The Mumbai Bench of ITAT in this case in Saleem Fazelbhoy Vs. Deputy Commissioner of Income-tax (supra) while deciding the issue in favour of the assessee referred to the following observations made by the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 so far applicability of beneficial provisions is concerned.

“The provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since the provision for promoting economic growth has to be interpreted liberally, restriction on it too has to be construed so as to advance the objective of the provisions and not to frustrate it.”

To the similar effect is the decision of Mumbai Bench of ITAT in the case of Mrs. Sonia Gulati v. ITO [2001] 115 Taxmann 232 (Mum.)(Mag.).wherein it was held that the investment in house would be complete only when such house becomes habitable. In fact this decision in Mrs. Sonia Gulati v. ITO [2001] 115 Taxmann 232 (Mum.)(Mag.) has been followed in Saleem Fazelbhoy vs. Deputy Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD- 167-(Mum)(supra) The Mumbai Bench of ITAT Mrs. Gulshanbanoo R. Mukhi vs. Joint Commissioner of Income-tax [2002] 83 ITD 649 (MUM.) has held that “the words used about the amount spent on purchase of new asset are “cost thereto” and not “price thereto”. The cost includes purchase as well. Consequently, we are of the view that the word used signifies that the amount of purchase will include other necessary expenditure in this behalf to make a residential house habitable and taken together will be the cost of the new asset.” The benefit,in this case, was claimed under section 54 of the Income-tax Act.

It is also submitted that the definition of a word or phrase as found in the dictionary can be adopted, has been reiterated by the Constitution Bench of the Supreme Court in the case of Sunrise Associates vs. Government of NCT of Delhi & others (and other appeals, special leave petitions and writ petitions) [2006] 145 STC 0576 wherein at para 42-page 594 of STC referred to the definition of a ticket as found in Webster’s Words & Phrases, permanent edition Vol. 25A supplement and para.42 is reproduced below-

Webster's Words and Phrases, permanent edition, volume25A supplement defines a "ticket" as "a printed card or a piece of paper that gives a

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person a specific right, as to attend a theatre, ride on a train, claim or purchase, etc."

The definition-para.42-can be found at page 1907-2ndEdition-Webster’s New Twentieth Century Dictionary Unabridged Edition and basing its observations on this definition and on its earlier decision in the case of H. Anraj (3) (1986) 1 SCC 414 the Supreme Court in the case of Sunrise Associates vs. Government of NCT of Delhi & others [2006] 145 STC 0576 (supra) held that “a lottery ticket has no value in itself. It is a mere piece of paper. Its value lies in the fact that it represents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid for the transfer of that chance. It is nothing more than a token or evidence of this right.”

This decision of the Supreme Court goes to show that reliance can be placed on the dictionary meaning whenever necessity arises to decide an issue. So when reference to the word “Habitable” is made to Webster’s New Twentieth Century Dictionary (unabridged –Second Edition –Deluxe Colour) it is defined as “capable of sustaining human beings” and the word “habitation” means place of abode; a settled dwelling house; a house or other place in which to live in.(page 815)

So the additional facilities such as interior decor including wood work, fitting of air conditioners in bed rooms, modular kitchen and split air conditioner in drawing room can be considered as part of cost of the new residential property.

(vi) It is to be noted that as per provisions of section 54(2) of the Act if the amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilized by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return- such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilized in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilized by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset. Though only section 139 is mentioned in section 54(2) enabling certain High Courts and Tribunal Benches to hold that the deposit in such designated account can be made at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier as per provisions of section 139(4) of the Income-tax Act it is advisable to deposit in such designated account on or before 31st July (the due date for filing of the return). The Punjab & Haryana High Court in the case of CIT v. Ms. Jagriti Aggarwal [2011] 203 Taxman 203 /15 taxmann.com 146 following the decision of the Karnataka High Court in the case of Fathima Bai v. ITO [2009] 32 DTR 243 and CIT v. Rajesh Kumar Jalan [2006] 286 ITR 274/ 157 Taxman 398 (Gau.) has held that for purposes of section 54 due date for furnishing of return of income as provided under section 139(1) is subject to extended period as provided under

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sub-section (4) of section 139. The Bangalore Bench of ITAT In the case of Nipun Mehrotra vs. Assistant Commissioner of Income-tax Circle 14(2), Bangalore [2008] 110 ITD 520 (BANG.) following the decision of the Gauhati High Court in the case of CIT v. Rajesh Kumar Jalan(supra) has held that section 139 of the Act mentioned in section 54F will not only include section 139(1) but will also include all sub-sections of section 139 of the Act. The Delhi Bench of ITAT in the case of Income-tax Officer, Ward No. 24(4), New Delhi vs. Smt. Sapana Dimri [2012] 19 taxmann.com 15 (Delhi)/50 SOT96, following CIT v. Ms. Jagriti Aggarwal(supra) and CIT v. Rajesh Kumar Jalan has also held that if the assessee had invested in new property within time allowed under section 139(4) of the Act, then he would be entitled for exemption under section 54 to extent amount invested in new property. The facts as obtaining in P. Thirumoorthy v. Income-tax Officer [2011] 007 ITR (Trib) 0010 also indicate if action is taken by the assessee within the time allowed under section 139(4) of the Act then he would be entitled to the benefits of section 54F of the Act. The facts obtaining in P.R. Kulkarni & Sons (HUF) vs. Additional Commissioner of Income-tax [2012] 19 taxmann.com 358 (Bang.) also point out to the same effect. The Chennai Bench of ITAT in a recent case decided on 15th June 2012 - R.K.P. Elayarajan vs. Deputy Commissioner of Income-tax, Circle - I, Vellore[2012] 23 taxmann.com 206 (Chennai - Trib.) has held that merely because investment is made after due date of filing of return, section 54F exemption cannot be denied where investment is made prior to filing of return under section 139(4)

As per proviso to section 54(2) of the Income-tax Act if the amount so

deposited is not utilized wholly or partly for the purchase or construction of the new asset within the specified period then the amount not so utilized shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires. However the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid. The scheme which has been referred to in this section is the Capital Gains Accounts Scheme 1988. It is to be noted that the assessee has no option but to open a capital scheme account (the specified account) if he does not purchase the property before the due date of filing of the return.

The assessee cannot pick up particular provisions in his own way and to defeat the benefit of introduction of section 54F. Please see the ITAT decision (gist) below in this regard. DECISION OF INCOME-TAX APPELLATE TRIBUNAL ON SECTION 54 F

“The Ahmedabad Bench of ITAT in the case of Thakorlal Harkishandas Intwala vs. Income-tax Officer, Ward-1, Bharuch [2010] 7 TAXMANN.COM 82 (AHD.) /[2011] 43 SOT 347 (Ahd.) has held that where the assessee had deposited the sale proceeds in normal saving bank account as against the scheme specified by the Central Government, proviso to section 54F would apply against the assessee and he cannot be given any benefit under section 54F Facts of the case

During the year the assessee sold a plot of land and deposited the sale proceeds in normal savings bank account. Out of said money, the assessee utilized only Rs. 45,000 towards construction of new house and the balance

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amount of Rs. 9,50,484 could not be utilized for construction of house before the due date of filing of the return. The Assessing Officer was of the view that since the assessee did not deposit the sale proceeds as under section 54F(4) in the Capital Account Scheme, 1988, the assessee would not be entitled for deduction under section 54F(4) of Rs. 9,50,484. Accordingly, deduction under section 54F(4) was restricted to Rs. 45,000 only due to non-compliance of certain conditions. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal:

Held in Para 14 of its order as follows-

Sub-section (4) of section 54F provides the amount of net consideration

which is not appropriated by the assessee towards the purchase of the new

asset made within one year before the date on which the transfer of the original

asset took place or which is not utilized by him for the purchase or construction

of a new asset before the date of furnishing the return of income under section

139, shall be deposited by him before furnishing such return in an account in

bank or institution as may be specified and utilize in accordance with any

scheme notified by the Central Government in the Official Gazette and such

return shall accompany the proof of such deposit and for the purpose of sub-

section (1), the amount if any already utilized by the assessee for the purchase

or construction of new asset together with the amount so deposited shall be

deemed to be cost of the new asset. The proviso to the above provision provides

that if the amount so deposited under the sub-section is not utilized wholly or

partly for purchase or construction of a new asset within the time so specified

then the amount shall be charged under section 45. Any amount not utilized for

purchase or construction of the new house should be deposited by the assessee

within the time and in the manner required by sub-section (4) and should be

utilized by the assessee in accordance with the notified scheme, in order to avail

himself of the benefit of sub-section (1). However, in the instant case, the

assessee had kept the amount in his ordinary saving bank account meaning

thereby the amount remained in the custody and control of the assessee and the

assessee could utilize the same in any manner as he wished. It would, therefore,

frustrate the very purpose of the notified scheme by the Government. The above

provisions would thus prove that in case the assessee seeks exemption from

the payment of tax on account of long-term capital gains, the assessee shall

have to satisfy the mandatory provisions of law as noted above. The

interpretation of the above provision would show that the assessee shall have

to strictly comply with the provisions of law in order to get exemption under

section 54F. No other interpretation could be given to such provisions of law.

The assessee, therefore, in order to secure the benefit of the above provisions

of law shall have to comply with the conditions noted above. The assessee cannot pick up particular provisions in his own way and to defeat the benefit of introduction of section 54F. The provisions contained under

section 54F are substantive provisions under the law and cannot be given go

by, by the assessee in order to get the benefit from exemption of taxes. It was

admitted fact that the assessee had deposited the sale proceeds in normal

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saving bank account as against the scheme specified by the Central

Government through notification in the Official Gazette as per section 54F (4).

The Assessing Officer specifically noted that the assessee utilized only

Rs. 45,000 towards construction of new house and balance amount of

Rs. 9,50,484 could not be utilized for construction of the house as per notified

scheme before the due date of filing of the return. Since the assessee did not

deposit the sale proceeds as per section 54F(4) in the notified bank account

scheme, therefore, the assessee would not be entitled for any benefit under

the provisions of law. It would, therefore, show that the assessee had violated

the provisions of section 54F(4) by not opening a designated account and

depositing the proceeds in that account. It was, therefore, not a case of technical

default but a case of substantial non-compliance of the provisions of law. The

whole scheme of the Act had thus been violated and ignored. The assessee

deposited the sale proceeds in a normal saving bank account and did not

utilize the amount as per scheme thus defeated the very concessional

scheme provided under the Act. The Assessing Officer directed the assessee

to furnish the evidences in support of his claim and details of construction of

residential house. The Assessing Officer considering the explanation of the

assessee specifically noted that the assessee had up to the date of filing of

the return utilized only an amount of Rs.45,000 towards construction of house

as on 3-7-1996. Thus, the assessee had not utilized the amount in question

for construction of house before the due date of filing of the return of income,

i.e., 31-8-1996 as per notified scheme. The assessee had also not filed any

evidences with the return of income regarding deposit of sale consideration in

the Capital Gain Account Scheme, 1988 and utilized the amount after the

date of filing of the return. Therefore, it was a clear case of violation of the

provisions of section 54F (4). The assessee had not explained any reasons

about non-utilization of the remaining amount as per the scheme. Therefore,

proviso to section 54F would apply against the assessee and the assessee

could not be given any benefit under the law. Considering the above

discussions, there was no justification to interfere with the orders of the

authorities below. Therefore, appeal of the assessee was to be dismissed.”

(vii) It is further to be noted that the Kerala High Court in the case of CIT

vs.Thomy P.Chakola (Decd.)-(2011)-49-DTR (Ker) 24 has held that if the

assessee does not purchase the property within the stipulated period then he is

entitled to adopt indexation only with regard to the year of sale of property and

not indexation with regard to the year in which the capital gain was not utilized

resulting in withdrawal of deposit. C-2. DOES THE TRANSFER OF PROPERTY COME UNDER SECTION 54 OR SECTION 54F?

This issue assumes importance because of three basic differences between the provisions of section 54 and 54F.These three differences are

(a) In order to claim exemption under section 54 it is sufficient if only the capital gains are invested in purchase of new residential property and/or investment in capital gain bonds whereas under section 54F the entire net sale consideration (which, in effect, is a higher amount) has to be invested.

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(b) As per provisions of section 54F the assessee who has transferred the asset (property other than the residential property) should not own more than one residential house property on the date of transfer of the property whereas there is no such restriction under section 54. (c) As per provisions of section 54F the assessee loses exemption under this section if he purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; There is no such restriction in section 54 of the Act.

So when a residential building with an extensive piece of land is sold the advantage would be plenty if the transfer of property is brought under section 54. In fact section 54 opens with the following-

“Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset)”

The decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax vs. Zaibunnisa Begum [1985] 151 ITR 0320(A.P.) provides an answer in favour of the assessee in the sense that only more beneficial provisions of section 54 (and not section 54F) are applicable. The head note from the decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax vs. Zaibunnisa Begum [1985] 151 ITR 0320(A.P.)(supra) buttresses the above point. It runs as under-

“Section 54 of the Income-tax Act, 1961, grants a concession where capital gains arise from the transfer of buildings or lands appurtenant thereto used by the assessee in the two years immediately preceding the date of transfer as his own or his parent's residence, if he constructs a house property or purchases one for purposes of residence within the time specified in the provision. The expression "land appurtenant thereto" occurring in section 54 has not been defined. It must, therefore, be understood in its popular and non-technical sense. It is not possible to accept the contention that clause (b) of the Explanation to section 5(1)(ivc) of the Wealth-tax Act, 1957, defining "land appurtenant" for the purpose of that clause should be considered equally applicable for the purpose of understanding that expression occurring in section 54 of the Income-tax Act. The Explanation in the Wealth-tax Act is only for the purpose of section 5(1)(ivc) because it is specifically stated so. The meaning assigned to that expression in the Urban Ceiling and Regulation Act is also not relevant. The tax authorities will have to determine the extent of land appurtenant to a building transferred, taking into consideration a variety of circumstances that may be relevant for the purpose. It is not possible to lay down infallible tests to be applied as the tests would vary depending upon the facts and circumstances of each case. For instance: (1) If the building together with the land is treated as an indivisible unit and enjoyed as such by the persons occupying the building, it is an indication that the entire extent of land is appurtenant to the building; (2) If the building has extensive lands appurtenant thereto and even if the building and the land have been treated as one single unit and enjoyed as such by the occupiers, an enquiry could be made to find out

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whether any part of the land contiguous to the building can be put to independent user without causing any determent to the enjoyment of the building as such. Such an enquiry should be conducted not based on any artificial considerations but from the point of view of the persons occupying the building. The number of persons or different branches of families residing in the building, the requirements of the persons occupying the building, consistent with their social standing, etc., is relevant for the purpose. If any surplus is arrived at on such enquiry, then the extent of such surplus land may not qualify to be treated as land appurtenant to the building; (3) if there is any evidence to indicate that any portion of the land contiguous to the building was applied to user other than the enjoyment of the building, then that provides a safe indication regarding the extent of land applied for such user. For instance, the land used by the occupiers for commercial or agricultural purposes although forming part of the land adjacent to the building, does not qualify to be treated as land appurtenant to the building; (4) if the owner or occupier is deriving any income from the land which is not liable to be assessed as income from house property under section 22 of the Income-tax Act, then the extent of such land does not qualify to be treated as land appurtenant to the building; and (5) any material pointing to the attempted user of the building for purposes other than the effective and proper enjoyment of the house would also afford a safe guide to determine the extent of surplus land not qualifying to be treated as land appurtenant to the building. The above tests are illustrative and by no means exhaustive. It is for the tax authorities to apply their mind properly to the facts of each case and to devise tests suitable and appropriate to each case.”

C-3.. WHETHER INVESTMENT IN MORE THAN ONE RESIDENTIAL PROPERTY IS POSSIBLE? There are three decisions of Karnataka High Courts which are as follows-

(a) In CIT vs. D.Ananda Basappa (2009)-309-ITR-329 it has been held that exemption under section 54 is available when two flats purchased were combined to make one residential unit. The High Court referred to section 13 of the General Clauses Act which states that whenever the singular is used for a word, it is permissible to include the plural. The High Court also observed that the contention of the Revenue that the expression “a” residential house should be understood in a sense that the building should be residential in nature and “a” should not be understood to indicate a singular number. The High Court finally held in favour of the assessee by holding as under-

“On facts, it is shown by the assessee that the apartments are situated side by side. The builder has also stated that he has effected modification of the flats to make it as one unit by opening the door in between two apartments. The fact that at the time when the inspector inspected the premises, the flats were occupied by two different tenants is not the ground to hold that the apartment is not a one residential unit. The fact that the assessee could have purchased both the flats in one single sale deed or could have narrated the purchase of two premises as one unit in the sale deed is not the ground to hold that the assessee had no intention to purchase the two flats as one unit.”

The Karnataka High Court in this case affirmed the decision rendered by the Bangalore Bench in the case of D.Anand Basappa v.ITO (2004)-91-ITD-53 the catchwords of which are as under-

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Section 54, read with section 54F, of the Income-tax Act, 1961 - Capital gains - Profit on sale of property used for investing in residential house - Assessment year 1996-97 - Whether there is no bar on acquiring more than one residential house to claim deduction under section 54 unlike section 54F - Held, yes - Whether, therefore, when an assessee acquired, within specified period, simultaneously two adjacent residential houses bearing different municipal numbers to meet his needs, out of proceeds of only one residential house, he was entitled to exemption under section 54 in respect of both houses so acquired - Held, yes. It is to be noted that the assessee in the case before the Karnataka High Court was a Hindu undivided family The High Court referred to the fact that in the case of a Hindu undivided family, property is held by the members as joint tenants and went to hold that “the members keeping in view the future needs in event of separation, purchase of more than one residential building cannot be said that the benefit of exemption is to be denied under section 54(1) of the Income-tax Act.” It is also to be noted that the Supreme Court on 10-08-2009 has dismissed the Department’s special leave petition against the judgment of the Karnataka High Court in the case of CIT vs.Ananda Basappa 309-ITR-329 wherein the High Court held that the assessee was entitled to exemption on purchase of 2 flats which were combined to make one residential flat. (Page 19-ITR Volume No.320).

(b). In the case of CIT vs. Smt. Rukminiamma (2010)-48-DTR (Kar)-377/(2011)-196-Taxman87(Kar) the Karnataka High Court following its earlier decision in the case of CIT vs. D. Ananda Basappa (supra) has held that the expression “a residential house” should be understood in a sense that the building should be of residential nature and “a” should not be understood to indicate a singular number. The facts of the case have been culled out from the judgment in para 2 of head note (of DTR) wherein para 12 of the judgment has been extracted and finally it has been concluded as under-

“Expression “a residential house” should be understood in a sense that the building should be of residential nature and “a” should not be understood to indicate a singular number; assessee was entitled to claim exemption in respect of four residential flats acquired by her”

(c). The Karnataka High Court in its judgment dated 05-01-2011 in ITA No.194 of 2010 in the case of CIT vs. Jyoti K.Mehta following its earlier decision in the case of CIT vs. Smt. Rukminiamma (supra) has held that “the evidence on record also discloses that the units are situated side by side, modifications were made, the door was opened making it as a single unit and the consideration from the sale of the sale of the residential unit is utilized to purchase these residential units and therefore, the assessee is entitled to the benefit of section 54. As such, she is not liable to pay the capital gains” The Madras High Court in the case of Dr. (Smt.) P.K. VASANTHI RANGARAJAN vs. CIT [2012] 23 taxmann.com 299 following the decision of the Karnataka High Court in the cases of CIT vs. Smt.K.G.Rukminiamma (supra) and CIT vs. D. Ananda Basappa(supra)has held that “four residential flats (constructed in this case) constituted "a residential house" for the purpose of section 54 of the Act”

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The observations of the Delhi High Court in the case of Commissioner of Income Tax vs. Gita Duggal[2013] 30 taxmann.com 230(Del) are worth noticing- “A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. Therefore, one cannot see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. The fact that residential house consists of several independent units cannot be permitted to act as an impediment to allowance of deduction under section 54/54F of the Income-tax Act.” The Delhi High Court has followed the two well known decisions of the Karnataka High Court in the cases of CIT vs. D. Ananda Basappa (supra) and CIT vs. Smt. K.G.Rukminiamma(supra) while arriving at a decision favourable to the assessee. The High Court of Andhra Pradesh in the case of CIT vs. Syed Ali Adil reported in (2013) 352 ITR 418 (AP) has held that purchase of 2 flats adjacent to one another and had a common meeting point would fulfill the requirement of exemption provisions of section 54 of the Income Tax Act.. The High Court has followed the two well known decisions of the Karnataka High Court in the cases of CIT vs. D. Ananda Basappa(supra) and CIT vs. Smt. K.G.Rukminiamma (supra). One redeeming feature is that the decision of the Mumbai Special Bench of ITAT in the case of ITO vs.Sushila M. Jhaveri[2007] 292 ITR (AT) 1 has been disapproved in this decision whereas the decisions in the cases of K.G.Vyas vs. Seventh ITO [1986] 26 TTJ 491 (Bom),ITO vs. P.C.Ramakrishna HUF [2007]107 TTJ 351(Chennai) and Prem Prakah Bhutani vs. Asst. CIT [2007] 110 TTJ 440(Del) have been approved.

The Hyderabad Bench of ITAT in the case of Prabhandam Prakash vs. Income-tax Officer, Ward-13(2), Hyderabad [2008] 22 SOT 58 (HYD.) vide its order dated 25-01-2008 referring to the decision of the Bangalore Bench OF ITAT in the case of D.Anand Basappa v.ITO (supra) held as under-(head note)

“Whether where assessee, out of sale consideration received on sale of land along with superstructure, purchased four flats and he occupied two flats for his residence and let out other two flats, assessee was entitled to pro rata exemption under section 54 in respect of two flats occupied by him and not in respect of all four flats - Held, yes” The Madras Bench of ITAT in the case of Income-tax Officer, City Ward - 1 (6), Chennai vs. P.C. Ramakrishna [2007] 108 ITD 251 (CHENNAI) vide its order dated 28-07-2006,following the decision of the Bangalore Bench OF ITAT

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in the case of D. Anand Basappa v. ITO (supra) and after referring to the decision of the Allahabad High Court in the case of Shiv Narain Chaudhari v. CWT [1977] 108 ITR 104 held that “we are of view that both the flats are acquired by the assessee, simultaneously and hence the conditions for acquiring the residential house within the time specified under section 54 of the Act are complied with. There is no bar in acquiring more than one residential house to claim deduction under section 54 of the Act unlike section 54F of the Act. Therefore, the assessee is eligible for deduction under section 54 of the Act in respect of the investment made in both the flats simultaneously for computation of capital gains. In view of this, the Revenue’s appeal deserves to be dismissed.”

In fact the Special Bench of ITAT in the case of Income-tax Officer v.Sushila M. Jhaveri (supra) [now held to be incorrect by A.P.High Court in Syed Ali Adil(supra)] referred to the decision of the Bangalore Bench of ITAT in the case of D.Anand Basappa v.ITO (supra) at para 6 of its order and after observing whether there is any ambiguity about the word “a” at para 7 of its order analyzed the dictionary meaning of the word “a” and held against the asseseee. However the Tribunal observed at para 10 as under-.

“However, we are in agreement with certain decisions of the Tribunal relied on by the learned counsel for the assessee wherein exemption was allowed in respect of investments in two adjacent or contiguous units converted into one residential house by having common passage/stair case, common kitchen, etc. intended to be used as single house for the residence of the family. As already observed, the intention of the Legislature is that investment should be made in one residential house. So long as the house purchased is one even after conversion, the exemption would be available. On the other hand, if the investment is made in two independent residential houses, even located in the same complex, then, in our opinion, exemption cannot be allowed for investment in both the houses. However, the choice would be with assessee to avail exemption in respect of any one house as held by the Hon’ble Bombay High Court in the case of K.C. Kaushik (supra). The view taken by us in this para is also justified by the decision of the Hon’ble Calcutta High Court in the case of B.B. Sarkar v. CIT [1981] 132 ITR 150, wherein purchase of ground floor of a house and thereafter construction of first floor was held to be an investment in one house only. Their Lordships at page 156 observed as under:

“If a floor is constructed to the new house or if it is renovated it remains a house and this will not be two houses.”” [In fact the facts in the case of K.C.Kaushik vs.P.B.Rane (1990)-185-ITR-

499(Bom) referred to above were different as observed in Ratanchand Murarka

v. Joint CIT [ITA No. 4485/M/1999, dated 12-9-2001] Assessment year 1996-

97]

The Board in Circular No. F. No. 207/24/76-ITA-II dated March 25, 1971, had clarified that the benefit would be available to the seller of more than one house, if each such house had been under self-occupation as required under the then law. Hence, the entire approach to section 54 need not be confined to the idea of a single house either for sale or for reinvestment. In view of the different understanding of the Revenue, when it relates to reinvestment, taxpayers seek to claim more than one residential unit as one. Such a plea was accepted in some cases by the Tribunal as in K.G. Vyas v. 7th ITO [1996] 16 ITD 195 (Bom),

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when the units were housed in the same building allegedly all for use by the same assessee. It was conceded in K. C. Kausik v. P.B. Rane, 5th ITO [1990] 185 ITR 499 (Bom), that the assessee could get relief with reference to any one house of his choice, when he reinvests in more than one house. The issue, whether he could have got exemption for both houses was not raised, as it was not obviously necessary in this case.

The Delhi High Court in CIT v. Smt. Sunita Aggarwal [2006] 284 ITR 20 (Delhi) has found that, when the assessee had acquired four portions of property by four different sale deeds, but they all constitute one residential house, where she was residing with her husband and children, the benefit will be available in respect of all. On the facts which were not disputed, it was held that it could not be assumed that the assessee had acquired more than one house, so that the Tribunal’s finding that the assessee was eligible for deduction on the aggregate investment in all the units was upheld on the ground that it is a decision on the facts not involving a substantial question of law.

The Punjab & Haryana High Court in the case of Sh. Pawan Arya vs. CIT (2010)-TMI-79018 - Punjab and Haryana High Court distinguished the decision of the Karnataka High Court in the case of CIT vs. D. Ananda Basappa (supra) as the facts in the case before the Punjab & Haryana High Court were different. The Punjab and Haryana High Court extracted the relevant portions of the Tribunal order which resulted in an appeal in this case at para 2 of its order- “The assessee claimed exemption on capital gains on sale of flat on the ground of acquisition of two houses. The Assessing Officer set off the capital gain against one of the houses but held the claim not to be admissible against second house. However, the CIT (A) upheld the claim of the assessee relying upon decision of Bangalore Bench of the Tribunal in D. Anand Basapa Vs. ITO (2004) 91 ITD 53. The said view has been reversed by the Tribunal as follows:-

"6. We have carefully considered the rival submissions in the light of the material placed before us. The facts in the present case are clear. The assessee is claiming exemption in respect of two independent residential houses situated at different locations; one is in Dilshad Colony, Delhi and the other is in Faridabad. The assessee in the Special Bench case had also purchased two residential houses against sale consideration of residential flat at 'Gulistan' situated at Bhulabai Desai Road, Mumbai. One residential property was at Varun Apartments at Varsova and the other property was at Erlyn Apartments, Bandra and it was held by the Special bench in the aforementioned case i.e. ITO Vs. Ms. Sushila M. Jhaveri (supra) that the assessee is entitled to get exemption only in respect of one house of her choice. Therefore, the decision of Special Bench is fully applicable to the present case and the assessee can avail exemption u/s 54 in respect of one residential house only. The factual aspect has not been disputed by ld. AR. The only dispute before us is about legal proposition whether the assessee is entitled to get exemption in respect of two independent residential houses purchased out of sale consideration of another residential house. Therefore, the issue is decided in favour of the department and it is held that the assessee is entitled to get exemption u/s 54 in respect of one property only and no question has been raised by ld. AR regarding the choice of the property or the factual aspect of the matter.

7. So it relates to the decision relied upon by ld. AR of Hon'ble Karnataka High Court in the case of CIT Vs. D. Anand Basappa, it may be mentioned that

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the said case cannot be applied to the case of the assessee on the ground that in that case the two houses purchased by the assessee were not independent properties and a factual finding has been recorded that the two apartments which were claimed to be exempted against sale consideration were situated side by side and it was also stated by the builder in that case that he has effected modification of the flats to make it as one unit by opening the door in between two apartments. On these facts, the Hon'ble High Court has observed that the fact that at the time when Inspector inspected the premises, the flats were occupied by two different tenants is not the ground to hold that apartment is not one residential unit. The fact that the assessee could have purchased both the flats in one single sale deed or could be narrated the purchase of two premises as one unit in the sale deed is not the ground to hold that the assessee had no intention to purchase two flats as one unit. From these observations of Hon'ble High Court, it is clear that while rendering the decision they have kept in mind that the purchase of two flats in the same building which were united for living of the assessee by making necessary modifications made the residential unit as one and, thus, that case could not be applied to the facts of the case of the assessee........."

So the facts in the case before the Punjab & Haryana High Court in Sh. Pawan Arya vs.CIT (supra) were different in the sense that in the case that arose before the Punjab & Haryana High Court in Sh.Pawan Arya vs.CIT(supra) the assessee had purchased 2 independent houses as in the case which arose before the Special of ITAT in Income-tax Officer v. Sushila M. Jhaveri(supra) whereas in the case which arose before the Karnataka High Court in CIT vs. Smt. Rukminiamma(supra) the assessee was allotted 4 residential flats situated in the same building by the builder so as to constitute “ a residential house”.

The Delhi Bench of ITAT in the case of Assistant Commissioner of Income-tax vs.Sudha Gurtoo (2011)-7-ITR(Trib)-653(Del) has held that when an assessee purchases ground floor and first floor in two deeds on two consecutive days it (such purchase) would constitute single residential unit. The Tribunal after referring to the following observations of the Commissioner (Appeals)

“even it were to be held otherwise i.e. that there were two residential units, the assessee would be eligible for deduction under provision 54F of the Act, since both these units were adjacent to each other, being ground floor of the same premises” held that

“the Commissioner (Appeals) after considering the confirmation from the developer stating that the house was indeed a single unit and perusing the lease deed had arrived at the conclusion that what the assessee had in her possession was one single residential unit and not two, comprising two floors of one and the same double storeyed residential house. There was no error in the order passed by the Commissioner (Appeals).”

It was also observed in this case that the observations of the Special Bench of ITAT in the case of ITO Vs. Ms. Sushila M. Jhaveri (supra) to the effect that “where than one adjacent unit are purchased and converted into one house for the purpose of residence by having common passage, common kitchen etc., it is a case of investment in one residential house” were just a passing reference and not a decision. In fact the issue before the Special Bench in the case of ITO Vs. Ms. Sushila M. Jhaveri (supra) was different.

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The following observations made at para.16 of its order in this case (Assistant Commissioner of Income-tax vs.Sudha Gurtoo (supra) are pertinent-

“The learned Commissioner of Income-tax(Appeals) has also relied on Additional CIT vs.Narendra Mohan Uniyal (2009)-34-SOT-152(Del).Therein, the assessee had sold a piece of land and had earned capital gains. Thereafter, the assessee purchased a piece of land for Rs.30 lakhs. Later yet, the assessee purchased a plot of land contiguous to the land purchased earlier. A residential house was constructed only on one piece of land purchased. The other piece was kept vacant. On denial of benefit under section 54F of the Act to the assessee, when the matter reached the Tribunal, it was held that section 54F of the Act contains no rider that no deduction will be allowed in respect of investment of capital gains made in acquisition of land appurtenant to a building or an investment in land on which the building is to be constructed. Reliance by the learned Commissioner of Income-tax (Appeals) on this decision is by holding and, rightly so, that the assessee’s case was still better, since the assessee had purchased the two floors of the same building within a span of two days”

The decision of the Allahabad High Court in the case of Shiv Narain Chaudhari v. Commissioner of Wealth-tax (supra) is also worth noticing-

The issue which arose before the Allahabad High Court in the case of Shiv Narain Chaudhari v. Commissioner of Wealth-tax (supra) was with regard to claiming exemption under section 5(1)(iv) of the Wealth-tax Act 1957 when several self-contained dwelling houses which are contiguous and situate in the same compound and within common boundaries and having unity of structure could be regarded as one house

The High Court held in the affirmative and in favour of the assessee. In this case two portions of the building bearing door no.92 and door

no.92A were built in 1960 and 1963 respectively. This is what the High Court observed in this case-(from the judgment)

“The more important question is whether the two portions of the building bearing door No. 92 and door No. 92-A could be regarded as forming one house or whether those two portions constituted two different houses.

The word “house” has not been defined in the Act. Of the several meanings of the word “house “contained in Shorter Oxford Dictionary, the one appropriate to the context, in our opinion, is building for human habitation, especially a dwelling place.”

In ascertaining the meaning of the word "house” for the purpose of this Act, the following observations of Lawrence J. in Annicola Investments Ltd. v. Minister of Housing and Local Government [1965] 3 All ER 850, 853, 854; [1966] 2 WLR 1204, 1211 are apposite:

“The precise meaning of the word 'houses' has frequently arisen for judicial consideration, but mostly in connection with other statutes or in other contexts. Decisions in relation to such other matters appear to me to afford very little, if any, assistance to the determination of the meaning in this case. What seems to be clear is that the word has a distinct fluidity of meaning, and that it is best construed in relation to the context in which it is found, and in relation to the objects and purposes of the Act or of the section of the Act in which it is used. "

To attract the exemption under clause (iv) of section 5(1) of the Act the house owned by the assessee should be used by the assessee exclusively for residential purpose. In the present case the assessee is a Hindu undivided

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family consisting of four adult male members. Each of them is occupying one residential unit in the building bearing door Nos. 92 and 92-A. It is well-settled that though a Hindu undivided family is ordinarily joint not only in estate but also in food and worship, the members of such family need not have a common residence. In other words, the family may continue to remain undivided even though different members of the family are residing separately. If a building otherwise comes within the meaning of the word " house ", the mere fact that different members of the Hindu undivided family who own that building, are living separately in different self-contained portions thereof, will not, in our opinion, constitute that building into many houses.

It is undisputed that both portions of the building bearing door Nos 92 and 92-A, Darbhanga Castle, are contiguous to each other and are within a common boundary and a common compound. Though there are four residential units within that building, they are connected by a common passage and the building has unity of structure.

That the portion of the building bearing door No. 92 was built in 1960 while the other portion bearing door No. 92-A was built in the year 1963, would not have any relevance to determine whether both those portions together constitute a house. A house may be built in stages; a portion of it may be built in one year and another portion of it may be built after an interval of several years. That one portion of the building bears one door number, while the other portion bears another door number and that these two portions are assessed separately by the municipality, are no doubt relevant circumstances in considering whether these two portions constitute one house or two different houses, but these circumstances are not decisive. The Tribunal has, in our opinion, attached excessive importance to these two circumstances.

As these two portions of the building are contiguous and situate in the same compound and within common boundaries and have unity of structure there is no reason why they should not together be regarded as constituting one house.

Bearing in mind the caution uttered by Lawrence J. in Annicola Investments Ltd.'s case [1965] 3 All ER 850; [1966] 2 WLR 1204 that the same word occurring in different enactments has to be given a meaning in relation to the context, the object and the purpose of that enactment, we shall advert to a few decisions in which the question whether a building in which there are several dwelling units, can be regarded as one house, was considered.

In Kimber v. Admans [1900] 1 Ch D 412 (CA) the facts were these: The plaintiffs were owners of two plots of lands forming part of a building

estate, and had built a house on each of these plots. The defendant had purchased the two remaining plots in that building estate. He proposed to erect on those plots four blocks of residential flats. Each block was to contain two flats on the ground floor and two flats on the first floor. The plaintiffs pleaded that the defendant was bound by a covenant that not more than ten houses shall be erected on the said four plots. Cozens Hardy J. had held that there was no breach of the covenant by the defendant and that the building of the nature which he intended to build was a dwelling house though each building was to contain a number of separate messuages. In appeal, while upholding that decision, Lindley M. R. observed:

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“What does that (covenant) mean? Does it refer to the mode in which the building to be erected is to be sub-divided or let, or does it refer to the aggregate of the rooms or whatever the contents of the building may consist of? I think that the latter is the meaning. The house is the whole amalgamation...... It applies, not to the interior portions of the building, but to the whole building. In Benabo v. Mayor, Aldermen and Burgesses of the Borough of Wood Green [1945] 2 All ER 162 (KB), the facts were these:

The local authority in whose area a house was situated, served a notice upon its landlord to carry out certain specified repairs to various parts of the building. At the date of the notice the house was let to two separate tenants, one of whom occupied the ground floor and the other the upper floor. The house was not structurally divided, both tenants using the same entrance door, hall and internal corridor. The local authority had, however, rated the two parts of the house as separate dwellings. The landlord failed to carry out the work required by that notice and the local authority carried out the work and called upon the landlord to pay the cost of such work under the Housing Act, 1936. The landlord pleaded that the notice and the demand which followed it were not valid since separate notices and separate demands in respect of each tenement was required and that the landlord was entitled to know the cost of effecting the repairs for each of the tenements. It was held in that case that for the purpose of the Housing Act, 1936, the fact that the house consisted of two separate dwellings, did not entitle the landlord to separate notices in respect of each dwelling and that as the Act was concerned with " houses " and not " dwellings " only one notice was necessary in respect of the entire house and separate notices were not necessary in respect of each dwelling. Humphreys J. observed thus at page 164:

“In fact, this was a house which was used by two separate families. The landlord, the person having control, had let certain rooms in the house to one person and certain other rooms to another person. Does that make the house two houses? In my opinion, emphatically not. It remained one house. I think that is the answer, and a complete answer, to this point. "

In Okereke v. Borough of Brent [1966] 1 All ER 150; [1966] 2 WLR 169 (CA) the facts were these.

A building containing three floors and a basement had been occupied at one time as a single house. Subsequently, it was divided into three separate self-contained dwellings which were rated separately. Two of these were each occupied by a different family and a third was occupied by members of more than one family. The respondent, Borough, had issued a notice to the owner of that building under section 15 of the Housing Act requiring him to effect certain improvements. The owner challenged that notice on the ground that the property did not fall within section 15 of that Act as the building was a mere collection of houses. The Court of Appeal by a majority decision held that the building came within the meaning of the word “house” under section 15 of the Housing Act. Salmon L.J. observed thus at page 158 (See also [1966] 2 WLR 169, 181 (CA)):

“Indeed, in my view it is wrong to hold, if words have any meaning, that each tenement in a tenement block is a house. It may be, as counsel for the respondent suggests, that the occupier of a tenement sometimes refers to it loosely as his house, just as it is said figuratively that an Englishman's home is his castle. This, however, is beside the point, for it seems to me as impossible to

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hold that a single tenement is a house, as it would be to hold that a suburban villa is a castle. "

The aforesaid decisions also support the view we have taken, namely, that a house may consist of more than one self-contained dwelling unit and that if there is unity of structure, the mere fact that such self-contained dwelling units are occupied by different persons, will not make that house into several houses. In the light of the foregoing discussion our answer to the question referred to us is partly in favour of the assessee and partly against it and is as follows:

“The house properties bearing Municipal Nos. 92 and 92-A, Darbhanga Castle (but not house No. 17/33, Mahatma Gandhi Marg) occupied as residences by different members of the Hindu undivided family together constituted one house belonging to the assessee-family and as such were exempt from wealth-tax under section 5(1)(iv) of the Act, but the house bearing Municipal No. 17/33, Mahatma Gandhi Marg, Allahabad, was not so exempt.”

It is to be noted that the contention of the assessee that the other house bearing Municipal No.17/33 Mahatma Gandhi Marg should also be exempt treating it as part of the main house was not accepted by the High Court as this house was situated in a different locality.

This decision of the Allahabad High Court in Shiv Narain Chaudhari v.Commissioner of Wealth-tax (supra) was followed by the Kerala High Court in the case of Commissioner of Wealth-tax v. Najima Nizar (Mrs.)(1992)-197-ITR-258(Ker) and head note from this decision runs as under-

Several self-contained units which are contiguous and situate in the same compound and with common boundaries and having unity of structure could be regarded as one building. The exemption under section 5(1)(iv) of the Wealth-tax Act, 1957, would be available in respect of the value of the entire building, subject to the limitation prescribed under section 5(1)(iv) of the Act. The Gujarat High Court in the case of Commissioner of Wealth-tax v.S.D. Jadeja[2006] 283 ITR 0045(Guj) has held that two contiguous buildings in the same compound used for residential purposes constitute a “house” within the meaning of section 7(4) of the Wealth-tax Act 1957 and hence entitled to exemption as a single house.

It is to be noted that section 7(4) of the Wealth-tax Act 1957 deals with valuation of a house property under occupation of the owner.

The Bombay Bench of the ITAT in the case of Fourth Wealth-tax Officer v.M.V.Patel (1987)-21-ITD-104 has held as under-(head note)

“The word ‘house’ is not defined in the Act. To know the construction of the word ‘house’ in section 5(1)(iv) one has to understand the subject-matter in respect of which it is used in the Act and from the provisions of the Act, it is clear that the meaning of the word ‘house’ is not restricted or controlled to a single residential unit and there are no controlling provisions in the statute, and the word takes into itself the whole physical erection or amalgamated building without any reference to the interior or internal arrangement created for occupation of several tenants. Therefore, the exemption allowed in the original assessment, in the present case, was proper. Accordingly, the Appellate Assistant Commissioner’s order cancelling the order passed under section 35 was to be sustained”

In this case the assessee was a co-owner along with two others each having one-third share, in a house property. The said house property had several independent residential units occupied by different tenants and all used

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for residential purposes. All these tenements were independent residential portions contained in one building, bearing one number in the municipal record. The wealth-tax officer fixed the value of the assessee’s one-third share, and allowed exemption on the full value under section 5(l)(iv) in the original assessments. However, on account of an audit objection in which it was suggested that each residential block was by itself a ‘house’ and that the original assessments granting exemption for the full value of the building was a mistake, the wealth-tax officer started proceedings under section 35, and held that each residential unit was by itself a house and that having regard to the number of residential blocks in the building and the total property value, the value of each residential unit would not exceed Rs. 10,000. He, therefore, ruled that exemption was allowable only to the extent of Rs.10,000 and that resulted in increasing the value of the net wealth by Rs. 85,000. On appeal, the Appellate Assistant Commissioner accepted the assessee’s claim. On further by the Revenue, the Tribunal referred to the decision of the Supreme Court in the case of Tata Engg. & Locomotive Co. Ltd. v. Gram Panchayat AIR 1976 SC 2463(supra) relied on by the Revenue which argued that each independent unit was a house and the Tribunal observed that “Their Lordships were construing the meaning of the word ‘house’ used in the Bombay Village Panchayats Act, 1933, and the question was whether ‘house’ included a factory building also” and quoted extensively from the decision of the Allahabad High Court in the case of Shiv Narain Chaudhari v.. Commissioner of Wealth-tax (1977)-108-ITR-104(All) and observed as under(para 14 of its order)

“It appears to our mind that the meaning of the word ‘house’ is not restricted or controlled to a single residential unit and we see no controlling provisions in the statute and the word, it seems to us, takes into itself the whole physical erection or amalgamated building without any reference to the interior or internal arrangement created for occupation of several tenants. The exemption allowed in the original assessments was, therefore, proper.”

The Delhi Bench of ITAT in the case of Prem Prakash Bhutani vs. Assistant Commissioner of Income Tax(2007)-110-TTJ(Del)-440 (decision dated 21.04.2006) has observed that several self occupied self dwelling units which are contiguous and situated in the same compound and with common boundary, having unity of structure should be regarded as one residential house. It is to be noted that this decision was rendered by a bench consisting of 2 members whereas the decision in Sushila M. Jhaveri (supra) was rendered by a special bench consisting of 3 members. Though the decision in Prem Prakash Bhutani(supra) was rendered earlier, it was not referred to in the later Full Bench decision.The Commissioner of Income Tax (Appeals) who partly allowed the appeal in favour of the assessee in Prem Prakash Bhutani’s case held that out of several units acquired, 2 flats which were contiguous and converted into a single flat can be taken as residence of the assessee’s family as well as his son’s family and decided the issue in favour of the assessee relying upon certain observations of the Allahabad High Court in the case of Shiv Narain Chaudhari vs. CWT (supra) and these observations have been highlighted above. The observations made by the Commissioner of Income Tax (Appeals) in Prem Prakash Bhutani wherein he had relied upon the decision of Allahabad High Court in Shiv Narain Chaudhari vs. CWT (supra) may therefore be considered to

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have been approved by the Tribunal. The Tribunal also relied upon the fact that there was only one ration card testifying to the fact that the family was one.

The term “contiguous” means touching, meeting or joining at the surface or border, closed together neighbouring, bordering or adjoining, as two contiguous bodies houses or countries (page 395 of Webster’s New Twentieth Century Dictionary Unabridged, Second Edition).

Therefore it is possible to claim exemption in respect of more than one unit if the conditions such as, one common kitchen with one municipal number,one ration card and contiguous flats even joined by a stair case between flats if the flats are situated one above the other, are satisfied. However it is not required that all these conditions should be satisfied. To sum up

There is no difficulty in claiming exemption on purchase of more than one residential unit in the same building (block) whether they are adjacent to each other or one above the other. Butin respect of flats within the same compound but in separate blocks there may be difficulty in getting a favourable decision from the income-tax and judicial authorities but a chance can be taken by making a claim for exemption based on the legal advice by a competent professional advisor.

Though the decision of the Allahabad High Court in the case of Shiv Narain Chaudhariv vs.. Commissioner of Wealth-tax (supra) dealt with an issue arising under the Wealth-tax Act the principles emanating out of this decision followed in a few other cases can be extended in understanding the important word “house” and it can therefore be inferred that when a house with more than one storey is purchased on sale of a house property to take advantage of provisions of section 54 and/or 54F the same (purchase of the house) will amount to purchase of one residential unit.

TAIL PIECE

The Madras Bench of ITAT in the case of Asst. CIT v.T.N.Gopal (IT Appeal No. 231of 2008, decided on 25-05-2009) / (2009)-16-CPT-363(Chennai-Trib.)(T.M) has held that mere extension of the existing building would not give benefit to the assessee under section 54F. Applying the principle in reverse direction it can as well be argued that mere existence of more than one storey in an existing building would not give raise to existence of more than one building disentitling the assessee from claiming exemption under section 54 of the Income-tax Act towards investment in (purchase of) a single residential house property. SOME IMPORTANT DECISIONS FROM ITAT

(i) The Mumbai Bench of the ITAT in the case of Rajesh Keshav Pillai vs.ITO (2010)-TMI-203869/(2011)-44-SOT-617(Mum) has held that if there are sales of more than one residential house exemption has to be computed with reference to each set of sale of residential house and the corresponding investment in one residential house. The Tribunal went on to hold that aggregation is not permitted and the principle of one to one has to be followed meaning thereby that surplus (difference between investment in new house property and capital gains), if any, arising out of sale of one residential property cannot be adjusted against deficit (difference between capital gains and investment in new house property) arising out of sale of other property.

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(ii) The ITAT Mumbai Bench in the case of Kishore H. Galaiya vs.ITO [2012] 24 taxmann.com 11 (Mumbai - Trib.) [2012] 24 taxmann.com 11 (Mumbai - Trib.) has held that booking of flat with a builder, is a case of 'construction' for purpose of claiming exemption under section 54; if construction is complete within 3 years section 54 exemption would be available even if possession was not taken within three years (iii) The Mumbai Bench of ITAT in the case of Dy.CIT vs. Ranjit Vithaldas[2012] 23 taxmann.com 226 (Mumbai - Trib.) has held that deduction under section 54 of the Income-tax Act is available where capital gains from sale of any number of houses is invested in a new house. As provisions of section 54 and 54F are similar so far as investing in house property is concerned the aforesaid decision can be applied to cases arising under section 54F of the Act. (iv) The ITAT Ahmedabad Bench of ITAT in the case of Asstt.CIT vs. Subhash Sevaram Bhavnani, following the ratio in CIT v. Subramaniya Bhat 165 ITR 571 (Kar.), has held that wherein construction commenced before transfer of old house and completed after transfer within the three year time-limit the assessee is entitled to benefit of deduction under section 54 of the Act. However it is to be noted that when the construction of new house is complete before transfer of old house then the assessee is not entitled to deduction under section 54 of the Act as was held by the Gujarat High Court in the case of Smt. Shantaben P. Gandhi v. CIT 129 ITR 218. (v) The ITAT Mumbai Bench in the case of Jatinder Kumar Madan vs.ITO [2012] 21 taxmann.com 316 (Mum.) has held that acquisition of new flat under a development agreement in exchange of old flat amounts to construction of new flat for purpose of claiming deduction under section 54 of the Act. (vi) The Chennai Bench of ITAT in the case of Smt. Seshu Jaggaiah vs.ITO[2012] 20 taxmann.com 521 (Chennai) has held that where after getting money on sale of property, assessee handed over money to her sons for their use and she could construct new residential property beyond prescribed time-limit, deduction under section 54 of the Act could not be allowed. (vii) The ITAT Mumbai Bench in the case of Asstt. CIT vs. Deepak S. Bheda [2012] 23 taxmann.com 159 (Mum.) has clarified that deduction under section 54EC cannot be denied on ground that assessee has availed exemption under section 54F also in respect of a part of capital gains (vii) The Kolkata Bench of ITAT in the case of Chanchal Kumar Sircar vs. ITO [2012] 18 taxmann.com 304 (Kol.) has held that in case of receipt of sale consideration in instalments, period of six months for claiming deduction under section 54EC has to be calculated from date of actual receipt of amount The following observations made by the Karnataka High Court in the case of CIT v. Ranka & Ranka [2012] 19 taxmann.com 65 (Kar.) are worth noticing- "It is our experience that in most of the cases, the levy of tax is made by placing such interpretation on the provision of the Act, so as to defeat the very object of those provisions. The Parliament with the best of intention, as incentive to trade and industry, has extended several benefits under the Act. Without properly appreciating the context and the object with which those provisions are enacted, the department has interpreted those provisions preventing those, benefits reaching the persons to whom it was intended. In most of the cases, the Tribunal has come to the rescue of those assessees, has interpreted those

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provisions in proper perspective and have extended the benefit to the assessee…………." C-4. WHEN DOES CAPITAL GAINS TAX ARISE?

As per the provisions of section 2(47) (v) “transfer “in relation to a capital asset includes-

Any transaction involving the allowing the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act,1882.

This section assumes importance as it deals with the definition of the word “transfer” and not sale. All actions have relevance only with regard to date of transfer. The Madras High Court in the case of Madthil Brothers vs.Deputy Commissioner of Income-tax (2008)-301-ITR-345(Mad) has categorically held that date of handing over possession of the property determines the date of transfer and execution of sale deed is not the determining factor. The liability to capital gains would arise even in case of transfer of possession of property through power of attorney.

The Supreme Court in the case of Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra (dead) through Lrs. – 2004 (8) SCC 614 referred to the background with regard to introduction of Section 53A enacted in 1929 by the Transfer of Property (Amendment) Act 1929 by importing into India in a modified form the equity of part performance as it developed in England over the years and observed that doctrine of part performance as stated in Section 53A of the Transfer of Property Act is an equitable doctrine which creates a bar of estoppel in favour of the transferee against the transferor. The Supreme Court in this case extracted at paragraph 8 of its order, from its earlier decision in the case of Shrimant Shamrao Suryavanshi and another vs. Pralhad Bhairoba Suryavanshi, 2002 (3) SCC 676, the essential conditions which are required to be fulfilled if a transferee wants to defend or protect his possession under section 53A of the Transfer of Property Act in the following words.

(1) There must be a contract to transfer for consideration of any immovable property; (2) the contract must be in writing, signed by the transferor, or by someone on his behalf; (3) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained: (4) the transferee must in part performance of the contract take possession of the property, or of any part thereof; (5) the transferee must have done some act in furtherance of the contract; and (6) the transferee must have performed or be willing to perform his part of the contract."

The Supreme Court also made the following observations at paragraph 9 of its order

“If these conditions are fulfilled then in a given case there is equity in favour of the proposed transferee who can protect his possession against the proposed transferor even though a registered deed conveying the title is not executed by the proposed transferor. In such a situation equitable doctrine of part performance provided under Section 53-A comes into play and provides that 'the transferor or any person claiming under him shall be debarred from

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enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract."

Therefore it is obligatory on the part of the transferee – the developer in the case of JDA – to do some act in furtherance of the contract. This further act starts with applying to various authorities after possession is taken by the transferee and so unless this further act is done it cannot be stated that provisions of section 2(47)(v) of the Income Tax Act apply so as to cover situation contemplated under section 53A of the Transfer of Property Act 1882. Mere signing of Memorandum of Understanding between the owner and the developer does not result in transfer of property and therefore it could legally be argued based on the decisions of the Supreme Court referred to above that unless the planning permit is sanctioned by the Appropriate Authorities permitting construction subject to fulfillment of certain conditions, it could not be said that some act in furtherance of the contract has been done by the transferee so as to cover situations contemplated under section 53A of the Transfer of Property Act read with 2(47)(v) of the Income Tax Act. Though the decisions referred to above have been rendered in defining the rights of the transferee under section 53A of the Transfer of Property Act 1882 the general principle emanating out of these decisions, that unless some further act is done by the transferee he cannot be said to have done some act in furtherance of the contract resulting in part performance of the contract, can be taken advantage of. So if adequate care is taken in drafting the development agreement at the time when the owner executes General Power of Attorney authorizing the developer to apply to Appropriate Authorities for sanctioning of plan etc., then it is possible to postpone the capital gains liability to a later year if the sanctioning authority takes a longer time in according permission. The Hyderabad Bench of the Income-tax Appellate Tribunal in the case of Ms. K. Radhika v. Dy. CIT [2011] 13 taxmann.com 92 through a detailed and well-reasoned order has held that unless provisions of section 53A of the Transfer of Property Act are satisfied transaction relating to Development Agreement of a property cannot fall within the scope of deemed transfer under section 2(47)(v ) of the Income-tax Act.

If it is possible for the assessee to part with possession of the property in piece meal falling in different assessment years, then capital gains tax gets distributed accordingly. The Madras High Court in the case of Commissioner of Income Tax vs. K. Jeelani Basha (2002) 256 – ITR – 282,following the decision of the Delhi High Court in the case of Commissioner of Income Tax vs. Shakuntala Rajeshwar (1986) 160 – ITR – 840 (Delhi.) has held that if the assessee parts with possession of one third of property on receiving part payment then the capital gains will have to be calculated only on the basis of such part consideration received and not on total consideration agreed upon.

The Madhya Pradesh High Court in the case of Avtar Singh Vs. Income-tax Officer [2004] 270 ITR 0092 has held that mere execution of general power of attorney by the owner does not result in deliverance to the purchaser if there is nothing in the agreement to indicate that possession was delivered to the purchaser. The matter was remitted to the Tribunal for fresh adjudication with regard to the factum of delivery of possession or enjoyment of property by the purchaser by any other means.

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Therefore in the case of joint development of property, if adequate care is taken in drafting the agreement (Memorandum of Understanding) and adequate planning is done with regard to act(s) to be done by the transferee in furtherance of the contract and proper tax planning is done by the transferor by understanding the gravity of the situation, payment of capital gains tax can be postponed to the proper assessment year in which capital gains are assessable to tax. The note of caution administered by the Madras High Court in the case of Commissioner of Income-tax vs. N.R. Bhusanraj [2002] 256 ITR 0340 may be kept in mind while resorting to tax planning. The Madras High Court has cautioned that in jurisprudence “intention” would be irrelevant and a transfer of a capital asset which is complete in itself cannot escape merely because the intention of the assessee was otherwise. In other words, if any action is done with contrary intention but it comes within the mischief of a taxing statue, it (such action) cannot escape tax liability for that year. C-5. WHAT SHOULD BE YEAR OF ACQUISITION IN CASE OF PROPERTIES ACQUIRED THROUGH WILL,SETTLEMENT etc.,AND HENCE INDEXATION VALUE TO BE ADOPTED FOR WORKING OUT CAPITAL GAINS?

A property (residential as well as other property) can either be purchased by the assessee or acquired by through a gift or Will or devolve on him through succession or inheritance.

The following article answers the query- LONG TERM CAPITAL GAINS ON SALE OF PROPERTY ACQUIRED THROUGH WILL etc Issue The issue, which quite often arises, is what should be the cost inflation index to be adopted in the case of sale of a house property acquired through a Will or any of the other modes stipulated in section 49(1)(ii) and (iii)(a) of the Income-tax Act, 1961. Should the cost inflation index pertaining to the financial year in which the property devolved on the assessee be adopted or is he entitled to take cost inflation index pertaining to the year in which the property was acquired by the previous owner? For example an assessee acquired, under a will, a house property on the death of his mother on July 14, 2012, and the property was acquired by his mother prior to April 1, 1981. The assessee now proposes to transfer the property and is willing to invest in purchase of a residential property to avoid capital gains tax. The following issue arises: "What should be the indexed cost of acquisition? Should the index point of 100 relating to the financial year 1981-82 be adopted for working out capital gains or should it be the cost inflation index pertaining to the financial year 2012-13 when the assessee became the owner of the property?" Relevant sections The following sections are relevant so far as this issue is concerned. Section 2(42A), Explanation 1(b) states that "in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49 there shall be included the period for which the asset was held by the previous owner referred to in the said section." The reference here to sub-section (1) of section 49 has come into the statute book with effect

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from April 1, 1967 as a result of substitution of the then clauses by this clause, by the Finance (No. 2) Act, 1967. Section 45 stipulates, "that any profit and gains arising from the transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head `Capital gains' and shall be deemed to be income of the previous year in which the transfer took place." Section 48: This section, as substituted by the Finance Act, 1992, with effect from April 1, 1993, provides for computation of capital gains by deducting from the full value of the consideration for the transfer of the capital asset the expenditure incurred wholly and exclusively in connection of the transfer and the cost of acquisition of the asset and the cost of any improvement. Provided further that where long-term capital gain arises from the transfer of a long term capital asset, other than capital gain arising to a non resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "cost of any improvement" had respectively been substituted. Section 49(1), clauses (ii) and (iii)(a) speak of cost with reference to certain modes of acquisition of the asset. As per these clauses of this section where the capital asset becomes the property of the assessee under a gift or will or by succession, inheritance or devolution the cost of improvement of the asset shall be deemed to be the cost for which the previous owner acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. Explanation 1 to section 49(1) defines the meaning of the expression "previous owner". The meaning of the expression "previous owner" can be explained as follows: The Explanation to sub section (1) of section 49 makes provision for a case where the owner from whom the assessee acquired the asset had not incurred any cost for acquiring the asset. It, therefore, lays down that in sub-section (1), "previous owner of the property" in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clauses (i) to (iv) of sub-section (1). Thus if an asset is received by "A" under a gift from "B" and if "B" had received said property under a will from "C" and if "C" had acquired it for a cost incurred by him, the cost of acquisition in the hands of "A" would be the cost for which "C" acquired it, as increased by the cost of improvement incurred by "C", "B" and "A". Circular No. 3P dated October 11, 1965 at paragraph 112 explains the purpose for which the Explanation was inserted by the Finance Act, 1965. Under section 49 of the Income-tax Act, the cost of acquisition of a capital asset which becomes the property of the assessee under a gift or will, or by succession, inheritance or devolution, etc., is deemed to be the cost for which

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the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred by the previous owner or the assessee, as the case may be. However, it is possible that the previous owner of the capital asset may have acquired the asset under a gift or will or by any other mode of acquisition referred to in section 49. In such a case, it could be urged that under section 49 of the Income-tax Act, the cost of acquisition of the asset to the assessee was nil. The Finance Act, 1965 has, therefore, amended this section with effect from 1st April, 1965 by way of adding an Explanation to it to the effect that the expression "previous owner of the property" in relation to a capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in section 49. Answer to the issue raised A direct answer to this issue can be found when the provisions of sections 49 and 48 are read together. As per the provisions of section 49(1), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it subject to any increase in cost of improvement by the assessee or the previous owner, etc. and as per the provisions of section 48 to arrive at the capital gains, the sum total of expenditure incurred in connection with transfer of the asset and the indexed cost of acquisition of the asset and the indexed cost of improvement has to be subtracted from the total consideration. The second proviso to section 48 provides that where the long-term capital gains arise from the transfer of a long-term capital asset, the provisions of clause (ii) (which speaks of cost of acquisition of the asset and improvement) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted. Therefore, when the capital asset becomes the property of the assessee, the indexed cost of acquisition of the asset of the previous owner shall be deemed to be the cost for which the assessee had acquired the property. In other words if the property had been acquired by the previous owner prior to April 1, 1981, while working out the indexed cost of acquisition of 100 points will be taken for the year of purchase and if the property had been acquired by the previous owner on or after April 1, 1981 the cost index inflation point pertaining to that particular financial year will be taken. On account of the deemed provisions of section 49 the argument that the cost inflation index pertaining to the year in which the capital asset became the property of the assessee falls to the ground. When provisions enacted for a particular purpose are referred to in one section of the Income-tax Act namely section 49 which speaks of cost of acquisition of the asset to the previous owner, the same should be extended to the provisions of section 48 which speaks of method of computation of capital gains. When the cost of a property is determined there cannot be more than one cost so far as the property is concerned. When the cost is determined by applying the indexed cost of acquisition and indexed cost of improvement, if any, as per the provisions of section 48 then the same (cost) will have to be applied while working out the cost of acquisition of the asset for the purposes of section 49(1). So far as treating the property as a long term capital asset is concerned there is no dispute as per the provisions of section 2(42A), Explanation 1(b) (as extracted above). There is also no dispute with regard to the assessment year in which the capital gains tax is payable as per provisions of section 45.

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Case laws (1).The ITAT, MUMBAI SPECIAL BENCH B-1, MUMBAI in the case of DCIT vs. Manjula J. Shah ITA No. 7315/Mum/2007 October 16, 2009[2010] 35 SOT 105 (MUM.) (SB) has held that indexation relates back to the year of acquisition of the property by the first owner. This decision rendered by the Special Bench of the Tribunal has been affirmed by the High Court of Mumbai in CIT vs.Manjula J.Shah [2012] 204 Taxman 691(Bom).The Delhi High Court in the case of Arun Shungloo Trust vs.CIT [2012] 205 Taxman 456 (Del) following the decision of the Bombay High Court in the case of Manjula J. Shah(supra) has held in favour of assessee by observing that benefit of indexed cost of inflation is given to ensure that tax payer pays capital gains tax on ‘real’ or actual ‘gain’ and not on increase in capital value of property due to inflation; this is the object or purpose in allowing benefit of indexed cost of improvement, even if the improvement was made by previous owner in cases covered by section 49 of the Income-tax Act. (2).The first decision that was reported was the one rendered by the Chandigarh Bench of the Income-tax Appellate Tribunal in the case of Mrs. Pushpa Sofat v. ITO [2002] 81 ITD 1 (Chd.) (SMC) . In this case the house was acquired around the year 1972 by the assessee's father and the assessee inherited the property through a Will left by her father. The assessee's father expired on February 17, 1991, and the assessee disposed of property during the assessment year 1993-94. The issue arose whether index point 223 pertaining to the accounting year 1991-92 (the year during which the father of assessee expired) should be adopted or index point of 100 pertaining to April 1, 1981 should be adopted. The Appellate Tribunal after referring to the provisions of sections 48 and 49(1) held that the cost of acquisition of the asset has to be deemed to be the cost for which the previous owner had acquired it. The Tribunal, therefore, ultimately held that point 100 pertaining to April 1, 1981 should be taken as the indexed cost of acquisition to work out capital gains and as the cost of property by applying the cost inflation index in terms of section 48(1)(a) was more than the sale consideration it was held that no taxable capital gain accrued to the assessee. (3). The ITAT Mumbai Bench in the case of Mrs. Gopi S.Shivnani vs. ITO-[2011] 9 taxmann.com 223 (Mum. – ITAT) has held as under-

“In case a property is sold which was acquired before 1-4-1981, provision of section 55(2)(b) permits assessee to adopt either actual cost of acquisition or fair market value of said asset as on 1st April 1981 for purpose of computation of capital gains thereon”

(4) In the case of Kamal Mishra v.Income-tax Officer 2008-19-SOT-251 decided by the Delhi Bench of ITAT the assessee was in receipt of certain shares and securities on the death of her husband in January 1998 and the assessee sold the shares during the assessment year 2002-03.While computing capital gain the Assessing Officer allowed indexation by taking the year of acquisition of shares in the year 1998,instead of the year in which the shares so devolved on the assessee by her husband’s death, was acquired by her husband. The Tribunal held in favour of the assessee by making the following observations at para.8 of its order - “The base year as determined by the learned Assessing Officer is erroneous. There cannot be two different dates in respect of the same asset devolving on the heir, one date to determine the date of cost of acquisition and another to determine the indexed cost of acquisition. Even otherwise the period of holding

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for determining long-term capital gains includes the period for which the original owner held the asset that devolved upon the legal heir. Accordingly, the Assessing Officer is directed to recompute capital gains on sale of securities by indexing cost of acquisition with reference to the year in which husband of assessee acquired them”. (5) The Kolkata Bench of ITAT in the case of SMT. MINA DEOGUN vs. INCOME TAX OFFICER ITAT (2008) 19 SOT 183 has held that where an assessee sells an inherited capital asset, the capital gain is to be computed with reference to the period of holding and cost of acquisition incurred by the first owner and it will be improper to apply only the cost inflation index, applicable to the year of inheritance. In this case the assessee’s father purchased residential house in 1958 and on his death in 1968, his mother became its owner. Then assessee’s mother expired on 16th Sept., 1999, whereupon assessee along with her three sisters became co-owners by succession. The property was sold by the co-owners during financial year 2003-04.Under the above circumstances it was held by the Tribunal that as per provisions of s. 2(42A), assessee was deemed to have held the property since 1958 and therefore the cost inflation index applicable to the financial year 1981-82 and not to the financial year 1998-99 should have been applied by the AO for determining cost of acquisition It is to be noted that as per provisions of section 49(1) whereas succession is covered in clause(iii)(a) gift is covered under sub-section(2).Both these clauses are covered by the Explanation to sub-section(1) of section 49 wherein the “previous owner of the property” is defined. (6)The Mumbai Bench in the case of Madanlal Gupta Family Trust v. Joint Commissioner of Income-tax [2005] 1 SOT 292 (MUM.) has held that once case is found to be covered by section 45, read with section 49, cost of acquisition has to be calculated with reference to provisions contained in section 49, in terms of which cost of acquisition should be deemed to be cost for which previous owner of property acquired it. Catchwords from that decision- Section 49 of the Income-tax Act, 1961 - Capital gains - Cost with reference to certain modes of acquisition - Assessment year 1996-97 - Whether in order to charge a property to levy of capital gains tax, department, in terms of section 48, has to take into account not only sale price but also cost of acquisition as statutorily defined - Held, yes - Whether stamp duty expenses constitute cost of acquisition - Held, no - Whether once case is found to be covered by section 45, read with section 49, cost of acquisition has to be calculated with reference to provisions contained in section 49 in terms of which cost of acquisition should be deemed to be cost for which previous owner of property acquired it - Held, yes - Assessee-trust sold certain property which was acquired by it as an alternate accommodation on surrender of tenancy rights - It claimed that as property was received free of cost , no capital gains tax was chargeable - Assessing Officer, treating stamp duty paid at time of registration as cost of acquisition, computed capital gains - Commissioner (Appeals) held that stamp duty did not constitute cost of acquisition and case was covered under section 49(1)(iii)(d) - Whether Commissioner (Appeals) was justified in remanding case to Assessing Officer for computing cost of acquisition under section 49 and for modifying assessment accordingly - Held, yes

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(7) The Mumbai Bench of ITAT in the case of Dy. Commissioner of Income-tax v. Smt. Meera Khera [2004] 2 SOT 902 (MUM.) has held as under- Catchwords- Section 49 of the Income-tax Act, 1961 - Capital gains - Cost with reference to certain modes of acquisition - Assessment year 1995-96 - Property in question was purchased on 13-5-1985 by family members of assessee and after an arrangement between them, assessee became owner of that property - Assessing Officer adopted cost of property as on 13-5-1985 - Whether there was no mistake in impugned order of Commissioner (Appeals) in applying cost inflation index relevant to assessment year 1986-87 to cost of property - Held, yes

Conclusion From the above, therefore, it could be inferred that the assessee who acquires the property through any of the modes stipulated in section 49(1)(ii) and (iii)(a) of the Income-tax Act, 1961, that is under a gift or will or by succession, inheritance or devolution is entitled to adopt the cost inflation index pertaining to the financial year in which the property was acquired by the previous owner. (8). The ITAT Indore Bench in the case of Smt.Shakuntala Somani vs. ITO [2012] 50 SOT 629 has held that where an assessee acquires property on partition of HUF,indexed cost of acquisition is to be computed with reference to the year in which HUF acquired the property and not year in which property came to possession on partition. (9) The ITAT Delhi Bench in the case of Asstt. CIT vs. Suresh Verma [2012] 19 taxmann.com 9 (Delhi) has held that where assessee became owner of a property by inheritance which was acquired by his father prior to 1-4-1981, benefit of indexation of cost would be available with reference to fair market value as on 1-4-1981 SUGGESTION

If the property to be transferred by the assessee is of substantial value and the assessee is in advanced stage of his life and has children on whom the properties would ultimately devolve, then he can settle the property on his children before transfer by paying nominal stamp charges prevalent in the State of Tamil Nadu(kindly look into the provisions of the respective state for such beneficial provision) and then the assessee and the beneficiaries can enter into sale/JDA transaction as capital gains would get distributed among the assessee- settlor and the beneficiaries and each one of them would be entitled to get exemption under section 54 and/or section 54EC of the Income-tax Act. Such a settlement would also not be hit by section 56(2)(vii) of the Income-tax Act.

NOTE OF CAUTION 1. As per provisions of section 27 of the Act the individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred. As per provisions of section 64 of the Act all income arising pertaining to this property so transferred would be taxed in the hands of the transferor and so any capital gain arising out of transfer of such asset shall be liable to capital gains tax( however subject to deductions) as per section 45 in the hands of the transferor. So it should be stated at the outset that no tax planning is possible unless transaction is done at market price (a)

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between a husband and wife and /or (b) between a parent and a minor child. So it is better to avoid such kind of transaction(s). 2. It is also advisable not to settle/transfer any property to daughter-in-law (son’s wife) without adequate consideration as the same shall be hit by the provisions of section 64(1)(vi) which read as under-

(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--

(vi) to the son's wife, of such individual, from assets transferred directly or indirectly on or after the 1st day of June, 1973, to the son's wife by such individual otherwise than for adequate consideration ;

In other words the transferor shall continue to be liable to pay tax in spite of the settlement/transfer without adequate consideration. Moreover as per provisions of section 63(b) “transfer” includes “settlement”. C-6. WHAT ARE THE AVENUES THAT ARE AVAILABLE TO SAVE CAPITAL GAINS TAX APART FROM INVESTING IN RESIDENTIAL PROPERTY?

As regards avenues that are available to save capital gains tax, investment can be made in capital gains bonds as stipulated in section 54EC of the Income-tax Act and the investment can be made up to a maximum of Rs.1 crore (i.e.) ceiling can be doubled as explained below.

This can be explained in the following manner.

If provisions of section 54EC are analyzed it is clear that the assessee gets exemption on the long-term capital gains if, and to the extent, the assessee makes investment in a long-term specified asset within six months after the date of transfer of the capital asset. Thus, if the assessee makes investment in the long-term specified asset equivalent to the amount of the long-term capital gain the whole of such capital gains would be tax exempt, but if the assessee invests a lesser amount, proportionate capital gain would qualify for the exemption.

The Finance Act, 2007 has, however, capped a ceiling of Rs. 50 lakhs on

the investment that can be made by an assessee in the long-term specified asset, by inserting, with effect from April 1, 2007 a proviso to sub-section (1) of section 54EC, which reads as under :

“Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees."

So the question that arises is whether the ceiling of Rs.50 lakhs is

applicable to the investment (to be made) in respect of capital gains arising on sale of asset. The answer is a firm no for the following reasons-

(i) On a plain reading of the proviso it is clear that the ceiling of Rs. 50 lakh laid down in the proviso is a ceiling on the amount of investment to be made in a financial year and not on the total amount of exemption and further the said ceiling on the amount of investment is also qua a financial year and not qua the assessee as such

(ii) In the Memorandum explaining the provisions in the Finance Bill, 2007, which inserted the said proviso there is nothing to suggest that the Legislature

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intended anything contrary to the above interpretation of the proviso. This proviso ran as under-

"It is also proposed to amend the said section so as to provide for a ceiling on investment by an assessee in such long-term specified assets. Investments in such specified assets to avail of exemption under section 54EC, on or after 1st day of April, 2007 will not exceed fifty lakh rupees in a financial year."

(iii) The Finance Minister in his Budget Speech for the financial year 2007-08 while discussing this amendment to section 54EC referred to the limit of Rs. 50 lakh as limit "per investor per year" and not simply "per investor".

(iv) If the intention of the Legislature had been to put a ceiling on the total amount of investment an assessee can make at any time the Legislature would not have used the words "in any financial year" in the proviso, but would have provided that "the investment in the specified asset by an assessee shall not exceed Rs. 50 lakh". Moreover the words used in the proviso are “in any financial year” and not “for any assessment year”

(v) Further if the intention was to restrict the exemption to Rs.50 lakhs the Legislature could have worded the proviso to the effect that "the exemption under this section shall not exceed Rs. 50 lakh".

(vi) Lastly in the case of an exemption provision like this one presuming that there is some ambiguity in the law, a provision for exemption should be interpreted liberally, reasonably and in favour of the assessee. Example as to how the exemption up to Rs.1 crore can be claimed-

Suppose an assessee disposes/transfers a property on 10-10-2012 resulting in a taxable capital gain of more than Rs.1Cr-capital gain after taking advantage of exemption under section 54- he could then invest Rs.50 lakhs on or before 31-03-2013 and another Rs.50 lakhs on or after 01-04-2013 however within 6 months from the date of handing of property in 54EC exempted securities.

The other avenue available under section 54GB of the Act is not discussed as the provision introduced with effect from 1st April 2012 is still in infant stage.

D.WITH REGARD TO NRIS

1. Applicability of section 195 read with section 197 regarding tax deducted at source

The provisions of section 195 of the Act would require tax deduction on payments made to non residents (including PIOs) which are chargeable to tax in India. The purchaser on purchase of a property from a non resident is expected to deduct tax on income by way of capital gains at 30 per cent. In this discussion wherever the discussion pertains to NRI it also applies to PIOs.

However as per Board Circular No.728 dated 30.10.95 and Circular No.734 dated 24.01.96 the person responsible for deduction of tax can take into consideration the effect of the deductions that are available under the Act Moreover the Supreme Court in the case of Transmission Corporation of AP Ltd. vs. CIT (1999) 239 – ITR - 587 has clearly laid down that where the person responsible for deduction is fairly certain then he can make his own determination. Moreover the argument of the assessee in the case before the Supreme Court was that section 195 contemplates tax deduction only

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for payments fully having character of income. The provision for determination of tax is a safeguard and this safeguard by way of workings can be furnished by a Chartered Accountant of the non-resident. As per provisions of Section 195(2) if still there is any doubt, with regard to appropriate proportion of such sum so chargeable to tax in the mind of the person making the payment of such sum to a non resident then such person may make an application to the Assessing Officer to determine by general or special order to determine the appropriate proportion with regard to tax deducted at source. The application can also be made under section 195(3) read with section 197 to the assessing officer by the recipient (payee) requesting the officer to issue necessary directions in this regard.

One more thing which has to be ensured now is permanent account number (PAN) for NRIs as in the absence of a PAN, the NRI would be subject to tax deduction at full rate and in the absence of PAN no certificate can be obtained either by the payer under section 195(2) or the payee under section 195(3) of the Act. This is the impact of section 206AA introduced with effect from 01-04-2010

There are at least 2 decisions wherein it has been held that any payment made by assessee in respect of purchase of land to a resident in India, who was holding power of attorney for five non-resident co-owners cannot be considered as payment to non residents attracting the provisions of section 195 of the Income-tax Act. These 2 decisions are-

(a) Rakesh Chauhan vs. Director of Income-tax (International Taxation) (2010)-33-DTR (Chd.) (Trib) 469

(b) Tecumseh Products (I) Ltd. vs. Deputy Commissioner of Income-tax, Circle 6 (TDS), Hyderabad [2007] 13 SOT 489 (HYD.) The decision in (b) followed the decision in (a)

Though these decisions are available providing benefit to the assessee it is better(with respect) not to take cognizance of these decisions and follow the procedure stipulated in section 195 read with section 197 of the Act for necessary direction from the Income-tax Officer, Foreign Section.

The Chennai Special Bench of the ITAT in the case of ITO vs. Prasad Production Ltd. (2010)-3-taxmann.com 78(Chennai-ITAT) (S.B.) vide its detailed order dated 09-04-2010 in ITA No.663/Mds/2003 has held that if the payer has a bonafide belief that no part of the payment has income character, then section 195(1) will not apply because section 195 will apply only if the payment is chargeable to income-tax either wholly or partly. The Delhi High Court in the case of Van Oord ACZ India (P) Ltd. vs.CIT (2010)-3-taxmann.com 52(Delhi)(judgment dated 15-03-2010) has held that in case in the assessment proceedings relating to the non-resident recipient, if it is ultimately held that the sum received by the recipient was not chargeable to tax, the effect of that would be that there was no obligation on the assessee to deduct tax at source on the sum paid to the said non-resident and in that eventuality, the assessee will not be treated as assessee-in-default and would be absolved of any consequences for non deduction of tax at source.

This is what the Supreme Court in the case of GE INDIA TECHNOLOGY CENTRE (P) LTD. vs. COMMISSIONER OF INCOME TAX & ANR. (2010) 44 DTR (SC) 201 overruling the decision of the Karnataka High

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Court in the case of CIT vs. Samsung Electronic Company Ltd. 320-ITR-209(Kar) has observed –Head note-

TDS—Payment to non-resident—Obligation to deduct tax vis-à-vis taxability of remittance—Most important expression in s. 195(1) consists of the words "chargeable under the provisions of the Act"—Payer is bound to deduct tax at source only if the sum paid is assessable to tax in India—A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the IT Act—Sec. 195 also covers composite payments which have an element of income embedded or incorporated in them—Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct tax in respect of such composite payments—However, obligation to deduct tax is limited to the appropriate proportion of income which is chargeable under the Act—This obligation flows from the said words used in s. 195(1)—Sec. 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure as to what should be the portion so taxable or the amount of tax to be deducted—In such a situation he is required to make an application to ITO(TDS) for determining the amount—It is only when these conditions are satisfied that the question of making an order under s. 195(2) arises - If the contention of the Department that the moment there is remittance the obligation to deduct tax arises is to be accepted, then the words "chargeable under the provisions of the Act" in s. 195(1) would stand obliterated - If the contention of the Department is accepted then the Department would be entitled to appropriate the moneys deposited by the payer even if it is not chargeable to tax because there is no provision in the Act whereby a payer can obtain refund—Sec. 237 r/w s. 199 implies that only the recipient of the sum can seek a refund - Thus, the interpretation of the Department leads to an absurd consequence—Entire basis of the Department's contention is based on administrative convenience in support of its interpretation—There are adequate safeguards in the Act which would prevent revenue leakage.

Even an NRI purchaser was not spared by ITAT Bangalore Bench in the case of Syed Aslam Hashmi vs. Income-tax Officer, (International Taxation), Ward-2(1) [2012] 26 taxmann.com 6 (Bangalore - Trib.). The ITAT Bangalore Bench in this case has categorically held that if the NRI purchaser fails to take recourse to section 195(2) of the Act then he would be required under section 195(1) to deduct tax on entire sale consideration payable to the NRI seller and in the absence of such deduction he would be treated as an assessee-in-default exposing himself to interest under section 201(1A) of the Act on the amount of tax not deducted.

The application (undertaking) for issuing of a certificate by the Income-tax Officer (Foreign Section) for NIL/less deduction can be made under section 195(2)[ refer circular no.10/2002 dated 09-10-2002 issued by CBDT] by the person responsible for making the payment along with the certificate of a Chartered Accountant specifying that the payment of sum does not attract tax or attracts tax at a lower rate based on the workings of the Chartered Accountant. In case of a bona fide belief by the payer that no part of the payment bears income character, it is not mandatory for him to undergo the procedure of section 195(2) before making any payment to a non-resident.

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The application for NIL/less deduction can also be made by the payee (the recipient) to the Income-tax Officer (Foreign Section) in Form 13 with all necessary and relevant documents along with workings.

The Income-tax Officer (Foreign Section) on being satisfied with the correctness of the claim made by the applicant shall proceed to issue a certificate under section 195(3) of the Income-tax Act specifying the rate at which tax has to be withheld by the payer and remit it to the Income-tax department on behalf of the payee.

TAIL PIECE The purchaser being a businessman, sometimes may not like to take

any risk as payment (to be) made for purchase of the property would partake the character of an expenditure on the debit side of his financial accounts (Profit & Loss Account) and any violation of TDS provisions on his part (which includes payments made to NRIs without tax deduction) would result in disallowance of entire payment made to the purchaser (refer section 40(a) (i) (b) of the Income-tax Act) and in that case he may insist that the assessee(transferor) should apply to the Income-tax Officer (Foreign Section) and get a direction/certificate from him.

The ITAT (Chennai Special Bench) in the case of Income-tax Officer vs. Prasad Production Ltd. [2010] 003 ITR (Trib) 0058 summarized the various situations that can arise for the applicability of section 195 as under-

(a) In case of a bona fide belief by the payer that no part of the payment bears income character, it is not mandatory for him to undergo the procedure of section 195(2) before making any payment to a non-resident. However, if the Department is of the view that the payer ought to have deducted tax at source, it will have recourse under section 201 of the Act. Thus, here the interests of the Revenue is protected. In the proceedings under section 201, the Assessing Officer will determine the portion chargeable to tax according to the provisions of the Act and determine the tax payable by the payer. The Assessing Officer is bound to determine the income chargeable to tax in accord-ance with the provisions of the Act. In any case, the liability of the payer cannot exceed that of the payee and if the payer is dissatisfied with the order under section 201, he will have recourse to appeal against the said order. Thus, the interests of both the parties are protected.

(b) If the payer believes that whole of the payment is chargeable to tax and if he deducts and pays the tax, no problem arises.

(c) If the payer believes that only a part of the payment is chargeable to tax, he can apply under section 195(2) for deduction at appropriate rates and act accordingly. No interest is jeopardised.

(d) If the payer believes that a part of the payment is income chargeable to tax, and does not make an application under section 195(2), he will have to deduct tax from the entire payment. Thus, the interests of the Revenue stand protected.

(e) If the payer believes that the entire payment or a part of it is income chargeable to tax and fails to deduct tax at source, he will face all the consequences under the Act. The consequences can be the raising of demand under section 201, disallowance under section 40(a)(i), penalty, prosecution etc. The interests of the Revenue stand protected.

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(f) If the payee wants to receive the payment without deduction of tax, he can apply for a certificate to that effect under section 195(3) and if he gets the certificate, no one is adversely affected.

(g) If the payee fails to get the certificate, he will have to receive payment net of tax. No interest is jeopardised. 2. APPLICABILITY OF CHAPTER XIIA OF THE INCOME-TAX ACT.

Chapter XIIA of the Income-tax Act deals with contains special provisions relating to certain incomes of non-residence. This chapter is usually pressed into service when the asset has been acquired out of convertible foreign exchange.

The term “Convertible foreign exchange” as it appears in section 115C (a) can be explained as below:

Board circular No.372 dated 08.12.1983 (1984 – 146 ITR(St.) 50 in paragraph 42.3 explains the meaning of convertible foreign exchange as understood in Foreign Exchange Regulation Act 1973 (FERA). It is explained that the meaning of the term would depend upon the undertaking “for the time being” under FERA and paragraph 42.4 refers to the press note dated 21.06.1983 clarifying that the non convertible rupees for bilateral account countries (e.g. Russian Roubles) will be accepted on par with convertible foreign exchange. As per Foreign Exchange Management Act 1999 which has replaced FERA, it should include any currency with multilateral convertibility either at fixed or floating rate for the foreign holders of home currency. Foreign exchange is defined under section 2(n) of Foreign Exchange Management Act 1999 as under:

“(n) “foreign exchange” means foreign currency and includes,-- (i) deposits, credits and balances payable in any foreign currency, (ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions, or persons outside India, but payable in Indian currency.”

Section 115C (b) of the Income-tax Act defines “foreign exchange asset” as any specified asset which the assessee has acquired or purchased with or subscribed to in, convertible foreign exchange. “Specified asset” means shares in an Indian company etc. as per provisions of Section 115 C (f) of the Income-tax Act. As per provisions of section 115C (d) of the Income-tax Act “long term capital gains” means income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset. As per provisions of section 115D (2) of the Income-tax Act where the gross total income consists only of investment income or income by way of long-term capital gains or both no deduction shall be allowed to the assessee under Chapter VI-A and nothing contained in the provisions of the second proviso to section 48 of the Income-tax Act shall apply to income chargeable under the head “capital gains”. The provisions of the second proviso read as under-

“Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the

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first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted”

In other words an NRI is not entitled to indexation benefit when he disposes of shares or debentures of an Indian company.

Section 115E of the Income-tax Act reads as under- “Tax on investment income and long-term capital gains.--Where the total

income of an assessee, being a non-resident Indian, includes-- (a) any income from investment or income from long-term capital gains of

an asset other than a specified asset; (b) income by way of long-term capital gains,

the tax payable by him shall be the aggregate of-- (i) the amount of income-tax calculated on the income in respect of

investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent.;

(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent. ; and

(iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).

This section (115E) is not happily worded for the reason that the term “long-term capital gains” as per section 115C (d) means income chargeable under the head “capital gains” relating to a capital asset, being a foreign exchange asset (and not being a short-term capital asset) and “foreign exchange asset” means a specified asset as defined in sub-section (f) of section 115 C to be shares, debentures etc., and it has been made complex by adding the term “ other than a specified asset” in sub-section(a) of section 115E after the words “long-term capital gains of asset”. In other words long-term capital gains refer to “specified assets” which are nothing but shares, debentures etc. By including the words “other than a specified asset” after “long-term capital gains” the definition is negated, meaning thereby the definition of “long-term capital gains” as per section 115C (d) is made ineffective or invalid. Either the definition of “long-term capital gains” should have been defined in a better manner or section 115E (a) should have worded in a better manner (i.e.) more clearly in the place where the term “other than a specified asset” appears. However this negation does not stand in the way of claiming indexation for assets other than “specified assets” such as residential property, plots etc. Moreover the saving grace is section 115I of the Income-tax Act where a breather has been provided in the sense that where a non-resident Indian (kindly note that as per definition of non–resident Indian in section 115C (e) the term means an individual being a citizen of India or a person of Indian Origin who is not a “resident”) elects not to be governed by the provisions of Chapter XIIA (i.e. sections 115C to 115I) for any assessment year he may opt out of these provisions. This is so because the object of this Chapter is to see that incentives to Non-resident Indians are provided and if the Non-resident Indian finds that these provisions are disadvantageous to him he may opt out of these provisions. As the Income Tax return form contains a column seeking information from NRIs whether any part of his income is to be

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taxed in accordance with the provisions of Chapter XIIA of the Income Tax Act, the requirement of filing a separate declaration which was in vogue till 31.03.90 has been done away with and it is enough if the Non-resident Indian files the return of income for the relevant assessment year under section 139. It is to be noted that otherwise as per the provisions of section 115G of the Income-tax Act it shall not be necessary for a non-resident Indian to furnish return of income under sub section (1) of Section 139 of the Income-tax Act if his total income in respect of which he is assessable under the Act during the previous year consisted only of investment income or income by way of long term capital gains or both and the tax deductible at source under Chapter XVIIB has been deducted from such income. 3. FACILITIES AVAILABLE TO NRIS AND PIOS FOR INVESTMENT IN INDIA

I. Bank Accounts and Deposits

a) Non-Resident (External) Rupee (NRE) Accounts (Principal / Interest Repatriable)

• Savings - The interest rates on NRE Savings deposits shall be at the rate applicable

to domestic savings deposits. Currently the interest rate is 3.5%.

• Term deposits ���� For 1 year to 3 years, the interest rates on fresh repatriable Non-

Resident (External) Rupee (NRE) Term deposits should not exceed the

LIBOR/SWAP rates, as on the last working day of the previous month, for US

dollar of corresponding maturity plus 50 basis points.

The interest rates as determined above for three year deposits should also be applicable in

case the maturity period exceeds three years

The changes in interest rates will also apply to NRE deposits renewed after their present

maturity period

b)FCNR(B)(Principal/Interest Repatriable)

Deposits of funds in the account may be accepted in such permissible currencies as may be

designated by the Reserve Bank from time to time.

• Presently the term deposit can be placed with ADs in India in 6 specific foreign

currencies (US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar and

Canadian Dollar).

• Rate of Interest - Fixed or floating within the ceiling rate of LIBOR/SWAP rates for

the respective currency/corresponding term minus 25 basis points.

• Maturity of deposits: 1-5 years.

c) NRO Accounts (Current earnings repatriable)

• Savings - Normally operated for crediting rupee earnings / income such as

dividends, interest. Currently the interest rate is 3.5 per cent.

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• Term Deposits - Banks are free to determine interest rates.

d) Repatriation from NRO balances

Authorised Dealers can allow remittance/s upto USD 1 million per financial year (April-

March) for bonafide purposes, from balances in NRO accounts subject to payment of

applicable taxes. The limit of USD 1 million per financial year includes sale proceeds of

immovable properties held by NRIs/PIO.

II. Other Investments on repatriation basis

• Government dated securities/treasury bills.

• Units of domestic mutual funds.

• Bonds issued by a public sector undertaking (PSU) in India.

• Non-convertible debentures of a company incorporated in India.

• Shares in Public Sector Enterprises being dis-invested by the Government of India,

provided the purchase is in accordance with the terms and conditions stipulated in

the notice inviting bids.

• Shares and convertible debentures of Indian companies under FDI scheme

(including automatic route & FIPB).

• Shares and convertible debentures of Indian companies through stock exchange

under Portfolio Investment Scheme.

• Perpetual debt instruments and debt capital instruments issued by banks in India.

III. Other Investments on non-repatriation basis

• Government dated securities (other than bearer securities)/treasury bills.

• Units of domestic mutual funds.

• Units of Money Market Mutual Funds in India.

• Non-convertible debentures of a company incorporated in India.

• The capital of a firm or proprietary concern in India, not engaged in any

agricultural or plantation activity or real estate business.

• Deposits with a company registered under the Companies Act, 1956 including

NBFC registered with RBI, or a body corporate created under an Act of Parliament

or State Legislature, a proprietorship concern or a firm out of rupee funds which do

not represent inward remittances or transfer from NRE/FCNR(B) Accounts into the

NRO Account.

• Commercial Paper issued by an Indian company.

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• Shares and convertible debentures of Indian companies other than under Portfolio

Investment Scheme.

IV. Investment in immovable Property

• May acquire immovable property in India other than agricultural land/ plantation

property or a farm house out of repatriable and non-repatriable funds.

In respect of such investments NRIs are eligible to repatriate

• Sale proceeds of immovable property acquired in India to the extent of repatriable

funds used for acquiring the property, up to two residential properties. The balance

will be repatriable through NRO Account subject to conditions mentioned at item

(I) (d).

• Refund of (a) application / earnest money / purchase consideration made by house-

building agencies/seller on account of non-allotment of flats / plots and (b)

cancellation of booking/deals for purchase of residential/commercial properties,

together with interest, net of taxes, provided original payment is made out of

NRE/FCNR(B) account/inward remittances.

• Housing Loan in rupees availed of by NRIs from ADs / Housing Financial

Institutions can be repaid by the close relatives in India of the borrower.

V. Facilities to returning NRIs/PIO

Returning NRIs/ PIO

• May continue to hold, own, transfer or invest in foreign currency, foreign security

or any immovable property situated outside India, if such currency, security or

property was acquired, held or owned when resident outside India.

• May open, hold and maintain with an authorised dealer in India a Resident Foreign

Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts.

Proceeds of assets held outside India at the time of return, can be credited to RFC

account. The funds in RFC accounts are free from all restrictions regarding

utilisation of foreign currency balances including any restriction on investment in

any form outside India.

4. PROCEDURE FOR REMITTANCE /REPATRIATION OF FUNDS BY NRIS

CBDT ON REMITTANCE TO NON-RESIDENTS UNDER SECTION 195

CIRCULAR NO. 04/2009, DATED 29-6-2009

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Section 195 of the Income-tax Act, 1961 mandates deduction of income tax from payments made or credit given to non-residents at the rates in force. The Reserve Bank of India has also mandated that except in the case of certain personal remittances which have been specifically exempted, no remittance shall be made to a non-resident unless a no objection certificate has been obtained from the Income Tax Department. This was modified to allow such remittances without insisting on a no objection certificate from the Income Tax Department, if the person making the remittance furnishes an undertaking (addressed to the Assessing Officer) accompanied by a certificate from an Accountant in a specified format. The certificate and undertaking are to be submitted (in duplicate) to the Reserve Bank of India / authorised dealers who in turn are required to forward a copy to the Assessing Officer concerned. The purpose of the undertaking and the certificate is to collect taxes at the stage when the remittance is made as it may not be possible to recover the tax at a later stage from non-residents.

2.There has been a substantial increase in foreign remittances, making the manual handling and tracking of certificates difficult. To monitor and track transactions in a timely manner, section 195 was amended vide Finance Act, 2008 to allow CBDT to prescribe rules for electronic filing of the undertaking. The format of the undertaking (Form 15CA) which is to be filed electronically and the format of the certificate of the Accountant (Form 15CB) have been notified vide Rule 37BB of the Income-tax Rules, 1962.

3. The revised procedure for furnishing information regarding remittances being made to non-residents w.e.f. 1st July, 2009 is as follows:-

(i)The person making the payment (remitter) will obtain a certificate from an accountant (other than employee) in Form 15CB.

(ii)The remitter will then access the website to electronically upload the remittance details to the Department in Form 15CA (undertaking). The information to be furnished in Form 15CA is to be filled using the information contained in Form 15CB (certificate).

(iii)The remitter will then take a print out of this filled up Form 15CA (which will bear an acknowledgement number generated by the system) and sign it. Form 15CA (undertaking) can be signed by the person authorised to sign the return of income of the remitter or a person so authorised by him in writing.

(iv)The duly signed Form 15CA (undertaking) and Form 15CB (certificate), will be submitted in duplicate to the Reserve Bank of India / authorized dealer. The Reserve Bank of India / authorized dealer will in turn forward a copy the certificate and undertaking to the Assessing Officer concerned.

(v) A remitter who has obtained a certificate from the Assessing Officer regarding the rate at or amount on which the tax is to be deducted is not required to obtain a certificate from the Accountant in Form 15CB. However, he is required to furnish information in Form 15CA (undertaking) and submit it along with a copy of the certificate from the Assessing Officer as per the procedure mentioned from Sl.No.(i) to (iv) above.

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(vi) A flow chart regarding filing of Form 15CA and Form 15CB is enclosed at Annexure -A.

4.The Directorate General of Income-tax (Systems) (www.incometaxindia.gov.in) shall specify the procedures, formats and standards for running of the scheme as well as instructions for filling up Forms 15CA and 15CB. These forms shall be available for upload and printout at www.tin-nsdl.com.

5. The Reserve Bank of India is being requested to circulate the revised procedure among all authorised dealers.

The flow chart is appended herewith.

E.FINAL STAGE FOR TRANSFER OF FUNDS VIS-À-VIS BANKER’S RESPONSIBILITY

File the income-tax return after following the usual procedure. It is better to get the assessment completed by the jurisdictional income-tax officer, Foreign Section. Follow the procedure laid down in Circular no 4 dated 29-06-2009 Submit a letter signed by the assessee addressed to the bank which has to transfer the funds-the bank and branch where accounts are kept by the assessee with the following documents-

1. Form 15CA signed by the assessee. 2. Form 15CB in duplicate signed by the Chartered Accountant 3. Form A2 to be signed by the assessee-this form would be supplied by

the bank. 4. Application for foreign exchange- this form would also be supplied by

the bank 5, Copy of the purchase document and sale document in respect of the

property the sale of which has resulted in capital gains. If the property had been inherited then copy of the WILL, legal heir certificate, death certificate on whose death the property has evolved on the asssessee,If there had been any Release in favour of assessee then copy of the Release Deed. In short to establish that the assessee had title over the property sold and the transmission of funds from such property is involved.

6 Copy of the income-tax acknowledgment with all supporting documents. Kindly note that maximum that could be repatriated in a year is one million US dollars. F.OTHER POINTS(NRIs)

1. Where the applicant was a ‘non-resident’ during the relevant period, his

income that accrued outside India in USA by reason of his employment there cannot form part of the total income taxable in India-refer Anurag Chaudhary, In re AAR No. 839 of 2009[2010] 1 taxmann.com 86 (AAR - New Delhi) 2. Check up on this news item

U.S. MAY IMPOSE ESTATE TAX ON NRIs

If ever there is anything like a good year to die in, it is 2010 — but only if you are a millionaire US citizen. America’s ‘death tax’, which was repealed in

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2010, is set to be introduced in the New Year. Formally called the estate tax, it is levied on inheritance before it is passed on from one generation to the next. The tax was introduced in 1916 and has been in force ever since. The brief window in 2010 was the only exception, making it a freak year in which death carried a huge tax break.

Under new laws being passed by the Obama administration, the first $5 million in value of any individual’s estate is tax-free, but all value above this figure is taxed at 35%. The tax will kick in from January 1. The reintroduction of the estate tax is forcing a rethink among wealthy Indian-origin American citizens.

When Rajesh Patel (name changed), a New York-based neurologist came to his native town Dharmaj, 90 km from Ahmedabad, this month, he carried an unusual cargo — paintings he had collected over two decades in the US. There are many such non-resident Indians (NRIs) who are shifting their movable wealth from the US to India to escape the net of the much-feared estate tax. It may not be of much help, though.

The estate tax is imposed on ‘all global’ movable and immovable estates of a deceased US citizen and collected from the estate’s administrator before any distribution is made to his or her inheritor. Still, many have started shifting their movable properties back home in India where they are still part of the Hindu Undivided Family (HUF).

“All individuals who are tax residents of the US, who may or may not be staying in that country now, fall under the purview of the estate law,” said Amitabh Singh, Tax Partner, Ernst & Young.

“US law agencies, under the fairness doctrine, impose an exit tax on individuals who intend to give up their citizenship to escape this exorbitant federal tax,” said Amitabh Singh of Ernst & Young. “Until last year, the federal estate duty in the US was 45% on all estates over and above $3.5 million,” said Nishith Desai, founder of research-based international law firm, Nishith Desai Associates. It has a branch in California. “In 2010, while the estate duty was done away with, there was apprehension that the Obama administration would reintroduce it at 55% with a low exemption of $1 million.” The new estate tax is lower, but is still a cause for angst.

3. What the NRI should do on transfer of property-

Deposit the sale proceeds in NRO account. Work out the tax calculations and find out the priority –whether the investment in house property (including additional facilities) will precede the investment in capital gains bonds. If that be the case then the nearest amount to be invested in capital gains bond would be known. If reverse is the case then estimate the amount to be invested in purchase of new property together with additional facilities such as air conditioners, wood work, modular kitchen and work out the money to be invested in capital gain bonds. The time available for investing in capital gains bonds is 6 months from the date of transfer and the time available for purchase of a house

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property is 2 years from the date of transfer and if the investment is not made before the due date for filing of the return then open a capital gains scheme account by transferring funds from NRO account but before opening such capital gains account deposit the money in capital gains bonds by issuing a cheque from NRO account as the capital gains scheme account can be used / operated only for purchase of house property.

G.CONCLUSION

(a) File the income-tax return on time for the assessment year pertaining to the financial year in which the property is sold / transferred. Kindly file detailed notes on capital gains and enclose all necessary documents.

(b) Expenditure such as professional charges paid to a Chartered Accountant for his opinion, fees if any, paid to an advocate for drafting deed(s) can be added to indexed cost of acquisition as per provisions of section 48 of the Income-tax Act.

(c) If the house property is not purchased before filing of the return for the assessment year pertaining to the financial year in which the property was sold then deposit the net capital gains (capital gains minus the amount (proposed to be) invested in Capital Gain Bonds) in a designated account as per the provisions of section 54(2) of the Income-tax Act on or before 31st July of the financial year following the year of sale/transfer (i.e.) before the due date of filing of return. Though only section 139 is mentioned in section 54(2) enabling certain High Courts to hold that the deposit in such designated account can be made at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier as per provisions of section 139(4) of the Income-tax Act it is advisable to deposit before 31st July.

For example if the property is sold say on 14-03-2011 then the net capital gains(capital gains minus the amount proposed to be invested in capital gain bonds) has to be invested in purchase of a property within 2 years (i.e.) on or before 13-03-2013 and if the property is not purchased on or before 31-07-2011(the due date for filing of the return for the assessment year 2011-12 pertaining to the financial year 2010-11) then the net capital gain has to be deposited in a designated account meant for this purpose. Investment in Capital Gain Bonds has to be made within 6 months from the date of sale (i.e.) on or before 13-09-2011

(d) Prepare an action plan by listing out the legal formalities to be carried out with the help of a competent professional and adhere to the time schedule as enshrined in the action plan for smooth completion of the entire transaction without any hitch.

(S.KRISHNAN)

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Remitter

Obtains certificate of Accountant (Form

15CB). This form is available at the website

www.tin-nsdl.com

RBI/Authorized dealer remits

the Amount

Submits the signed paper

undertaking form to the RBI / Auth.

dealer along with certificate of an

Accountant in duplicate.

Printout of the undertaking form

(15CA) is signed

Electronically uploads the

remittance details in Form 15CA

Takes printout of filled undertaking

form (15CA) with system generated acknowledgement number.

A copy of undertaking (Form

15CA) & certificate of

Accountant (Form15CB)

forwarded to Assessing officer

Accesses the above website

Annexure – A

Flow chart of filing undertaking form u/s 195 of I T Act 1961