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Smart Summary

Factual and Procedural Background

This appeal, filed by the assessee, challenges the order dated 30-9-2011 of CIT(A)-IV, Hyderabad in Appeal No. 253/ACIT 6(1)/CIT(A)-IV/10-11 pertaining to the assessment year 2008-09. The sole issue in the appeal is the assessee's claim for exemption under section 54F of the Income-tax Act.

During the relevant previous year the assessee sold 110,000 shares for a consideration of Rs. 96,36,519. From those sale proceeds the assessee invested Rs. 55,68,662 to purchase a flat which was registered in the name of his minor daughter. The Assessing Officer (AO) disallowed the deduction claimed under section 54F(1) solely on the ground that the flat was not purchased in the name of the assessee himself and relied upon certain High Court and ITAT decisions (including ITO v. Prakash Timaji Dhanjode).

The assessee appealed to the Commissioner (Appeals). On the last date fixed (28-11-2011) the assessee's authorised representative did not appear; the CIT(A) decided the appeal on the basis of the statement of facts and grounds of appeal and upheld the AO's view, denying the exemption because the property was registered in the name of the assessee's daughter.

Legal Issues Presented

  1. Whether the assessee is entitled to claim exemption under section 54F of the Income-tax Act where the residential property was purchased (and financed) by the assessee but registered in the name of his minor daughter?
  2. Whether the statutory language of section 54F(1) requires that the house be purchased in the name of the assessee personally, or whether a broader / liberal interpretation permitting purchase in another's name (in particular a dependent or minor child) can be adopted?

Arguments of the Parties

Appellant's Arguments (Assessee / AR)

  • The flat was purchased with funds provided entirely by the assessee, even though the registration was made in the name of the assessee's minor daughter (chosen for auspicious reasons).
  • The income of the minor daughter is assessed in the hands of the assessee under clubbing provisions, indicating the daughter's lack of an independent ostensible source for the investment.
  • The term "purchase" is not defined in the Income-tax Act and should be given its ordinary/common parlance meaning; a liberal and wider interpretation should be preferred over a literal one, particularly for beneficial provisions.
  • Even where registration could not be effected for technical reasons, courts have accepted claims of exemption if consideration is paid and possession obtained; therefore registration in another's name should not automatically defeat the claim.
  • The assessee relied on authorities (including Commissioner Of Income-Tax v. V. Natarajan, CIT v. Gurnam Singh, CIT v. Ravinder Kumar Arora and Mir Gulam Ali Khan v. CIT) that support a liberal interpretation and the proposition that the word "assessee" may be given a wide meaning.

Respondent's Arguments (Department / DR)

  • The minor daughter has a separate legal identity despite clubbing of her income with that of the father for tax computation; clubbing does not obliterate her separate legal existence.
  • The assessee and his minor daughter cannot be treated as the same person; therefore ownership in the assessee's name is necessary to claim exemption under section 54F.
  • The cases cited by the assessee are distinguishable because many relate to section 54 and not section 54F; section 54F has a more legal character and requires ownership in the assessee's name.
  • The Department relied on authorities (including Jainarayan v. ITO, Prakash v. ITO, Prakash Timaji Dhanjode and Ram Kishan v. ITO) that take the contrary view that the property must be purchased in the assessee's name to get exemption under section 54F.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court in this Opinion
ITO v. Prakash Timaji Dhanjode [2002] 258 ITR (AT) 114 (ITAT, Nagpur) Held that for claiming exemption under section 54F the property must be purchased in the assessee's name (authority relied upon by the AO). Noted by the Tribunal as an authority taking the view adverse to the assessee; the Tribunal considered it among divergent decisions but did not follow it.
Commissioner Of Income-Tax v. V. Natarajan [2006] 287 ITR 271 / 154 Taxman 399 (Madras High Court) Interpreted related provisions (section 54 context in the opinion) in a manner supportive of a liberal approach to purchase/ownership requirements for exemption. Identified as one of the authorities supporting a liberal interpretation; the Tribunal cited it as part of the cluster of decisions favouring the assessee's position.
CIT v. Gurnam Singh [2010] 327 ITR 278 / [2008] 170 Taxman 160 (Punjab & Haryana High Court) Recognised a view consistent with a non-strict interpretation (discussed by the Tribunal alongside other favorable authorities). Referenced as supporting the proposition that section 54F does not mandate purchase exclusively in the assessee's name; the Tribunal relied on its consistency with other favourable decisions.
CIT v. Ravinder Kumar Arora [2012] 342 ITR 38 / [2011] 203 Taxman 289 (Delhi High Court) Held that the language of section 54F does not mandate that the house be purchased in the name of the assessee alone; adopted a wide and liberal interpretation. The Tribunal followed the ratio of the Delhi High Court in this case as persuasive and consistent with the jurisdictional High Court's approach.
Late Mir Gulam Ali Khan v. CIT [1987] 165 ITR 228 / [1986] 28 Taxman 572 (Andhra Pradesh High Court) Held that the word "assessee" should be given a wide and liberal interpretation (in the section 54 context), and may include legal heirs; stressed the object of exemption provisions. The Tribunal treated this decision as authoritative (being from the jurisdictional High Court) and followed its principle that a liberal interpretation should be adopted for purposes of exemption.
Third ITO v. S. Vardarajan [1989] 33 TTJ 466 (ITAT, Madras Bench) Considered a case where the property was purchased in the name of the assessee's wife and held that the assessee was entitled to exemption under section 54 (factual analogy). The Tribunal cited this ITAT decision as an analogous authority supporting allowance of exemption where registration is in a family member's name.
K.P. Verghese v. ITO [1981] 131 ITR 597 / 7 Taxman 13 (Supreme Court) Principle that statutory provisions should, if possible, be construed to avoid absurdity and mischief; courts may modify literal language to effect legislative intent. The Tribunal invoked this Supreme Court principle to support a liberal construction of section 54F as a beneficial provision and to justify departing from a strict literal approach.
Jainarayan v. ITO [2008] 306 ITR 335 (Punjab & Haryana High Court) Taken to support the view that for exemption under section 54F the property has to be purchased in the assessee's name. Presented by the Department as contrary authority; the Tribunal acknowledged this divergent view but did not follow it.
Prakash v. ITO [2009] 312 ITR 40 / [2008] 173 Taxman 311 (Bombay High Court) Held a view contrary to allowing exemption where property is not in the assessee's name (relied upon by the Department). Recognised by the Tribunal as an authority taking the opposite view; the Tribunal considered it in the context of conflicting decisions and preferred the line favourable to the assessee.
Ram Kishan v. ITO [IT Appeal No. 3559 (Delhi) of 2009; dated 12-12-2007] Listed by the Department as an authority supporting the requirement of ownership being in the assessee's name for section 54F relief. Cited by the Department; the Tribunal noted it among decisions taking an adverse view but did not adopt it.
C.V. Ramanathan v. CIT [1989] 125 ITR 191 (Madras High Court) Referred to in the Andhra Pradesh High Court's reasoning (supporting liberal construction in the section 54 context). Mentioned in the opinion as part of the authorities that support a liberal approach; used indirectly via the AP High Court's observation.

Court's Reasoning and Analysis

The Tribunal examined the factual matrix and the language of section 54F(1). It recorded the undisputed facts that the assessee had invested the sale proceeds of shares in purchasing a flat and that the AO's sole reason for denial was that the flat was registered in the name of the assessee's minor daughter.

The Tribunal quoted the operative phrase from section 54F(1): "The assessee has within a period of one year before or after the date on which the transfer took place purchased, or has within a period of three years after that date constructed a residential house...." and observed that a bare reading of the provision does not express a requirement that the house must be purchased in the name of the assessee exclusively. The Tribunal concluded that the statutory requirement is that the "assessee must have purchased the house."

On the facts, the Tribunal noted that the minor daughter had no ostensible source to make the investment and that the money for the purchase had in fact been provided by the assessee from the share sale proceeds. The assessee had also explained the reason for registering the property in his daughter's name.

Confronted with divergent judicial authorities, the Tribunal considered the legislative intent behind section 54F (as explained in Board's Circular No.346 dated 30-6-1982) — namely encouragement of house construction and investment in house property — and characterised section 54F as a beneficial provision which calls for a liberal interpretation. The Tribunal relied upon the Andhra Pradesh High Court decision in Late Mir Gulam Ali Khan (and the Delhi High Court decision in Ravinder Kumar Arora which followed it), as well as an ITAT Madras decision (Third ITO v. S. Vardarajan), as persuasive and binding in approach.

The Tribunal also invoked the Supreme Court's principle in K.P. Verghese v. ITO that a court may adopt a construction that avoids absurd or unjust results and gives effect to the legislature's obvious intention. Given the conflict of authorities, the Tribunal applied the principle that, for beneficial provisions, the interpretation favourable to the assessee should be adopted.

On that basis the Tribunal held that the assessee had "purchased" the flat for the purposes of section 54F(1) even though registration was in the name of his minor daughter, since the assessee furnished the consideration and the daughter had no ostensible independent source to make the investment.

Holding and Implications

HOLDING: The appeal is allowed and the assessee is entitled to the deduction under section 54F for the flat purchased in the name of his minor daughter, subject to the restrictions contained in the proviso to section 54F(1) of the Income-tax Act.

Implications:

  • The direct effect of the decision is that the AO's disallowance solely because the property was registered in the name of the minor daughter was set aside and the exemption under section 54F was granted to the assessee on the facts of this case.
  • The Tribunal followed the line of authorities (including the jurisdictional Andhra Pradesh High Court and the Delhi High Court) that adopt a liberal interpretation of section 54F and applied the principle that beneficial provisions should be construed in favour of the assessee when there are divergent views.
  • The Tribunal limited its grant of relief to the factual scenario before it (assessee supplied the purchase consideration and the minor had no ostensible source) and expressly made the allowance subject to the proviso to section 54F(1). The opinion does not purport to lay down a broader rule beyond the scope of the authorities it followed.
Show full summary ...

    N. Ram Kumar v. Assistant Commissioner of Income-tax, Circle-6(1), Hyderabad

    Saktijit Dey, Judicial Member - This appeal filed by the assessee is directed against order dated30-9-2011 of CIT(A)-IV, Hyderabad passed in Appeal No. 253/ACIT 6(1)/CIT(A)-IV/10-11 and it pertains to the assessment year 2008-09.

    2. The sole issue arising in the present appeal of the assessee is the claim of exemption u/s 54F made by the assessee.

    3. Briefly the facts are during the relevant previous year, the assessee has sold 1,10,000 shares for a consideration of Rs. 96,36,519. Out of sale consideration of shares, the assessee invested a sum of Rs. 55,68,662/- for purchasing a flat in the name of his minor daughter. The assessee claimed the amount invested in purchase of flat as a deduction u/s 54F(1) of the Act. The AO disallowed the deduction claimed on the ground that the flat was not purchased by the assessee in his own name. The AO relying upon different High Courts' decisions and also a decision of ITAT, Nagpur Bench in case of ITO v. Prakash Timaji Dhanjode [2002] 258 ITR (AT) 114 held that the assessee is not entitled for deduction u/s 54F(i). Assessee being aggrieved by the assessment order filed an appeal before the CIT(A). Since the AR of the assessee or no one appeared before the CIT(A) on the last date fixed on 28-11-2011 the appeal was decided by the CIT(A) on the basis of statement of facts and grounds of appeal filed before him. The CIT(A) upheld the reasoning of the AO that since the property was purchased in the name of the assessee's daughter and not in the name of the assessee himself, no deduction u/s 54F can be allowed.

    4. The learned AR for the assessee submitted before us that the property was purchased in the name of minor daughter who is considered to be very auspicious for the assessee. However, the entire investment in the purchase of property was made by the assessee himself. It was submitted that the income of the minor daughter is also assessed at the hands of the assessee only. The learned AR submitted that the term/meaning of the word "purchase" has not been defined in the IT Act. Therefore, the meaning is to be construed/understood in common parlance as accepted in the daily transactions of the business world. Further, the meaning of the word purchase in section 54F of the Act has to be given the meaning as understood by a layman and that a liberal and wider interpretation must be given as against literal interpretation. It was argued that in a case no registration is made on account of certain technical problems and the whole consideration is paid and possession is also obtained, in such situations also the claim of exemption is held as valid. The learned AR submitted that when there is no dispute raised by the department to the fact that the investment was made by the assessee in purchasing the flat only because the registration was made in the name of minor daughter, the assessee cannot be deprived of the exemption u/s 54 of the Act. In support of his contentions, the assessee relied upon the following case law.

    (i) Commissioner Of Income-Tax v. V. Natarajan [2006] 287 ITR 271/ 154 Taxman 399 (Mad.)

    (ii) CIT v. Gurnam Singh [2010] 327 ITR 278/[2008] 170 Taxman 160 (Punj. & Har.)

    (iii) CIT v. Ravinder Kumar Arora [2012] 342 ITR 38 /[2011] 203 Taxman 289 / 15 taxmann.com 307 (Delhi)

    The learned AR relying upon a judgment of Jurisdictional High Court in the case of late Mir Gulam Ali Khan v. CIT [1987] 165 ITR 228 /[1986] 28 Taxman 572 (AP) submitted that the word 'assessee' also includes the legal heir.

    5. The learned DR, on the other hand, contended that minor daughter has a separate legal identity from her father and her income is clubbed for the income tax purposes with the income of her father. This does not abolishes her legal identity as an individual and it is to the limited purpose of calculating tax under the Income-tax Act, her income is clubbed to the father's income. Therefore, the assessee and his minor daughter cannot be held to be the same. Distinguishing the case laws cited by the learned AR, the learned DR submitted that the issues involved in the cases are factually distinguishable since they are relating to section 54 of the Act and not relating to section 54F. The learned DR submitted that section 54F is more legal in approach since u/s 54F, the ownership rights in the name of the assessee is required to enable him to get the benefits of section 54F of the Act. In support of her contention, the learned DR relied upon following case law.

    (i) Jainarayan v. ITO [2008] 306 ITR 335 (Punj. & Har.)

    (ii) Prakash v. ITO [2009] 312 ITR 40/[2008] 173 Taxman 311 (Bom.)

    (iii) Prakash Timaji Dhanjode's case (supra )

    (iv) Ram Kishan v. ITO [IT Appeal No. 3559 (Delhi) of 2009; dated 12-12-2007]

    6. We have heard rival submissions and perused the materials on record and also gone through the decisions relied upon by both the parties. Undisputedly, the assessee has made investments in purchasing the flat out of the consideration receive d from sale of shares. The AO has disallowed exemption claimed u/s 54F solely on the ground that the flat has been registered in the name of his minor daughter. The AO on interpreting section 54F came to hold that for claiming exemption u/s 54F, the house has to be purchased in the name of the assessee only. At this stage, it is necessary to look into the provisions of section 54F(1) of the Act which are quoted hereunder.

    " ..... The assessee has within a period of one year before or after the date on which the transfer took place purchased, or has within a period of three years after that date constructed a residential house......."

    A bare reading of section 54F(1) makes it clear that there is no requirement that the house has to be purchased in the name of the assessee only. The only requirement of the provision is the assessee must have purchased the house. In the present appeal, the fact remains that the minor daughter has no ostensible source to make such investment in purchase of flat. It is the assessee who had actually made the investment out of the consideration received towards sale of shares. The assessee has also explained the reason behind registration of the house in the name of his minor daughter. In the aforesaid factual backdrop, the decisions cited at the Bar are found to be expressing divergent view. The A P High Court in the case of Late Mir Gulam Ali Khan (supra) while examining he allow ability of exemption u/s 54 of the Act held that the word 'assessee' must be given a wide and liberal interpretation so as to include his legal heirs also. The Honourable AP High Court further held the provision contained u/s 54 of the Act also must be given a liberal interpretation. For the sake of convenience, the observation mad by the Honourable High Court is extracted hereunder:-

    "Relying upon the expression "assessee" occurring in section 54 of the Act, it is contended for the Department that in order to claim the exemption, the person who sold the house must be the same as the person who purchased the house, that is, the assessee must be one and the same person. The identity must be the same. We are unable to accept this contention. The object of grating exemption u/s 54 of the Act is that a person who sells a residential house for the purpose of purchasing another convenient house must be given exemption so far as capital gains are concerned. As long as the sale of the house and purchase of another house are part of the same scheme, the lapse of sometime between the sale and purchase makes no difference. The word "assessee" must be given a wise and liberal interpretation so as to include his legal heirs also. There is no warrant for giving too strict an interpretation the word "assessee" as that would frustrate the object of granting the exemption and what is more, in the instant case, the very same assessee immediately after the sale of the house entered into an agreement for purchasing another house and paid a sum of Rs.1,000 as earnest money and subsequently the legal representative completed the transaction within a period of one year from the date of the death of the deceased. The sale and purchase are two links in the same chain. We are fortified in this view by a decision of the Madras High court in C.V. Ramanathan v. CIT [1989] 125 ITR 191."

    7. The Hon'ble Delhi High Court in the case of Ravinder Kumar Arora (supra) following the principles laid down by the Hon'ble Andhra Pradesh High Court in the case of Late Mir Gulam Ali Khan ( supra) held that the language of section 54F does not mandate that the house property should be purchased in the name of the assessee alone. The Honourable Delhi High Court held that the word "assessee" must be given wide and liberal interpretation as held by the Hon'ble AP High Court in the case of Late Mir Gulam Ali Khan (supra). The Hon'ble Delhi High Court further held that language contained u/s 54F(1) is pari materia with section 54 of the Act. Similar is also the view in the case of CIT v. Gurnam Singh [2010] 327 ITR 278 /[2008] 170 Taxman 16 (Punj. & Har.) and Hon'ble Madras High court in the case of Commissioner Of Income-Tax v. V. Natarajan [2006] 287 ITR 271 / 154 Taxman 399. The ITAT, Madras Bench in the case reported in 33 TTJ 466 while considering a case of identical nature where the assessee purchased the property in the name of his wife and claimed exemption u/s 54 held that the assessee is entitled to exemption u/s 54 of the Act. However, it is seen that the Hon'ble Punjab & Haryana High Court in the case of Jainarayan (supra) and in the case of Prakash (supra ) and ITAT in the case of Prakash Timaji Dhanjode (supra) have held a different view to the effect that for getting exemption u/s 54F, the property has to be purchased in assessee's name. The intention of the legislature in introducing sec. 54F as explained in Board's Circular No.346 dated 30th June, 1982 is for encouraging house construction. It is an encouragement given to the assessee to exchange one of the residential houses for another or where he has none to convert any of his long term assets into a residential house. The object behind such a provision is to encourage large scale house building activity or investment in house property to meet acute housing shortage in the country. Therefore, looking at the legislative intent, a liberal interpretation has to be given to section 54F which is a beneficial provision. The Hon'ble Supreme Court in case of K.P. Verghese v. ITO [1981] 131 ITR 597/ 7 Taxman 13 has observed in the following manner:-

    "A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction."

    It is also well settled principle of law that when there are divergent views, to give effect to a beneficial provision the view favourable to the assessee has to be adopted. In the aforesaid view of the matter, following the ratio laid down by the jurisdictional High Court in case of late Mir Gulam Ali Khan (supra), by the Hon'ble Delhi High Court in case of Ravinder Kumar Arora (supra) and also by the ITAT, Madras Bench in Third ITO v. S. Vardarajan [1989] 33 TTJ 466 (supra), we hold that the assessee will be entitled for deduction u/s 54F for the flat purchased in the name of his daughter subject to the restrictions under the proviso to section 54F(1) of the Act. Hence the grounds raised by the assessee are allowed.

    8. In the result, the appeal filed by the assessee is allowed.

    pooja

    ____________

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    Comments

    N. Ram Kumar v. Assistant Commissioner of Income-tax, Circle-6(1), Hyderabad
    (Aug 10, 2012)