NEW DELHI, JAN 22, 2013: THE issues before the Bench are - Whether, for the purpose of claiming Sec 54F benefits, it is essential for the assessee to invest in residential house in his own name and not his wife and Whether purposive construction of law prevails over literal construction. And the ruling goes in favour of the assessee.

Facts of the case

Assessee is a retired individual from IOCL. He had earned income by ways of salary, house property and other sources. He had inherited 50% share in a residential house from his father in 1968. The other half share was inherited by his brother. In the year 2008, both the brothers jointly sold the property which gave rise to proportionate capital gains in the assessee’s hands. The assessee had claimed deduction u/s 54F on the ground that the sale proceeds were invested in the acquisition of a vacant plot for Rs. 31,25,100/- and the purchase of a residential house for Rs. 34,35,700/- in the name of his wife. During assessment, the AO observed that u/s 54F, the investment in the residential house should be made in the assessee’s name. AO had reduced the deduction and computed the capital gains accordingly.

On appeal, CIT(A) accepted the assessee’s contention based on the judgment of the Madras HC in CIT Vs. V. Natarajan : (2006) 287 ITR 271 and that of the AP High Court in Late Gulam Ali Khan Vs. CIT : (1987) 165 ITR 228. On further appeal by the Revenue, Tribunal had agreed with the decision of the CIT(A) and in doing so followed the judgment of the Madras and AP HCs and also another judgment of the Karnataka HC in DIT, International Taxation, Bangalore : (2011) 203 Taxman 208. It also noted the judgment of the Bombay HC in Prakash Vs. ITO (2008-TIOL-465-HC-MUM-IT) in which a contrary view was taken but preferred the view taken by the Madras and Karnataka High Courts adopting the rule laid down by the SC in CIT Vs. Vegetable Products Ltd (2002-TIOL-574-SC-IT-LB) which says that if a statutory provision was capable of more than one view, then the view which favours the tax payer should be preferred. The Tribunal also observed that Section 54F being a beneficial provision enacted for encouraging investment in residential houses should be liberally interpreted.

Having heard the matter, the High Court held that:

++ we have no hesitation in agreeing with the view taken by the Tribunal. Apart from the fact that the judgments of the Madras and Karnataka High Courts, are in favour of the assessee, the Revenue fairly brought to our notice a similar view of this Court in CIT Vs. Ravinder Kumar Arora (2011-TIOL-818-HC-DEL-IT). That was also a case which arose under Section 54F. The new residential property was acquired in the joint names of the assessee and his wife. The income tax authorities restricted the deduction u/s 54F to 50% on the footing that the deduction was not available on the portion of the investment which stands in the name of the assessee’s wife. This view was disapproved by HC;

++ it noted that the entire purchase consideration was paid only by the assessee and not a single penny was contributed by the assessee’s wife. It also noted that a purposive construction is to be preferred as against a literal construction, more so when even applying the literal construction, there is nothing in the section to show that the house should be purchased in the name of the assessee only. As a matter of fact, Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed “a residential house”;

++ HC in the decision cited alone also noticed the judgment of the Madras High Court and agreed with the same, observing that though the Madras case was decided in relation to Section 54 of the Act, that Section was in pari materia with Section 54F. The judgment of the Punjab and Haryana High Court in the case of CIT Vs. Gurnam Singh, in which the same view was taken with reference to Section 54F was also noticed by this Court. It thus appears to us that the predominant judicial view, including that of this Court, is that for the purposes of Section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no constribution from the assessee’s wife. Having regard to the rule of purposive construction and the object which Section 54F seeks to achieve and respectfully agreeing with the judgment of this Court, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the revenue.

(See 2013-TIOL-51-HC-DEL-IT)