Bombay HC: Investing in India Will Not Be Affected by Any Amendment Made to I-T Section 54

Recently, the Bombay High Court has ruled that the amendment made in accordance with section 54 of the Income Tax Act, 1961, doesn’t have a retrospective impact on limiting investments in India. This amended provision takes effect from April 1, 2015, and will be applicable in the future, but not before the amendment date.

The petitioner challenges the decision made on March 18, 2019, by Respondent No.1, Commissioner of Income Tax (International Taxation)-3. As a result, the petitioner faced rejection by them under Section 264 of the Income Tax Act, 1961.

Hemant Dinkar Kandlur, a Non-Resident Indian working in the USA, filed an income tax return for Assessment Year (“AY”) 2014-15, declaring zero taxable income. He believed that as an NRI, his income wasn’t taxable in India. His income tax liability was Rs. 1,61,855/-, while tax deducted at source (“TDS”) on his salary and interest amounted to Rs. 2,34,220/-. As per this scenario, the petitioner believed he was eligible for a Rs. 72,370/- refund.

The petitioner also sold a residential flat in India for Rs. 54,12,760/- and acquired another residential flat in the USA, surpassing the Long Term Capital Gain (“LTCG”) amount within Section 54’s stipulated time limit. Due to a misconception, he deposited an amount greater than the LTCG into a Capital Gain Account Scheme (“CGAS”).

The concerned Income Tax Officer granted the appeal for which the petitioner had applied for sale proceeds without TDS (Tax Deducted at Source) under Section 197 read with Section 195 of the Act. Upon understanding the correct legal provisions, the petitioner submitted a rectification application alongside an accurate income return to the CPC, Bangalore. Under Section 143(1) of the Act, the petitioner filed an application for the revision of the intimation.

Mr. Devendra Jain, representing the petitioner, acknowledged that even after the Commissioner appropriately assumed jurisdiction over the petitioner’s Revision Application, he failed to consider established legal provisions outlined in various binding precedents. Mr Jain also referred to Section 54(1) of the Act as it existed prior to the amendment by the Finance (No.2) Act, 2014, to argue that there is only one condition to claim a tax deduction under Section 54 at the relevant assessment year, which was the purchase of a new residential house within the prescribed time, regardless of house’s location.

The amendment, which amended the phrase ‘in India,’ w.e.f. April 1, 2015, and was meant to apply to proposed following assessment years. This interpretation relies on the principle that if a tax provision is unclear or ambiguous in its meaning, the courts should adopt an interpretation in favour of the assessee.

Mr Sharma, representing Respondent No.1, argued that, under Section 139(1) of the Income Tax Act, the deadline for filing the original income return was July 31, 2014, and under Section 139(4) of the Act, the deadline for a belated return was March 31, 2016, which goes beyond the specified timeframe. Consequently, he contended that the petitioner was ineligible to revise the return under Section 139(5) of the Act.

Furthermore, he contended that Section 54 of the Income Tax Act, which pertains to non-resident Indians, is applicable only when the new asset is purchased or constructed ‘in India.’

The bench, consisting of Justice K. R. Shriram and Justice N. K. Gokhale, observed that the amendment clearly stated it would be effective from April 1, 2015, applying to future periods only, and not before the date of modification.

The bench ruled, “The language of Section 54(F) of the I-T Act before the amendment is neither ambiguous nor vague. The intention of the legislature to insert the words ‘in India’ with effect from 1st April 2015 is not uncertain or confusing and hence the applicability of the amendment cannot but be prospective.”

It was also evident that the petitioner had not filed revised returns under Section 139(5) of the Act but had acknowledged an inadvertent error in declaring a Nil aggregate income through a rectification application. The Court decided to invalidate and set aside the original order saying that the petitioner was entitled to a refund of Rs. 72,370/- for the excess tax deduction at source.