Reading ‘capital gains' provisions

Section 45 of the I.T. Act, 1961 (Act) stipulates that profits or gains arising from the ‘transfer' of a ‘capital asset' shall be chargeable to income-tax under the head ‘capital gains'. However, some sections, such as 54 & 54EC, provide for exemption of such income from tax on satisfaction of the conditions mentioned in these sections.

Section 54

This applies only to individuals and HUFs and prescribes that where an assessee transfers a property, being long-term capital asset, which is used for residence and he, within the specified periods, purchases or constructs another residential house, then the amount of capital gain generated would be exempt from tax in the manner provided in these sections.

Section 54EC

This section provides for exemption of long-term capital gains if the same are invested in notified bonds to the extent of investment made, subject to a limit of Rs 50 lakh (from April 1, 2007) and lock-in period of three years.

HC view

Should desired investments be in the name of the assessee?This issue has been examined by the Karnataka High Court in the case of Jennifer Bhide (2011) 42 (I) ITCL 8. The HC has held that it is not expressly stated in these sections that new assets should be in the assessee's name. To get the benefits of these sections, what is material is only the investment of the sale consideration/capital gain amount in the new residential premises/bonds. Once this is done, the assessee becomes entitled to the benefits provided by these sections.

Analysis of the decision

The High Court, it is regretfully said, has merely made a literal interpretation of the provisions of the two sections, ignoring the rules of interpretation prescribed by eminent jurists/courts. Both the sections provide for investments by the assessee.

This, apparently, implies that the compliance has to be made for the new assets by the taxpayer himself by acquiring such assets both legally and beneficially. This is not possible when the acquisition is made in the name of somebody else, where the ‘assessee' will be entitled merely to beneficial ownership. Not reading the provisions in this way would lead to contravention of the provisions of Benami Transactions (Prohibition) Act — existing and proposed. A statute cannot be interpreted in a manner that may lead to friction, inconsistency or contravention of some other statute.

The HC's interpretation of the relevant provisions is against legislative intent. If the Legislature intended that new assets can be in anybody's name, then there was no need to use the word ‘assessee' in these sections. It would have been sufficient to say that the consideration/capital gain arising from transfer be used in the manner and within the periods prescribed.

Seeing the skin, missing the soul

Rules of interpretation require that meaning should be given to each and every word used in the statute as the Legislature is deemed not to waste its words and say anything in vain. HC's decision makes the word ‘assessee' redundant in these sections.

HC's interpretation would lead to misuse of s.54F, which provides that the benefit of this section would be available if the assessee does not own more than one residential property. This requirement can be by-passed when the earlier property is in somebody else's name. The HC's interpretation flouts the well-accepted rule that the Act must be read as a whole to make a consistent enactment of the whole statute — not in parts.

Finally, the decision can be faulted on the basis of observations made in Principles of Statutory Interpretation by Chief Justice (Retd) G.P. Singh, 1999 edition, where he has said that a bare mechanical interpretation of the words, devoid of concept of purpose, will reduce most of the remedial and beneficent legislation to futility [see AIR 1994 SC 1775 at 1785]. As stated by Iyer J., “to be literal in meaning, is to see the skin and miss the soul. The judicial key to construction is the composite perception of the deha and dehi of the provision” [AIR 1977 SC 965 at 968]. Legislation in modern State is actuated with some policy to curb some public evil or to effectuate some public benefits. These are lost in the interpretation done by the HC. Hence, the decision needs to be reviewed by the Supreme Court.

(The author is a former chairman of CBDT.)

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