Res Integra – section Sahil
Garud
45(2)
r.w.s 54 [B.com,
A.C.A.]
It
is true that the glitches and blotches in the literal language of the law, with
various sections linked together, are noticed only when a sui generis practical scenario pops up which challenges its
position in such well-constructed law. This is another such situation which
needs clarifications and opinions so that the tax professionals can be impeccable
in the advice they provide on tax mitigation through planning.
When any tax payer decides to convert
his investment/property, say a
residential house on a plot of land being a capital asset covered u/s 2(14),
into his stock in trade (SIT) with a view to deal in that property, he suffers
a notional capital gain. Such gain is
measured as the difference between the Fair Market value as on the date when he
converts his asset & the original
cost of acquisition (with indexation) of the Property. Such a charge is made
under the provision of section 45(2). The Supreme Court Judgment in the case of
CIT Vs. Bai Shririnbai Kooka
(46 ITR 86 SC) dated 23/02/1962 following
its verdict in the Bombay High Court (30
ITR 753) had an great impact on the plans of revenue authorities and it
may be considered as a reason for enactment of this section 45(2) originally
w.e.f 01.04.64. The Court in that case held in favour of the Assessee saying
that a person cannot make profit out of himself and hence charged only that
portion of Income which was arrived at as a difference between the market value
on the date of conversion and the final sale value of the stock in trade (SIT).
According to me, the legislature in its
wisdom deferred the charge of the capital gain introduced by 45(2) till a date when
the stock is actually sold, since such gain is a notional gain and the assessee
does not receive any actual consideration on the date of its transfer. In this
era of inflation of property prices, charging the Assessee with a heavy amount of
tax just on conversion of his property into his stock in trade would result in undue
hardship to the Assessee. Therefore such deferment of tax payment till the date
of actual sale of the stock in trade and thus till an actual receipt of some
consideration thereon was well justified. But according to me, the position w.r.t.
timing of investment u/s 54/54F…(series) so as to claim exemption from the capital
gain still needs clarification from viewers and experts. The literal reading of
the section 45(2) and section 54 doesn’t give a clear picture and leave a scope
for argument due to slight ambiguity.
Section 45(with
subs.1 to 6) is the charging section, subsection (2) of which deals with the
current scenario put forward here. This subsection (2) reads as follows: “Notwithstanding
anything contained in subsection (1), the profits and gains arising from
transfer by way of conversion by the owner……………………… as a result of transfer
of the capital asset”. Thus by using the words “transfer by way of conversion” this section recognizes the conversion
as the transfer with regard to timing of the gain.
Now, the plain
reading of Section 54 says that “Subject to provisions of subsection
(2),………then], instead of capital gain being charged to income tax as income of
the previous year in which transfer took place, it shall be dealt with in
accordance with…….” Thus it can be / might be construed by the
Revenue authorities that since section 54 in the above given portion refers to
the year in which transfer took place while simultaneously section 45 using the
words ‘transfer’ interchangeably with ‘conversion’, the time limit for an Assessee
to invest as per section 54 (2 years/3years) will start ticking from the date
of conversion. But such interpretation is contrary to the very scheme of the
Act and in a way fails to avoid the Assessee’s hardship.
As said
above, since the legislature has purposely deferred the charge on capital gain
till he actually earns some consideration by selling the stock, in a similar
way the time limit for enjoying the benefit of exemption should also be deferred.
Discrimination can’t be made between subsection (2) and other subsections of
section 45, all being part of the same charging section. An Assessee suffering a charge under other subsections of section 45
and the Assessee suffering it u/ss (2) must be given equal opportunity to claim
exemptions as per the charging provisions, otherwise it can be argued as a violation of Article 14 of the Constitution of India in so far as it makes such discrimination.
Therefore these provisions should be interpreted in such a way that time limit
(2/3 years) for investment u/s 54 would incept from the day when he actually receives
some consideration, in the same way as the charge is deferred till the stock is
sold. Deferring the charge but not deferring the time limit for investment u/s
54 would go against the scheme of the act.
“It should be remembered that ‘language’
is at best an imperfect instrument for the expression of human intention.”
It is a well settled position
in law following the Supreme Court Judgment in case of CIT Vs. J.H Gotla (1985 AIR 1698) that, if a result which is not intended to be subserved
by the object of the legislation is found from literal interpretation, and if
another construction is possible apart from strict literal construction, then
that construction should be preferred to the strict literal construction. In
other words, where the plain literal interpretation of a statutory provision
produces a manifestly unjust result which could never have been intended by the
Legislature, the court can modify the language used by the Legislature. Also in
the case of Bajaj Tempo (1992 AIR 1622)
the Hon’ble Supreme Court of India resorted to an interpretation which was
different from the literal interpretation saying that “it becomes necessary to resort to a
construction which is reasonable and purposive to make the provision meaningful,
and adopting literal construction in such cases would result in defeating the
very purpose of the relevant sections”. The Hon’ble Bombay High Court also in the case of CIT Vs. Manjula Shah (16 Taxmann 42) while dealing with
a matter w.r.t. Capital gain taxation, permitted that the meaning of one
section can be imported while interpreting the other linked section so that the
overall interpretation does not go contrary to the scheme of the Act and the
legislative intent.
Therefore, according to
me, while interpreting the provisions of section 54 which exempts the Charge of tax in the year
of transfer, the meaning and intent of deferring the charge as per section 45(2)
should be imported into this section so as to give proper justice to the scheme
of the Act and so to the Assessee.
--
Sahil Garud
Chartered Accountant.
Bom. High Court
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