Bombay High Court Clarifies No Retrospective Applicability of Amendment Restricting Investment in India in Capital Gain Tax

Bombay High Court Clarifies No Retrospective Applicability of Amendment Restricting Investment in India in Capital Gain Tax

Directs Commissioner of Income Tax (Appeals) to accept the rectified return and decide the matter in accordance with the law

The Bombay High Court has held that the amendment to the Finance Act, 2014 restricting investment in house property in India has retrospective applicability. It is not merely a clarificatory or explanatory amendment, but a substantive one.

The bench comprising Justice K. R. Shriram and Justice N. K. Gokhale observed that Section 54(F) of the Finance Act, (before its amendment) was that the assessee should invest capital gain in a residential house. It did not mention any boundaries. It was only after the amendment on 1 April 2015 that the condition was imposed that the assessee should invest the sale proceeds arising out of a sale of a capital asset in a residential property situated ‘in India’ within the stipulated period.

The petitioner/assessee is a non-resident Indian working in the United States. He filed an Income Tax Return (ITR) for the Assessment Year 2014–15, declaring NIL taxable income, under the assumption that being a non-resident Indian (NRI), his income was not taxable in India.

It was processed by the Centralized Processing Centre (CPC) under Section 143(1). The tax payable on his income was Rs.1,61,855 and the tax deducted at source (TDS) on his salary and interest was Rs.2,34,220.

According to the petitioner, he was entitled to a refund of Rs.72,370. He sold a residential flat in India and purchased another in the United States for a consideration greater than the amount of long-term capital gain (LTCG) within the time limit prescribed by Section 54. However, under a mistaken presumption, he deposited an amount higher than the amount of LTCG into a Capital Gain Account Scheme (CGAS).

The petitioner applied for a receipt of sale proceeds without deduction of tax at source under Section 197 read with Section 195. He was granted the same by the income tax officer.

On learning the correct provisions of the law, he filed a rectification application accompanied by a correct ITR with the CPC, Bengaluru. He sought a revision of the intimation under Section 143(1) of the Act dated 30 June 2016.

The Income Tax department considered his application but rejected his claim on the ground that the petitioner was not eligible for deduction under Section 54 as the investment was made in a house property situated outside India. It relied upon an amendment in Section 54(1) of the Finance (No. 2) Act, 2014, which inserted the words 'in India' in the provision.

The department stated that Section 5(2) suggested that the amendment was merely clarificatory because of the words ‘in India’ contained therein. It meant that the provisions of Section 5(2) would always operate subject to the other provisions of the Act, including Section 54F.

The income tax department argued that the assessee’s revised return was non-est for being filed beyond the due date. It maintained that the assessee did not file the revised return under Section 139(5) but admitted to an error in declaring total income as nil via a rectification application.

However, the court held that pre-amended Section 54F of the Finance Act only provided for the investment of the capital gain in a residential house by the assessee without mentioning any boundary. But the 2015 amendment introduced the condition that the assessee should invest the capital gains in a residential property situated ‘in India’.

Thus, the court directed the Commissioner of Income Tax (Appeals) to accept the rectified return on or before 31 December 2023 and decide the same in accordance with the law.