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2005 (11) TMI 386 - AT - Income TaxExemption u/s 54F - Capital gains - non-resident - whether benefit of section 54F is available to a residential house purchased out of India - HELD THAT - We noticed that originally the income-tax was first introduced in India in 1860. After independence the Income-tax Bill, 1961 came out of the legislative anvil and the Income-tax Act, 1961, received the assent of the President on 13th September, 1961 and came into force from 1st April, 1962. This Act was made applicable to the whole of India. Since this Act applicable in India, therefore, the provisions of this Act are applicable in India and same are required to be read accordingly. Thus section 54F is also required to read accordingly, the words purchase/construction of a residential house on plain and simple reading means, the purchase/construction of a residential house must be in India and not outside India. Following the decision in the case of Padmasundara Rao 2002 (3) TMI 44 - SUPREME COURT and K.P. Varghese v. ITO 1981 (9) TMI 1 - SUPREME COURT , we find that a residential house purchased/constructed must be in India and not outside India, in USA. This interpretation is strongly supported by the marginal note to section 54F. Section 54F inserted by the Finance Act, 1982, with effect from 1-4-2003. It has been explained in Circular No. 346,- Explanatory notes on the provisions of Finance Act, 1982 in para 20.2 with a view to encouraging house construction, the Finance Act, 1982, has inserted a new section 54F. . Thus, we hold that benefit u/s 54F is not allowable for a residential house purchased/constructed outside India. In the result, the appeal is dismissed.
Issues Involved:
1. Reopening of the assessment under section 147 of the Income-tax Act, 1961. 2. Non-granting of deduction under section 54F of the Income-tax Act, 1961. 3. Levying tax on interest income at the rate prescribed under the Double Tax Avoidance Agreement with the USA. Issue-wise Detailed Analysis: 1. Reopening of the assessment under section 147 of the Income-tax Act, 1961: The first ground of appeal regarding the reopening of the assessment under section 147 was not pressed by the assessee and thus was dismissed as not pressed. 2. Non-granting of deduction under section 54F of the Income-tax Act, 1961: The core issue was whether the benefit of section 54F, which provides for exemption of capital gains on investment in a residential house, is applicable when the residential house is purchased outside India. The facts of the case revealed that the assessee, a non-resident, sold plots of land in India and claimed exemption under section 54F for the investment made in a residential house in the USA. The Assessing Officer denied the exemption on the grounds that the sale proceeds were not utilized for acquiring the new asset and that the new asset was purchased outside India. The CIT(A) confirmed the Assessing Officer's decision, agreeing with the latter's conclusion that section 54F is intended to encourage house construction in India, as inferred from the Memorandum explaining the provisions of the Finance Bill, 1982. The CIT(A) did not agree with the Assessing Officer's first conclusion that the sale consideration must be utilized for acquiring the new asset, as section 54F does not stipulate such a requirement. The assessee's representative argued that section 54F does not distinguish between residents and non-residents and should be interpreted to allow benefits to both categories without discrimination. Several examples were provided to illustrate that residents could claim exemptions under similar circumstances, implying that non-residents should also be entitled to the same benefits. However, the tribunal held that the provisions of the Income-tax Act, 1961, apply within India, and thus, the purchase or construction of a residential house under section 54F must be in India. This interpretation was supported by judicial precedents, including the Supreme Court's rulings in Padmasundara Rao v. State of Tamil Nadu and K.P. Varghese v. ITO, which emphasized interpreting statutes based on the language used and the legislative intent. 3. Levying tax on interest income at the rate prescribed under the Double Tax Avoidance Agreement with the USA: The third ground of appeal was that the CIT(A) did not adjudicate the assessee's claim for levying tax on interest income at the rate of 15% as prescribed under the Double Tax Avoidance Agreement with the USA. After hearing both sides, the tribunal remanded this matter back to the CIT(A) for a decision in accordance with the law. Conclusion: The appeal was dismissed, with the tribunal holding that the benefit under section 54F is not allowable for a residential house purchased or constructed outside India. The issue regarding the tax rate on interest income was remanded to the CIT(A) for adjudication.
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