Facts of the Case

The assessee claimed deduction under Section 54 of the Income-tax Act on capital gains arising from transfer of a property, on the ground that the gains were invested in a residential house property located in London. The property had been partly financed through borrowed funds, and the assessee had been working in London for several years.

The Assessing Officer disallowed the deduction of ₹2,77,46,675, holding that the investment in a residential house situated outside India did not satisfy the conditions of Section 54. Reliance was placed on the ITAT Ahmedabad decision in Smt. Leena J. Shah v. ACIT and certain principles of statutory interpretation.

The Commissioner of Income Tax (Appeals) deleted the addition and allowed the deduction. Aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT), Allahabad Bench.

Issues Involved

Whether, for Assessment Year 2012-13 (i.e., prior to the amendment effective from 01-04-2014), deduction under Section 54 is allowable when the new residential house property is purchased outside India.

Petitioner’s (Revenue’s) Arguments

  • Section 54 should be interpreted to require that the new residential property be situated in India.
  • Investment in a house outside India does not fulfill the basic requirement for claiming deduction.
  • Reliance was placed on the ITAT Ahmedabad ruling in Smt. Leena J. Shah v. ACIT, which held that the new house must be in India.
  • It was argued that the CIT(A) erred in relying on Supreme Court decisions that were not directly applicable to the facts.

 Respondent’s (Assessee’s) Arguments

  • There was no binding decision of the jurisdictional High Court or ITAT against the assessee on this issue.
  • The Ahmedabad ITAT decision relied upon by the Assessing Officer had already been overruled by the Gujarat High Court in Leena Jugalkishor Shah v. ACIT.
  • Prior to the statutory amendment, Section 54 did not contain any restriction that the property must be located in India.
  • Therefore, the deduction could not be denied merely on the ground that the property was situated abroad.

Court Order / Findings

  • Prior to the amendment effective from 01-04-2014, Section 54 did not expressly require that the residential house be situated in India.
  • The Gujarat High Court in Leena Jugalkishor Shah v. ACIT clarified that the only condition under the unamended provision was investment in a residential house, without geographic limitation.
  • Courts cannot import words into a statute that are not present.
  • Where the language of the statute is clear, judicial interpretation cannot impose additional conditions.
  • Since the amendment introducing the condition “in India” was prospective, it cannot be applied retrospectively.

 Important Clarification

  • The requirement that the new residential property must be located in India applies only from Assessment Year 2015-16 onwards (Finance Act, 2014 amendment effective 01-04-2014).
  • For earlier years, investment in a residential property outside India could still qualify for exemption under Section 54 or Section 54F, subject to other conditions.
  • Substantive provisions restricting taxpayer rights cannot be applied retrospectively unless expressly provided by law. 

Link to download the order – https://itat.gov.in/public/files/upload/1574674175-RAGHAV-184.pdf

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