Important Ruling for NRIs: Section 54 Exemption on Overseas Residential Investments Prior to A.Y. 2015–16

Introduction

The Income Tax Appellate Tribunal (ITAT), Mumbai, in its recent ruling on ITA No. 1739/Mum/2024, delivered a significant judgment in favor of the appellant, Smt. Shanti A. Motwane. The case pertained to the assessment year (A.Y.) 2013–14 and was adjudicated by a bench comprising Ms. Kavitha Rajagopal (Judicial Member) and Smt. Renu Jauhri (Accountant Member). The order addressed critical issues of timeliness of the assessment order and eligibility for exemption under Section 54 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

Case Background

Smt. Shanti A. Motwane, a non-resident Indian (NRI) during the relevant financial year, filed her income tax return for A.Y. 2013–14, declaring a total income of ₹3,84,280. Subsequently, the Income Tax Department noticed high-value transactions in her bank account, prompting the reopening of the case under Section 147 of the Act by issuing a notice under Section 148 on June 23, 2021.

During the year under consideration, the appellant had sold an immovable property in India for ₹1,97,50,000 and invested ₹93,65,640 in a residential property in Ontario, Canada. The Assessing Officer (AO) disallowed the exemption claimed under Section 54 on the grounds that the property was outside India, citing the retrospective applicability of the amendment to Section 54 introduced by the Finance (No. 2) Act, 2014.

Grounds of Appeal

1. Assessment Order Time-Barred:
   The appellant contended that the assessment order was invalid, as it was passed beyond the prescribed time limit. Section 144C(4) mandates that the AO must pass the assessment order within one month from the end of the month in which the statutory period for filing objections expired.
2. Disallowance of Exemption Under Section 54:
   The AO disallowed the exemption under Section 54 on the premise that the property purchased in Ontario, Canada, did not qualify for the deduction, arguing that the amendment to Section 54, specifying “in India,” was clarificatory and retrospective. The appellant asserted that the amendment was prospective and applicable only from A.Y. 2015–16.

Tribunal’s Analysis

1. Assessment Order and Timeliness:
   The Tribunal noted that the issue of whether the order was time-barred became academic since the appeal was allowed on substantive grounds.
2. Exemption Under Section 54 – Prospective vs. Retrospective Amendment:
   The Tribunal examined whether the amendment to Section 54, which added the words “in India,” was clarificatory or substantive. Referring to the legal framework and judicial precedents, the Tribunal made the following observations:
   • Pre-Amendment Language:
     Before its amendment by the Finance (No. 2) Act, 2014 (effective from April 1, 2015), Section 54 did not restrict the location of the residential property to India.
   • Legal Precedent:
     The Tribunal cited the Bombay High Court’s ruling in Hemant Dinkar Kandlur v/s CIT(IT)-3/ Union of India Hon’ble Bombay High Court in writ petition No. 1644/2022 dated 12.09.2023 which clarified that the amendment was substantive and applied prospectively. The High Court emphasized that a retrospective application of the amendment would impose additional conditions on transactions completed before the amendment, which was neither the intention nor the object of the legislative change.
   • Clarity on the Amendment:
     The Tribunal held that the language of Section 54, prior to its amendment, was clear and unambiguous. The condition requiring investment in a property “in India” was introduced explicitly by the amendment and could not be read into the provision for earlier periods.
     Relying on the settled principle of law, the Tribunal reiterated that amendments introducing substantive changes are presumed to apply prospectively unless explicitly stated otherwise.

Tribunal’s Ruling

Based on the analysis, the Tribunal concluded as follows:

1. The appellant’s investment in the residential property in Ontario, Canada, qualified for exemption under Section 54 for A.Y. 2013–14.
2. The AO’s interpretation of the amendment to Section 54 as retrospective was incorrect.
3. The amendment introduced by the Finance (No. 2) Act, 2014, specifying “in India,” applied only from A.Y. 2015–16 and could not be imposed on transactions before that period.

This ruling serves as an important precedent for taxpayers, especially NRIs, who invest in residential properties outside India and claim exemptions under Section 54 for periods prior to A.Y. 2015–16.

Citation: Shanti A. Motwane Vs International Tax Ward 3(2)(1), Air India Building, Nariman Point, Mumbai-400021, ITA No. 1739/Mum/2024 (A.Y. 2013-14)