ORDER
T.N.C. Rangarajan, Vice-President
1. This appeal relates to the claim of the assessee for exemption under Section 54E of the Income-tax Act, 1961.
2. Section 54E was originally inserted by Finance (No. 2) Act of 1977 with effect from 1-4-1978. It provided that where the assessee invests the consideration received in respect of a transfer of capital asset in any specified asset, there will be a proportional abatement of tax on capital gains to the extent of the investment. The explanation stated that specified asset would mean among other items deposits for a period of not less than 3 years with the State Bank of India or other notified Banks. The Finance Act, 1978 provided a further condition that a declaration should be given along with the deposit that no loan will be taken upon the fixed deposit. In the Budget Speech presenting the Finance Bill, 1979, the Finance Minister stated:
The scheme of taxation of capital gains was modified in 1977 in several directions. One of the changes made was to provide for exemption from income-tax on long-term capital gains if the sale proceeds of any asset were re-invested within six months in certain preferred assets. Since asset owners secure capital gains largely through no effort on their own part, this exemption confers an unfair advantage on asset holders as compared to income earners and thus contributes to the disparity in society. I, therefore, propose to withdraw this exemption of capital gains in respect of transfers made after 28th February, 1979. This measure will yield an additional revenue of Rs. 14 crores annually. Since, however, advance tax is not payable in respect of capital gains, there will be no accretion to revenue during the year 1979-80.
Accordingly, Clause 7 of the Finance Bill, 1979 states as follows :
Clause 7: Nothing in this Section shall apply to or in relation to any capital gain arising from any transfer of a capital asset made after 28th day of February, 1979.
However, when the bill was made into an Act, the actual amendment took the following form:
8. Amendment of Section 54E. – In Section 54E of the Income-tax Act, –
(1) ** ** ** (a) ** ** ** (b) ** ** ** (c) ** ** ** (d) in Explanation 1, - (i) for the words, brackets and figure 'For the purposes of this sub-section and Sub-section (3), 'specified asset' means any of the following assets, namely:-', the following shall be substituted, namely:- 'For the purposes of this sub-section 'specified asset' means - (a) in a case where the original asset is transferred before the 1st day of March, 1979, any of the following assets, namely:-'; (ii) after Clause (vi), the following clause shall be inserted, namely :- (b) in a case where the original asset is transferred after the 28th day of February, 1979, such National Rural Development Bonds as the Central Government may notify in this behalf in the Official Gazette."- (117 ITR St. 71) 3. In the Explanatory Notes to the Act it was stated; Modification of the provisions relating to the exemption of long-term capital gains - Section 54E, 16.1 Under Section 54E, capital gains arising on the transfer of a 'long-term capital asset' are exempted from income-tax if the full value of the consideration received or accruing as a result of the transfer is invested or deposited in specified financial assets within six months of the date of the transfer.... 1. The first modification is that in respect of a transfer of a long-term capital asset made after 28-2-1979, the capital gains will be' exempted only if the investment is made in the new 7-Year National Rural Development Bonds to be issued by the Government. In respect of transfers of capital assets made before 1-3-1979, however, the requirement of making the investment in any of the preferred assets as hitherto will continue.
4. It is in this legal background that we have to consider the claim of the assessee. The assessee is an individual. He sold the immovable property being Door No. 26, IV Main Road, Madras-28 by a sale deed executed on 28-2-1979. This deed was presented for registration on 5-3-1979 and registered on 21-3-1979. The deed recited that the assessee had received an amount of Rs. 20,000 on 26-2-1979 and the balance of Rs. 80,000 at the time of registration making up a total consideration of Rs. 1,00,000. The assessee deposited Rs. 90,000 on 19-3-1979 in a fixed deposit with the Canara Bank for a period of 5 years. The balance of Rs. 10,000 was deposited on 19-6-1979 also for a period of 5 years.
5. On these facts, the assessee claimed that the transfer had taken place before 1-3-1979 and, therefore, the fixed deposit in the Canara Bank fulfilled the condition required for abatement of tax on capital gains under Section 54E. The ITO, however, rejected this claim on the ground that the date of registration is the date of transfer and since the transfer of assets took place after 28-2-1979, investment in National Rural Development Bonds was required to claim the abatement. This was confirmed on appeal.
6. In the further appeal before us it was contended on behalf of the assessee relying on the statement of law in the case of T.V. Kalyanasundaram Pillai v. Karuppa Mooppanar AIR 1927 PC 42 which was re-stated by the Supreme Court in the case of Hammadh Ammal v. Avadiappa Fathar [1991] 1 SCC 715, that after registration the document operates from the date of execution and therefore it must be accepted that the sale deed executed on 28-2-1979, even though registered in March 1979, effectively transferred the original asset before 1-3-1979 and, accordingly, the investment of the proceeds in fixed deposit in a bank was eligible for abatement of capital gains tax.
7. On the other hand, it was contended on behalf of the revenue that the provisions of Section 47 of the Registration Act recognising the operation of a registered sale deed from the date of execution would apply only to the parties to the document and would not affect third parties for whom the transfer could be effective only upon registration of the document. No doubt, in view of the decision of the Supreme Court, cited by the assesses, we can apparently proceed on the basis that the asset was transferred as between the assessee and the purchaser on 28-2-1979 and, therefore, Clause (a) of Explanation 1 of Section 54E would apply. In this view, it may not be necessary to consider the question as to what happens if the transfer is considered to have taken place only on the date of registration of the document.
8. However, with regard to the third parties, such as the ITO, the application of the provisions of Section 47 of the Registration Act would lead to certain difficulties. For instance, if a document executed in one assessment year is registered in the next assessment year, the ITO cannot be aware of it until the registration takes place and it would involve the reopening of the assessment for the earlier year to bring it to tax in the year in which the same was executed. Since registration is a must for completing the transactions in immovable properties and since registration is a public notice of the transaction, it may appear to be more prudent in the case of actions taken by public authorities to take the date of registration as the date of transfer of an immovable property. Thus, there is a variance in the approach to the question whether for the purpose of transfer of an immovable property from the point of view of the ITO being a public authority, it is the date of registration that counts or the date of the operation of the document with reference to Section 47 of the Registration Act which counts. In the case of Radhakrishnan Laxminarayan Toshniwal v. Shridhar Ramchandm Alshi AIR 1960 SC 1368 the Supreme Court held that it cannot be argued that once registration is effected, title relates back to the execution of the sale deed so as to render an application under the Bihar Act 12 of 1962 presented prior to registration as premature. Similarly, it was held by the Bombay High Court in the case of Amarchand Jainarain Agarwal v. Union of India [1983] 142 ITR 410 that Section 269C is attracted only on the date of registration and it will not be avoided even if the sale was executed prior to the coming into force of the section but registration effected after it came into force, by arguing that the transfer operated from the earlier date of execution of the sale deed. This Tribunal has followed this principle in the case of CTO v. S.E.S. Mwuganandam [1990] 32 ITD 148 (Mad.) to which one of us (J.M.) was a party,
9. It is because of this uncertain position that the assessee wrote a letter dated 5-5-1979 to the CBDT requesting that he should be advised whether he will be assessed with reference to the date of execution of the document or the date of registration of the document so that he can make the appropriate investment. However, the CBDT gave a reply on 13-3-1980, long after the period of six months available from the date of transfer for investment, stating that the Board does not give advance rulings on legal issues. This is inexplicable when the CBDT has issued a circular instructing the Officer of the Department to act in the following manner:
Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed by law, officers should –
(a) draw their attention to any refunds an reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reasons or other;
(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.” [Circular No. 14 (XL-35) of 1955 dated 11-4-1955].
[reproduced and judicially noted in the case of Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.) at p. 71]
An honest and law abiding taxpayer would have expected the Central Board of Direct Taxes which thus professes to be friendly to the assessees to at least clarify its own stand so that the assessee could act in accordance with the stand of the department. The assessee apprehends that the revenue would continue to treat this as a legal issue and carry on this litigation.
10. It is in this background that we are required to consider the alternate submission of the assessee that even if the transfer is considered to have taken place after 28-2-1979 with reference to the date of registration, the section as enacted could not be applied to the assessee because it was not specifically enacted with retrospective effect so as to take away the vested rights of the assessee. The contention of the revenue in reply is that the charge of tax is with reference to the law as it stands on the first day of the assessment year and since the amended Act treats transfers made after 28-2-1979 in a different manner, the assessee was required to comply with the conditions so prescribed for availing the tax rebate.
11. It is no doubt true that income-tax is charged according to the provisions of the Act as they stand on the 1st April of the assessment year. The Supreme Court has pointed out in the case of CIT v. Isthmiain Steamship Lines [1951] 20 ITR 572 that it is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication. But the subject of the charge is not the income of the year of assessment, but refers to the transactions of the previous year. This is in contrast to the indirect levies under the Central Excise & Customs enactments where the provisional Collection of Taxes Act, 1931 provides that upon declaration by Parliament, the imposition or increase of duty of customs or excise will have immediate effect upon presentation of Finance Bill, and such provisions will have the force of law and cease to have effect on the expiry of the 75th day, unless the Bill becomes an Act. These considerations have no relevance to the Income-tax Act which is a tax on the income of the previous year. Therefore, it prima facie appears that the selection of the date of the presentation of the Budget for modifying the mode of investment as a condition for eligibility for tax rebate was inappropriate.
12. The history of this legislation shows that the original intention revealed in the Finance Bill was to omit the provisions of this tax rebate as such. If such an omission had taken place, then of course it could be said that effective from 1st March, there will be no tax rebate in respect of capital gains arising from transfer of capital assets. This is because, in tax matters the State is allowed to pick and choose objects, persons, methods and even rates for taxation if it does so reasonably. (See Khyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925). However, in the present case, when the Bill was enacted, instead of omitting the rebate itself, only the required pattern of investment was changed. In other words, the tax rebate was continued to be available to the assessee, the principle underlying the tax rebate being the reinvestment of the proceeds of the transfer of capital assets.
13. Now comes the question whether within the previous year a classification of the transfers for the purpose of reinvestment for part of the previous year would have a reasonable basis. Apparently, the mode of investment has nothing to do with the levy of income-tax. Nor is it a matter of any particular significance in this case that a specified mode should be preferred for part of the previous year when it is accepted on principle that reinvestments will qualify for rebate and both the specified assets of reinvestment are in Government owned institutions. Coupled with this is the uncertainty as to the date of transfer of immovable properties in respect of which the revised mode of investment would be a condition precedent for the tax rebate. Looked at from these perspectives, it would appear that a retrospective operation of the amendment in conjunction with lack of reasonable classification may make the section unconstitutional. It has been held by the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 at p. 618 that a section should be so construed as to make it constitutionally valid and avoid that construction which attributes irrationality to the Legislature.
14. We are, therefore, compelled to take a close look at the mechanism of this section. In Section 8 of the Finance Act, itself two expressions are used. In respect of Clause (a) the word used is ‘substituted’ whereas in respect of Clause (b) the word used is ‘inserted’. This is not a case of provisional collection of tax where it could take effect from the date of the Bill. Under Clause (5) of the General Clauses Act, the amendment can take effect only from the date specified in the Act or on receiving the assent of the President. Since the Finance Act, 1979, Section 1 states that it shall be deemed to have come into force from 1-4-1979, this section comes into the statute from 1-4-1979. Of course, it states that in a case where the asset is transferred after 28th February, the investment must be in the National Rural Development Bonds. But this does not make the section retrospective as it could not operate during the period 1-3-1974 to 1-4-1974. Therefore, a person who made a transfer between 1-3-1979 and 1-4-1979 could not have acted in accordance with the amendment as he could not be sure that the provisions in the Bill would become an Act. In fact, this section was not even in the Bill so as to enable the taxpayer to anticipate it, because what was proposed in the Bill was different from what was enacted and the assessee could never have known when he entered into the transaction that a different reinvestment pattern would be required to get relief. The reference to 28th February 1979 thus goes beyond the date of enactment. We also have the classic case of the Gift-tax Bill, 1990 which lapsed without even becoming an Act, putting many taxpayers who acted on the basis of the proposed Bill to difficulties.
15. We may avoid this vexed question of retrospective operations of the statute if we approach the section from a different perspective. We can consider the section as prospective law applicable to the assessment year but classifying the transactions into two categories, viz., those before 28th Feb. 1979 and those after 1st March 1979 by imposing different conditions for granting exemption. Even so we have to face the question whether the substitution of the condition became effective on 1st March 1979 itself. The Act no doubt allows a period of six months from the date of transfer to make the necessary investment. In the case of transfers prior to 28-2-1979, there is no problem. But in the case of transactions after 1-3-1979, on a literal reading of Section 8, while the facility of investment in Banks is repealed, the facility of investing in Rural Bonds awaits the issue of such bonds. The Supreme Court in the case of State of Maharashtra v. C.P. Manganese Ore Co. [1977] 1 SCC 644 has pointed out that the word “substituted” does not necessarily or always connote two severable steps that is to say, one of repeal and another of a fresh enactment. It could not be inferred that in case substitution failed or proved ineffective, a repeal was brought about so as to create what may be described as a vacuum in the statutory law on the subject matter.
16. The foremost cannon of construction is ‘res magis vakat quam pereat’ (Statute should be so construed as to make it effective). As observed by Lord Hale, Judges ought to be curious and subtle to invent reasons and means to make acts effective according to the just intentions of parties (Broom’s Legal Maxims, 10th Edn., p. 362). The main purpose of the section was to grant exemptions from capital gains tax upon reinvestment in specified assets. When the specification for such an asset is substituted, it can be effective only when the new asset is available for investment. Otherwise, exemption granted by the Act will be defeated by the administrative act of hot making the asset available for investment. In other words, it would postulate a repeal of an earlier avenue without providing the new avenue for investment and thus create a vacuum not intended by the statute as it has reiterated the principle of exemption upon reinvestment. There is also a general proposition that an affirmative statute giving a new right does not of itself and of necessity destroy a previously existing right unless the intention is that the two rights should not exist together (see Broom’s Legal Maxim, 10th Edn., p. 382). Even assuming in this case that it was not intended that the right to invest in National Rural Development Bonds and in nationalised banks were not intended to exist together, it cannot lead to the position that the right to invest in banks is taken away even before the right to invest in National Rural Development Bonds becomes effective.
17. It was pointed out on behalf of the Revenue that Section 54E allowed a period of six months from the date of transfer to make the required reinvestment and since the National Rural Development Bonds were issued and available from 22-6-1979 within 6 months from 1-3-1979, the assessee could still have subscribed to it to obtain the relief. The assessee. points out that the CBDT had not clarified the doubt by that date and when he made the investment on 19-6-1979, the National Rural Development Bonds were not available. Even if he had waited, in the context of the doubt as to which specified asset is applicable with reference to the relevant date of transfer, as date of execution or date of sale, the assessee had to choose the fixed deposit in the Bank as he could with permission take it out and buy National Rural Development Bonds; where it would be locked up in the 7 Year Bonds if the situation was vice versa and he would not be in a position to withdraw and invest in a Bank if so required, after getting clarification from CBDT, in reply to his letter. Moreover, this itself illustrates the predicament of a taxpayer who wants to comply with the statute but finds the avenue unavailable. Merely because a period of six months is allowed for investment, it does not mean that the taxpayer should be obliged to wait the period out. He is entitled to plan his affairs and if he so wishes, he should be enabled to reinvest even on the date of transfer so as to avoid any temptation to fritter away the funds. He is even entitled to invest as soon as possible to get out of the lock-in-period quickly and get the funds released early for better investment and return as a prudent investor. In a legislation dealing with finance it is to be expected that it would be activated in a business like manner. Looked at from this point of view, the substitution was ineffective between 1-3-1979 and 1-4-1979 when this section itself was not in force and until 22-6-1979 when the National Rural Development Bonds were issued, since the substitution proved ineffective until then. As we have noted before, while the main purpose of the section viz. to grant exemption upon reinvestment, remained intact, the object of the substitution of the specified asset was only to channelise the funds to the National Rural Development Bonds instead of Nationalised Banks. If such channelisation was so important as to be brought about from 1-3-1979 when the budget was presented one would have expected that the National Rural Development Bond also would have been issued with equal promptitude. The very fact that they were issued long after indicates that this secondary object was not germane to the primary purpose of the section. Therefore, it is reasonable to conclude that until the substitution took place effectively on 22-6-1979, investment in Nationalised Banks cannot be ignored in granting relief. In other words, Section 8(a) effectively repealed the earlier section only on 22-6-1979 while 8(b) could be said to have conferred an additional right to invest in National Rural Bonds for those who were prepared to wait for the issue. In any event, the section itself was not in force before 1 -4-1979 and there was no repeal of the earlier provisions between 1-3-1979 and 1-4-1979. From any point of view, in the present case, the transfer whether considered as having taken place on 28-2-1979 when the sale deed was executed or on 21-3-1979 when it was registered, was governed by the provisions of the Act as it stood on those dates, there being no effective substitution of the provisions of Section 54E by then. The assessce cannot, therefore, be deprived of the right to invest in Nationalised banks and such investment cannot be disqualified for exemption.
18. The Supreme Court has observed in the case of CIT v. J. II. Gotla [1985] 156 ITR 323 that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Keeping this principle also in view, we find that the most appropriate construction is that made above. The Central Board of Direct Taxes itself appears to be aware of this conflict between equity and taxation as pointed out by the Supreme Court inasmuch as by Circular No. 359 dated 10-5-1983 it was considered that if the investment from the date of transfer is strictly construed and investments prior to the date of execution are discarded it would go against the purpose and spirit of the section. A similar approach was called for in the present case because there being felt a difficulty in the application of law with reference to the date of execution, contrasted with the date of registration, the CBDT could have very well issued a circular accepting the investments in fixed deposits, as well, at least with respect to transfers prior to 31-3-1979, as being eligible for the tax rebate. This may be a pious hope but such pious hopes have judicial approbation – see Seth Lunidaram Tikamdas v. CIT [1980] 121 ITR 824 (Mad.).
19. We are, therefore, of the considered opinion that the assessee was entitled to the rebate under Section 54E and we, therefore, direct the Income-tax Officer to grant the rebate and recompute the total income. The appeal is allowed.
