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Capital gains can enjoy income tax exemptions where proceeds are reinvested in specified assets within prescribed period. Often the assessee face difficulty in meeting such time limitations, which would mean denial of exemption by the assessing officer.

In the case of ITO v. H P Vishweswaraiah (250ITR863) the assessee received additional /enhanced compensation for compulsory acquisition of land by the Central Government. Section 54E(3) before it was omitted from 1.4.88 provides for an exemption if the compensation amount is reinvested in specified bonds etc. In this case the compensation was physically received only subsequent to the date of withdrawal of exemption from the statute book.

In this case the revenue sought remand of the order passed by the Tribunal. In showing concern over the manner of passing of the silent order by the Tribunal the Division Bench however pointed out that while construing beneficial provisions that are specifically put on the statute book for a specific purpose, namely, to give to the assessee certain benefit which the law confers because of the fact that otherwise, in situations such as compulsory acquisition where the assessee is left with a large capital amount if the normal principles of taxation were to apply, a greater part of receipt would virtually be confiscated. The Court at this stage required a harmonious application of law to achieve the effective purpose of law.

In another case of the Commissioner of Income-tax Vs. Roda Mistry (Smt.)(231ITR12) the assessing officer denied a similar exemption claim in the case of an assessee in whose case the acquisition dater pertained to the period prior to coming into force of such exemption 54E. The Andhra Pradesh High Court held that there is no warrant to confine the provision contained in section 54E(3) of the Income-tax Act only to the additional compensation received in respect of the acquisitions that take place after the introduction of the provisions. Such a narrow interpretation is not warranted, either going by the language of the section or by having recourse to the purposive interpretation.

The Karnataka High Court taking note of the AP High Court ruling came heavily on the department for battling in unnecessary litigations. The Court pointed out that despite the AP High Court virtually setting out guidelines indicating where the lower authority has gone wrong it is not proper to seek any remand as that would lead to unnecessary litigation. In this regard the Court explained that in the majority of cases that are remanded a kind of ego problem comes up in so far as the feathers get ruffled and an even more foolish order emerges. Ultimately, in order to put a full stop to the litigation going in the circles on the second or third occasion, purely, out of a sense of fatigue, it is the High Court which ultimately decides the issue and sets it at rest. On these very facts the High Court chose not to remand the case and instead e reiterated the principles laid down by the AP High Court.

The Karnataka High Court in this sounding judgment finally held that when the compensation was enhanced that notionally dated back to the original receipt which in turn got modified. It thus held that the assessee was entitled to exemption even if the provisions of section 54E(3) were no longer in the statute book in so far as the same were omitted.

Good news is that a new section 54H was inserted in 1991 to take care of such problems which went unnoticed in this judgment. It says that the exemption would be given if the proceeds of compensation are invested within six months from the date of receipt irrespective of the fact whether on such date the exemption section remains on the statute book or not.

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