1. Section 54EC of the Income-tax Act, 1961 allows a deduction in respect of long-term capital gains arising from transfer of any long-term capital asset ("original asset") where the following conditions are satisfied:
- The assessee invests the whole or any part of such long-term capital gains in the long-term specified asset i.e. bonds redeemable after three years issued by NHAI/REC.
- Such investment is made "at any time within a period of six months after the date of such transfer".
- The investment so made by an assessee during any financial year does not exceed Rs. 50 lakhs. This condition is imposed by the Proviso to section 54EC(1).
If all the above conditions are satisfied, any assessee shall be entitled to deduction of entire amount of capital gains if the entire amount is so invested. If only part of the capital gains is invested, deduction of proportionate amount shall be allowed. It should be noted that the interest from the NHAI/REC bonds (long-term specified asset) are not tax-free but liable to be taxed in full.
Interpretation of the proviso to section 54EC(1) - The Rs. 50 Lakhs Cap
2. The proviso to section 54EC(1) reads as under:
"Provided that the investment made on or after the 1st day of April, 2007 in the long term specified asset by an assessee during any financial year does not exceed fifty lakh rupees"
The question that arises in respect of the proviso to section 54EC(1) is whether the cap of Rs. 50 lakhs imposed by it applies to investment in a financial year or to the deduction allowable in respect of a financial year. In other words, can an assessee who transfers a capital asset in the second-half of a financial year i.e. on or after 30th September and makes a capital gain of Rs. 1 crore or more, claim a deduction of Rs. 1 crore by investing Rs. 1 crore in specified bonds within 6 months of transfer Rs. 50 lakhs in the financial year of transfer of capital asset and Rs. 50 lakhs in next financial year?
In a recent decision - Aspi Ginwala v. Asstt. CIT [2012] 20 taxmann.com 75 (Ahd. - Trib.), the Tribunal answered the above question in the affirmative. The Tribunal held that it is clear from the proviso to section 54EC(1) that where assessee transfers his capital asset after 30th September of the financial year he gets an opportunity to make an investment of Rs. 50 lakhs each in two different financial years and is able to claim exemption upto Rs. 1 crore under section 54EC of the Act. Since the language of the proviso is clear and unambiguous, assessee is entitled to get exemption upto Rs. 1 crore.
Practical difficulty - However, even though law as interpreted by the Tribunal permits deduction of Rs. 1 crore to be claimed under section 54EC by following the above strategy, a practical difficulty arises. What if there is no issue of REC/NHAI bonds open to invest in next financial year during the time-limit of 6 months from date of transfer of capital asset? In the above case, the assessee sold his property on 22-10-2007 and invested Rs. 50 lakhs in specified bonds (REC Bonds) on 31-12-2007 (i.e. within the 6 months period). Assessee invested Rs. 50 lakhs in NHAI bonds in next financial year on 26-5-2008 (after the 6 months time limit) since, there were no specified bonds available for subscription from 1st April, 2008 to 21-4-2008 during the next financial year. As during this period from 1-4-2008 to 26-5-2008 subscription in eligible investment was closed, the investment made by the assessee on 26-5-2008 i.e. 1st day of the reopening of the subscription of eligible investment in NHAI Bonds and assessee contented that this should be treated to be in time. Relying on the following passage from Ram Agarwal v. Jt. CIT [2002] 81 ITD 163 (Mum.) in the context of section 54F, the ITAT upheld assessee's contention:
"In regard to claim of exemption under section 54F we may mention that it is found by the learned CIT(A) that the bank was closed on 31-8-1995 on account of strike as certified by the officials of the concerned bank. From the certification given by the bank officials, the assessee had approached the bank officials with the cheque for the amount of deposit on 30-8-1995. The assessee remained unable to obtain receipt on 31-8-1995 due to bank strike and the cheque was cleared on 1-9-1995. In this view of the situation, it can well be said that the deposit of the assessee was in accordance with the provisions of statute as on the last date i.e. the 31-8-1995, the deposit could not be made due to the reason which was beyond the control of the assessee particularly in view that the efforts were made by the assessee a day prior to last date to deposit the requisite amount in the bank to make him entitle for exemption under sec. 54F. ………."
Since no contrary decision was cited on behalf of the Revenue, ITAT applied the above decision and held that the investments made by the assessee on 26-05-2008 beyond six months is eligible for exemption in view of the fact that no subscription for eligible investment was available to the assessee from 1st April, 2008 to 26-05-2008. The whole idea appears to be not to penalize an assessee where he is not at fault and unable to comply due to reasons beyond his control and acts with due diligence to comply at the first opportunity available to him.
Thus, the strategy for maximizing the exemption under section 54EC is as under:
Interpretation of the proviso to section 54EC(1) - The Rs. 50 Lakhs Cap
2. The proviso to section 54EC(1) reads as under:
"Provided that the investment made on or after the 1st day of April, 2007 in the long term specified asset by an assessee during any financial year does not exceed fifty lakh rupees"
The question that arises in respect of the proviso to section 54EC(1) is whether the cap of Rs. 50 lakhs imposed by it applies to investment in a financial year or to the deduction allowable in respect of a financial year. In other words, can an assessee who transfers a capital asset in the second-half of a financial year i.e. on or after 30th September and makes a capital gain of Rs. 1 crore or more, claim a deduction of Rs. 1 crore by investing Rs. 1 crore in specified bonds within 6 months of transfer Rs. 50 lakhs in the financial year of transfer of capital asset and Rs. 50 lakhs in next financial year?
In a recent decision - Aspi Ginwala v. Asstt. CIT [2012] 20 taxmann.com 75 (Ahd. - Trib.), the Tribunal answered the above question in the affirmative. The Tribunal held that it is clear from the proviso to section 54EC(1) that where assessee transfers his capital asset after 30th September of the financial year he gets an opportunity to make an investment of Rs. 50 lakhs each in two different financial years and is able to claim exemption upto Rs. 1 crore under section 54EC of the Act. Since the language of the proviso is clear and unambiguous, assessee is entitled to get exemption upto Rs. 1 crore.
Practical difficulty - However, even though law as interpreted by the Tribunal permits deduction of Rs. 1 crore to be claimed under section 54EC by following the above strategy, a practical difficulty arises. What if there is no issue of REC/NHAI bonds open to invest in next financial year during the time-limit of 6 months from date of transfer of capital asset? In the above case, the assessee sold his property on 22-10-2007 and invested Rs. 50 lakhs in specified bonds (REC Bonds) on 31-12-2007 (i.e. within the 6 months period). Assessee invested Rs. 50 lakhs in NHAI bonds in next financial year on 26-5-2008 (after the 6 months time limit) since, there were no specified bonds available for subscription from 1st April, 2008 to 21-4-2008 during the next financial year. As during this period from 1-4-2008 to 26-5-2008 subscription in eligible investment was closed, the investment made by the assessee on 26-5-2008 i.e. 1st day of the reopening of the subscription of eligible investment in NHAI Bonds and assessee contented that this should be treated to be in time. Relying on the following passage from Ram Agarwal v. Jt. CIT [2002] 81 ITD 163 (Mum.) in the context of section 54F, the ITAT upheld assessee's contention:
"In regard to claim of exemption under section 54F we may mention that it is found by the learned CIT(A) that the bank was closed on 31-8-1995 on account of strike as certified by the officials of the concerned bank. From the certification given by the bank officials, the assessee had approached the bank officials with the cheque for the amount of deposit on 30-8-1995. The assessee remained unable to obtain receipt on 31-8-1995 due to bank strike and the cheque was cleared on 1-9-1995. In this view of the situation, it can well be said that the deposit of the assessee was in accordance with the provisions of statute as on the last date i.e. the 31-8-1995, the deposit could not be made due to the reason which was beyond the control of the assessee particularly in view that the efforts were made by the assessee a day prior to last date to deposit the requisite amount in the bank to make him entitle for exemption under sec. 54F. ………."
Since no contrary decision was cited on behalf of the Revenue, ITAT applied the above decision and held that the investments made by the assessee on 26-05-2008 beyond six months is eligible for exemption in view of the fact that no subscription for eligible investment was available to the assessee from 1st April, 2008 to 26-05-2008. The whole idea appears to be not to penalize an assessee where he is not at fault and unable to comply due to reasons beyond his control and acts with due diligence to comply at the first opportunity available to him.
Thus, the strategy for maximizing the exemption under section 54EC is as under:
- Transfer long-term capital asset from which taxable capital gains will be Rs. 1 crore or more in the second half of a financial year i.e. after 30th September but on or before 31st March.
- Invest Rs. 50 lakhs in specified bonds in the financial year of transfer itself.
- Invest Rs. 50 lakhs in specified bonds in the next financial year within 6 months time-limit i.e. 6 months from the date of transfer of capital asset. If no issue of specified bonds is open during next financial year, then investRs. 50 lakhs on the first day of opening of the first issue of eligible bonds (REC/NHAI bonds) during the next financial year.
Contrary Decision of ITAT
3. In Asstt. CIT v. Shri Raj Kumar Jain & Sons (HUF) [2012] 19 taxmann.com 27 (Jp.), the ITAT had taken a contrary view since taking a view that assessee who transfers a capital asset in the second half of a financial year (1st October to 31st March) can claim a deduction of Rs. 1 crore is unfair to assessees who transfer a capital asset in the 1st half of a financial year who can claim a deduction of only Rs. 50 lakhs. The Tribunal observed as under:
"The ld. DR during the course of proceedings before us has fairly contended that the interpretation which the ld. AR wants to place on the proviso to Section 54EC will enable the assessee to claim exemption of around Rs. 1.00 crore. In case, the transfer of assets has taken place from 1st Oct. to 31st March because the assessee will be able to invest Rs. 50.00 lakhs in a financial year in which the transfer has taken place and Rs. 50.00 lakhs in subsequent financial year. However, the assessee's who have earned the capital gain on transfer of assets from Ist April to 30th Sept. will be able to have deduction only of Rs. 50.00 lakhs. We therefore, feel that assessee in the instant case is entitled to exemption of Rs. 50.00 lakhs u/s 54EC and it is not the case where two interpretations of Section 54EC are possible"
Departmental views in CBDT Circulars
4. CBDT's Circular No. 3/2008, dated 12-3-2008 explains the proviso introduced by the Finance Act, 2007 as under:
"28.2 The quantum of investible bonds issued by NHAI and REC being limited, it was felt necessary to ensure that the benefit was available to all the investor. For this purpose, it was necessary to ensure that the limited number of bonds available for subscription is also available for small investors. Therefore, with a view to ensure equitable distribution of benefits amongst prospective investors, the Government decided to impose a ceiling on the quantum of investment that could be made in such bonds. Accordingly, the said section has been amended so as to provide for a ceiling on investment by an assessee in such long-term specified assets. Investments in such specified assets to avail exemption under section 54EC, on or after April 1, 2007 will not exceed fifty lakh rupees in a financial year."
Thus, the above CBDT Circular not brought before ITAT in either of the above cases speaks of 'ceiling on quantum of investment' rather than 'ceiling on quantum of deduction'.
Where the Act or even Departmental Circulars intend that it is a ceiling on deduction in respect of amounts invested in a financial year rather than a ceiling on quantum of investment to be made in a financial year, they say so explicitly. Take the example of section 80CCF. The text of section 80CCF reads as under:
"Deduction in respect of subscription to long-term infrastructure bonds.
80CCF. In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, the whole of the amount, to the extent such amount does not exceed twenty thousand rupees, paid or deposited, during the previous year relevant to the assessment year beginning on the 1st day of April, 2011 or to the assessment year beginning on the 1st day of April, 2012, as subscription to long-term infrastructure bonds as may, for the purposes of this section, be notified by the Central Government."
Thus, section 80CCF clearly says that invest all that you want in infrastructure bonds but deduction shall be limited to Rs. 20,000 and only what is paid or deposited during the previous year will be considered for deduction under that section. If same interpretation was to be placed on the proviso to section 54EC(1)-that amount of deduction will be limited to Rs. 50 lakhs and only amounts deposited during financial year shall be considered, nothing prevented Parliament from drafting the proviso to section 54EC(1) along the lines of section 80CCF.
CBDT's Circular No. 1/2011, dated 6-4-2011 explains section 80CCF as under:
"14. Deduction in respect of long-term infrastructure bonds
14.1 In tune with the policy thrust of promoting investment in the infrastructure sector, a new section 80CCF was inserted in the Income-tax Act to provide that subscription during the financial year 2010-11 made to long-term infrastructure bonds (as may be notified by the Central Government), to the extent of Rs. 20,000, shall be allowed as deduction….."
5. It is clear from CBDT's Circular No. 3/2008, dated 12-3-2008 as also from a comparison of section 54EC and section 80CCF thatthe cap of Rs. 50 Lakhs in the proviso to section 54EC(1) is an investment cap and not a deduction cap. The decision of the Tribunal in Aspi Ginwala (supra) is in line with the language of the provisions of the Act and CBDT's Circulars. It is submitted that the contrary views of ITAT in Shri Raj Kumar Jain & Sons (HUF)(supra) (which appears to be guided by notions of unfairness to assessees who transfer assets in the first half of the financial year rather than the text of the provisions and CBDT circulars) needs reconsideration. In any case, if two contrary views are there on an issue, Tribunal will be guided by the view favourable to the assessee. From that angle, the view in Aspi Ginwala (supra) has to be preferred to the view in Shri Raj Kumar Jain & Sons (HUF)(supra). This principle has been endorsed by ITAT in a recent case where there were two contrary ITAT decisions on non-compete fee and view favourable to assessee was applied by Tribunal to decide the case.
3. In Asstt. CIT v. Shri Raj Kumar Jain & Sons (HUF) [2012] 19 taxmann.com 27 (Jp.), the ITAT had taken a contrary view since taking a view that assessee who transfers a capital asset in the second half of a financial year (1st October to 31st March) can claim a deduction of Rs. 1 crore is unfair to assessees who transfer a capital asset in the 1st half of a financial year who can claim a deduction of only Rs. 50 lakhs. The Tribunal observed as under:
"The ld. DR during the course of proceedings before us has fairly contended that the interpretation which the ld. AR wants to place on the proviso to Section 54EC will enable the assessee to claim exemption of around Rs. 1.00 crore. In case, the transfer of assets has taken place from 1st Oct. to 31st March because the assessee will be able to invest Rs. 50.00 lakhs in a financial year in which the transfer has taken place and Rs. 50.00 lakhs in subsequent financial year. However, the assessee's who have earned the capital gain on transfer of assets from Ist April to 30th Sept. will be able to have deduction only of Rs. 50.00 lakhs. We therefore, feel that assessee in the instant case is entitled to exemption of Rs. 50.00 lakhs u/s 54EC and it is not the case where two interpretations of Section 54EC are possible"
Departmental views in CBDT Circulars
4. CBDT's Circular No. 3/2008, dated 12-3-2008 explains the proviso introduced by the Finance Act, 2007 as under:
"28.2 The quantum of investible bonds issued by NHAI and REC being limited, it was felt necessary to ensure that the benefit was available to all the investor. For this purpose, it was necessary to ensure that the limited number of bonds available for subscription is also available for small investors. Therefore, with a view to ensure equitable distribution of benefits amongst prospective investors, the Government decided to impose a ceiling on the quantum of investment that could be made in such bonds. Accordingly, the said section has been amended so as to provide for a ceiling on investment by an assessee in such long-term specified assets. Investments in such specified assets to avail exemption under section 54EC, on or after April 1, 2007 will not exceed fifty lakh rupees in a financial year."
Thus, the above CBDT Circular not brought before ITAT in either of the above cases speaks of 'ceiling on quantum of investment' rather than 'ceiling on quantum of deduction'.
Where the Act or even Departmental Circulars intend that it is a ceiling on deduction in respect of amounts invested in a financial year rather than a ceiling on quantum of investment to be made in a financial year, they say so explicitly. Take the example of section 80CCF. The text of section 80CCF reads as under:
"Deduction in respect of subscription to long-term infrastructure bonds.
80CCF. In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, the whole of the amount, to the extent such amount does not exceed twenty thousand rupees, paid or deposited, during the previous year relevant to the assessment year beginning on the 1st day of April, 2011 or to the assessment year beginning on the 1st day of April, 2012, as subscription to long-term infrastructure bonds as may, for the purposes of this section, be notified by the Central Government."
Thus, section 80CCF clearly says that invest all that you want in infrastructure bonds but deduction shall be limited to Rs. 20,000 and only what is paid or deposited during the previous year will be considered for deduction under that section. If same interpretation was to be placed on the proviso to section 54EC(1)-that amount of deduction will be limited to Rs. 50 lakhs and only amounts deposited during financial year shall be considered, nothing prevented Parliament from drafting the proviso to section 54EC(1) along the lines of section 80CCF.
CBDT's Circular No. 1/2011, dated 6-4-2011 explains section 80CCF as under:
"14. Deduction in respect of long-term infrastructure bonds
14.1 In tune with the policy thrust of promoting investment in the infrastructure sector, a new section 80CCF was inserted in the Income-tax Act to provide that subscription during the financial year 2010-11 made to long-term infrastructure bonds (as may be notified by the Central Government), to the extent of Rs. 20,000, shall be allowed as deduction….."
5. It is clear from CBDT's Circular No. 3/2008, dated 12-3-2008 as also from a comparison of section 54EC and section 80CCF thatthe cap of Rs. 50 Lakhs in the proviso to section 54EC(1) is an investment cap and not a deduction cap. The decision of the Tribunal in Aspi Ginwala (supra) is in line with the language of the provisions of the Act and CBDT's Circulars. It is submitted that the contrary views of ITAT in Shri Raj Kumar Jain & Sons (HUF)(supra) (which appears to be guided by notions of unfairness to assessees who transfer assets in the first half of the financial year rather than the text of the provisions and CBDT circulars) needs reconsideration. In any case, if two contrary views are there on an issue, Tribunal will be guided by the view favourable to the assessee. From that angle, the view in Aspi Ginwala (supra) has to be preferred to the view in Shri Raj Kumar Jain & Sons (HUF)(supra). This principle has been endorsed by ITAT in a recent case where there were two contrary ITAT decisions on non-compete fee and view favourable to assessee was applied by Tribunal to decide the case.
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