2006 (4) TMI 443 - AT - Income Tax

Assessee's Appeal Dismissed: HUDCO Bonds Purchase Not Qualify for Deduction

The appeal filed by the assessee against the disallowance of deduction under section 54EA of the Income Tax Act was dismissed. The court upheld the ... Capital gains Issues Involved:1. Disallowance of deduction under section 54EA of the I.T. Act.Issue-wise Detailed Analysis:Disallowance of Deduction Under Section 54EA of the I.T. Act:The assessee appealed against the CIT(A)'s order which disallowed the deduction under section 54EA of the I.T. Act for the assessment year 1998-99. The core issue was whether the purchase of HUDCO Bonds from the assessee's father qualified as an 'investment' under section 54EA, which would exempt the long-term capital gains from tax.The assessee sold loose diamonds and gold jewelry for Rs. 40,87,424 and claimed exemption under section 54EA by purchasing HUDCO Bonds worth Rs. 43 lakhs from his father. The assessee argued that the purchase of these bonds constituted an investment, fulfilling the requirements of section 54EA.The Assessing Officer (AO) denied the deduction, reasoning that the legislative intent behind section 54EA was to channel savings into priority sectors of the economy through new investments, not purchases. The AO emphasized that the terms 'investment' and 'purchase' are distinct, and the assessee's action did not meet the criteria for exemption under section 54EA.The CIT(A) upheld the AO's decision, stating that the funds from the bond purchase ended up with a private individual (the assessee's father) rather than being invested in the priority sector as intended by the legislation.In the appeal, the assessee's representative argued that the father had not claimed any deduction under section 54EA and that the bonds' purchase should qualify as an investment. The representative also referred to a Press Note by CBDT that discussed the issue of HUDCO Bonds.The Tribunal reviewed the facts and legislative framework, noting that section 54EA was designed to promote investment in priority sectors by exempting capital gains if the proceeds were invested in specified securities within six months. The Tribunal highlighted that the exemption aimed to boost infrastructure development and that the investment had to be held for three years without being used as collateral for loans.The Tribunal found that the assessee's purchase of bonds from his father did not align with the legislative intent of section 54EA. The bonds were not newly issued for priority sector investment but were simply transferred between individuals. The Tribunal clarified that the terms 'issued' or 'to be issued' in the context of HUDCO Bonds referred to their availability for public subscription, not secondary market purchases.Furthermore, the Tribunal emphasized that the exemption required a clear intention to invest in specified securities for priority sector development, which was not demonstrated in the assessee's case. The bonds were originally purchased by the father for general investment purposes, not under the scheme of section 54EA.Consequently, the Tribunal concluded that the assessee's purchase of HUDCO Bonds from his father did not qualify for the exemption under section 54EA. The appeal was dismissed, affirming the CIT(A)'s order.Conclusion: The appeal filed by the assessee was dismissed, and the disallowance of the deduction under section 54EA was upheld.