2012 (6) TMI 139 - AT - Income Tax

Minors' Capital Gains for 54EC Deductions: Tribunal Upholds Separate Treatment

Deputy Commissioner of Income-tax, Circle-8, Kolkata Versus Rajeev Goyal

The Tribunal held that capital gains invested in REC Capital Gain Bonds by minors should be considered separately for deductions under Section 54EC, even ... Deduction u/s 54EC - eligibility for deduction u/s 54EC on investment in REC Capital Gain Bonds on account of minors' income from Long Term Capital Gains (LTCG) separately, in case income is clubbed u/s 64(1A) - assessee together with his minor children earned LTCG on sale of shares and invested the same in specified bonds - Revenue clubbed LTCG earned by his minor children in assessee's hands but limited deduction u/s 54EC only to investment of Rs.50 lakhs in assessee's name - Held that:- From definition of 'person' u/s 2(31), it is clear that in case minor is an assessable entity even though his income is clubbed u/s 64(1) in the hands of his parents, he is to be considered separate than his parents. Further, income to be clubbed u/s 64 should be net taxable income, i.e. income computed after allowing permissible deductions. It may also be mentioned that there is difference between the word 'assessee' and the word 'person'. Notification no. 380/2006 dated 22.12.2006 prescribing maximum limit of 50 lacs on the amount of investment in REC Bond, have not put on any embargo on the investments by an assessee but the embargo is on allotment of the bonds to a 'person' and such embargo is on the allotting authority. Sec. 54EC stipulates investment limit and not deduction limit, hence deduction for investment by each minor child is thereby allowed - Decided in favor of assessee Issues Involved:1. Eligibility for deduction under Section 54EC of the Income-tax Act, 1961 on investment in REC Capital Gain Bonds for minors' income from Long Term Capital Gains (LTCG) when income is clubbed under Section 64(1A) of the Act.Issue-wise Detailed Analysis:1. Eligibility for Deduction under Section 54EC for Minors' Income:The primary issue in these appeals is whether the assessee can claim a deduction under Section 54EC of the Income-tax Act, 1961, on investments made in REC Capital Gain Bonds for the LTCG earned by his minor children, even when their income is clubbed with his under Section 64(1A) of the Act. The revenue raised three grounds:- The CIT(A) erred in directing the Assessing Officer to allow the deduction under Section 54EC for the minor daughter before clubbing the income with the assessee's income under Section 64(1A).- The CIT(A) erred in treating the minor as an assessee within the meaning of Section 64(1A) read with Section 2(7) of the Act.- The CIT(A) erred in recording that the limit of Rs. 50,00,000 under Section 54EC is applicable for investments in eligible bonds from 1st April 2007.2. Facts of the Case:The assessee and his minor children earned LTCG from the sale of shares and invested in REC Capital Gain Bonds. The assessee claimed deductions under Section 54EC for himself and his minor children. The Assessing Officer clubbed the minors' LTCG with the assessee's income but disallowed the deductions claimed for the minors, restricting the deduction to Rs. 50 lacs for the assessee. The CIT(A) allowed the assessee's claim, leading to the revenue's appeal.3. Revenue's Argument:The revenue argued that the benefit of deduction is available to an assessee, and in this case, the individual assessee, Shri Shankar Sharma, is the only assessable entity. The minors cannot be considered independent assessees for the purpose of the Act, as their income is clubbed with the assessee's income.4. Assessee's Argument:The assessee's counsel argued that the original Section 54EC did not limit the investment amount for claiming deductions. The proviso added from 1st April 2007 restricted the deduction to Rs. 50 lacs but was applicable only for investments made after that date. The counsel referred to various notifications and judicial precedents to support the claim that each individual, including minors, is a separate person under Section 2(31) of the Act, and there is no limit on separately allotting bonds up to Rs. 50 lacs for each person.5. Tribunal's Findings:The Tribunal examined the notifications and the definition of 'person' under Section 2(31) of the Act. It concluded that minors are separate assessable entities, and their income, even when clubbed under Section 64(1A), should be considered separately for deductions under Section 54EC. The Tribunal noted that the notification restricted the allotment of bonds to a single person but did not limit the deduction for an assessee. The Tribunal also referred to judicial precedents supporting the view that deductions should be allowed before clubbing minors' income with the parent's income.6. Conclusion:The Tribunal held that the capital gains invested in REC Capital Gain Bonds by the minors should be considered separately for deductions under Section 54EC, even if their income is clubbed with the assessee's income under Section 64(1A). The appeals of the revenue were dismissed, and the CIT(A)'s order allowing the assessee's claim was upheld.Judgment:The Tribunal dismissed the revenue's appeals, affirming the CIT(A)'s decision to allow the assessee's claim for deductions under Section 54EC for investments made by the minors in REC Capital Gain Bonds. The Tribunal emphasized that the minors are separate assessable entities and their income should be considered separately for deductions, even when clubbed with the parent's income under Section 64(1A).