2014 (12) TMI 852 - HC - Income Tax

Section 54EC exemption allows Rs. 50 lakh bond investment per financial year within six months of property transfer

Commissioner of Income Tax Versus Coromandel Industries Limited

The Madras HC held that Section 54EC(1) exemption should be construed financial year-wise, not transaction-wise. An assessee can invest Rs. 50 lakhs in ... Benefit of investment on capital gains u/s 54EC(1) - Intention of the legislature is to limit the investment in the long term specified asset to ₹ 50 Lakhs or not - Whether the first proviso to Section 54EC(1) of the Act would restrict the benefit of investment of capital gains in bonds to that financial year during which the property was sold or it applies to any financial year during the six months period – Held that:- The Tribunal rightly held that the exemption granted under proviso to Section 54EC(1) of the Act should be construed not transaction-wise, but financial year-wise - if an assessee is able to invest a sum of ₹ 50,00,000/- each in two different financial years, within a period of six months from the date of transfer of the capital asset, it cannot be said to be inadmissible - Following the decision in Commissioner of Income Tax v. C. Jaichander and another [2014 (11) TMI 54 - MADRAS HIGH COURT] - Section 54EC(1) of the Act restricts the time limit for the period of investment after the property has been sold to six months - There is no cap on the investment to be made in bonds. The first proviso to Section 54EC(1) of the Act specifies the quantum of investment and it states that the investment so made on or after 1.4.2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees - as per the mandate of Section 54EC(1) of the Act, the time limit for investment is six months and the benefit that flows from the first proviso is that if the assessee makes the investment of ₹ 50,00,000/- in any financial year, it would have the benefit of Section 54EC(1) - The intention of the legislature probably appears to be that the amendment should be for the AY 2015-2016 to avoid unwanted litigations of the previous years - from a reading of Section 54EC(1) and the first proviso, it is clear that the time limit for investment is six months from the date of transfer and even if such investment falls under two financial years, the benefit claimed by the assessee cannot be denied. The decision of this Court in Areva T and D India Ltd. v. Assistant Commissioner of Income tax, [2008 (9) TMI 510 - Madras High Court] is not applicable to the facts of the present case, as in the decision the writ petitions filed for issuance of writ of declaration declaring that the conditions occurring in Notification No. 380 of 2006 F. No. 142/09/ 2006-TPL, dated December 22, 2006, along with the words 'subject to the following conditions, namely,' issued by the Central Board of Direct Taxes are ultra vires Section 54EC of the Income-tax Act, 1961, and arbitrary and violative of Articles 14 and 265 of the Constitution of India and consequently unenforceable, were dismissed as infructuous taking note of the subsequent amendment to Section 54EC of the Act, incorporating the limit on amount of investment in bonds in the section itself – thus, no substantial question of law arises for consideration – Decided against revenue. The core legal questions considered by the Court in this appeal are:(i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in relying on its earlier decision in Sriram Indubal v. ITO, despite an appeal pending before the High Court in that matter;(ii) Whether the Tribunal erred in not applying the legislative intention to limit the investment in long-term specified assets under Section 54EC of the Income Tax Act to Rs. 50 lakhs, as held in the Areva T&D India Ltd. case, which was relied upon by the Assessing Officer and the Commissioner of Income Tax (Appeals).The issues revolve around the interpretation and application of Section 54EC(1) of the Income Tax Act, specifically the quantum and timing of investment in specified bonds to claim exemption from capital gains tax.Issue-wise Detailed Analysis:1. Reliance on Tribunal Decision Despite Pending AppealThe Revenue challenged the Tribunal's reliance on its own earlier decision in Sriram Indubal v. ITO, contending that since an appeal against that decision was pending before the High Court, the Tribunal should not have followed it. The Court did not find this argument persuasive, implicitly recognizing the principle that tribunals can rely on their own precedents unless and until they are overruled by a higher authority. No specific legal framework was cited for this point, but the Court's approach aligns with the established judicial discipline of following binding precedents within the same forum.2. Interpretation of Section 54EC(1) Regarding the Rs. 50 Lakhs Investment LimitThe principal legal framework is Section 54EC(1) of the Income Tax Act, which provides exemption from capital gains tax if the capital gains arising from transfer of a long-term capital asset are invested within six months in specified long-term assets (bonds). The proviso to this sub-section limits the investment made in any financial year to Rs. 50 lakhs.The Assessing Officer and the Commissioner of Income Tax (Appeals) had restricted the exemption to Rs. 50 lakhs, relying on the decision in Areva T&D India Ltd. v. Assistant Commissioner, which had interpreted the proviso as a cap on the total investment allowable for exemption.The Tribunal, however, held that the exemption under the proviso should be construed on a financial year basis, allowing the assessee to invest Rs. 50 lakhs in two different financial years within the six-month period following the transfer, thereby permitting a total investment of Rs. 1 crore for exemption.The Court referred to its recent authoritative decision in Commissioner of Income Tax v. C. Jaichander, which clarified the interpretation of Section 54EC(1) and its proviso. The Court observed that:The six-month period is the time limit for making the investment to claim exemption;The proviso restricts the investment amount to Rs. 50 lakhs per financial year, not per transaction or total investment within six months;Therefore, if an assessee invests Rs. 50 lakhs in two different financial years within the six-month window, both investments qualify for exemption;This interpretation arises from a plain reading of the statutory language, which does not impose a cumulative cap across financial years within the six-month period.The Court further noted that the legislature recognized the ambiguity created by this interpretation and, by the Finance (No.2) Act, 2014 (effective from 1.4.2015), inserted a second proviso to Section 54EC(1) to clarify that the total investment in specified assets from capital gains arising from one or more assets during the financial year of transfer and the subsequent financial year shall not exceed Rs. 50 lakhs.The legislative memorandum and explanatory notes accompanying the Finance Bill 2014 were cited to demonstrate that the amendment aimed to remove the ambiguity and prevent splitting investments across two financial years to claim exemption exceeding Rs. 50 lakhs. However, this amendment applies prospectively from assessment year 2015-16 onward, and does not affect prior years.Applying this legal framework to the facts, the Court held that since the investments were made within six months but spanned two financial years, the assessee was entitled to claim exemption for Rs. 1 crore (Rs. 50 lakhs in each financial year). The Court rejected the applicability of the Areva T&D India Ltd. decision to the facts, as that case concerned a challenge to the validity of a notification and was rendered infructuous by subsequent legislative amendments incorporating the investment limit into the statute itself.The Court also emphasized that the proviso as it stood before 1.4.2015 did not impose a cumulative cap across financial years, and the legislative amendment was intended to clarify and restrict future claims, not to retrospectively alter the law applicable to the assessment year 2009-10.Conclusions on Issues:The Tribunal was justified in relying on its earlier decision despite a pending appeal before the High Court.The proviso to Section 54EC(1) limits investment to Rs. 50 lakhs per financial year, not cumulatively across financial years within the six-month period.Investments made in two different financial years within six months of transfer qualify for exemption separately, allowing an aggregate investment of Rs. 1 crore in the facts of this case.The legislative amendment effective from 1.4.2015 clarifies the limitation prospectively and does not affect the assessment year in question.The Areva T&D India Ltd. decision is not applicable to the facts and period under consideration.Significant Holdings:The Court stated verbatim:'5. The key issue that arises for consideration is whether the first proviso to Section 54EC(1) of the Act would restrict the benefit of investment of capital gains in bonds to that financial year during which the property was sold or it applies to any financial year during the six months period.7. On a plain reading of the above said provision, we are of the view that Section 54EC(1) of the Act restricts the time limit for the period of investment after the property has been sold to six months. There is no cap on the investment to be made in bonds. The first proviso to Section 54EC(1) of the Act specifies the quantum of investment and it states that the investment so made on or after 1.4.2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees. In other words, as per the mandate of Section 54EC(1) of the Act, the time limit for investment is six months and the benefit that flows from the first proviso is that if the assessee makes the investment of Rs. 50,00,000/- in any financial year, it would have the benefit of Section 54EC(1) of the Act.'10. The legislature has chosen to remove the ambiguity in the proviso to Section 54EC(1) of the Act by inserting a second proviso with effect from 1.4.2015... The intention of the legislature probably appears to be that this amendment should be for the assessment year 2015-2016 to avoid unwanted litigations of the previous years. Even otherwise, we do not wish to read anything more into the first proviso to Section 54EC(1) of the Act, as it stood in relation to the assessees.11. In any event, from a reading of Section 54EC(1) and the first proviso, it is clear that the time limit for investment is six months from the date of transfer and even if such investment falls under two financial years, the benefit claimed by the assessee cannot be denied.'Core principles established include:The exemption under Section 54EC(1) is subject to a six-month investment window post-transfer of the asset.The Rs. 50 lakh investment cap applies per financial year, not cumulatively across financial years within the six-month window (prior to 1.4.2015 amendment).Legislative amendments clarifying ambiguous provisions apply prospectively and do not affect past assessment years.Final determination was that the assessee was entitled to claim exemption for Rs. 1 crore invested in two financial years within six months of transfer, and the Revenue's appeal was dismissed with no costs.