Investment in REC Bonds within six months qualifies for Section 54EC deduction despite deemed short-term capital gain

The ITAT Ahmedabad allowed the assessee's appeal regarding deduction under Section 54EC for investment in REC Bonds. The tribunal held that exemption under Section 54EC cannot be denied merely because short-term capital gain was deemed under Section 50, following Gujarat HC precedent in Aditya Medisales Ltd. Additionally, the tribunal ruled that investment of Rs. 50 lakhs each in two financial years within six months of asset transfer qualifies for deduction, citing Madras HC decision in C. Jaichander. The tribunal applied General Clauses Act 1897 to interpret "six months" as British calendar months, determining the assessee's investment on 30.06.2014 fell within the prescribed period from the 16.12.2013 asset sale date.

---

---

Issues Involved:
1. Disallowance of deduction under Section 54EC of the Income Tax Act.
2. Enhancement of income by treating the capital gain as short-term capital gain.
3. Legality of the order passed by the Ld. CIT(A).

Summary:

Issue 1: Disallowance of Deduction under Section 54EC
The assessee filed an appeal against the disallowance of Rs. 50,00,000/- claimed under Section 54EC. The Assessing Officer (A.O.) argued that the amendment effective from 01.04.2015 clarified the maximum deduction limit of Rs. 50 lakhs under Section 54EC. The A.O. disallowed the excess claim of Rs. 50 lakhs as the second investment in REC Bonds was made beyond the prescribed six-month period.

Issue 2: Enhancement of Income as Short-Term Capital Gain
The Ld. CIT(A) further enhanced the income by disallowing the deduction of Rs. 50 lakhs invested in REC Bonds on 31.03.2014. It was held that the asset sold was a depreciable asset, and under Section 50, the profit from such a sale is deemed to be short-term capital gain, regardless of the holding period. Thus, the assessee was not eligible for exemption under Section 54EC.

Issue 3: Legality of the Order by Ld. CIT(A)
The assessee contested the legality of the order passed by Ld. CIT(A), citing precedents where courts held that the deeming fiction under Section 50 does not affect the eligibility for exemption under Section 54EC if the asset is otherwise a long-term capital asset.

Tribunal's Findings:
1. On Disallowance of Deduction:
The Tribunal referred to the Gujarat High Court's ruling in Aditya Medisales Ltd., which held that exemption under Section 54EC cannot be denied due to the deeming fiction of short-term capital gain under Section 50. The Tribunal also cited the Madras High Court's decision in C. Jaichander, which allowed deduction for investments made in two different financial years within six months from the date of transfer.

2. On Enhancement of Income:
The Tribunal noted that the amendment effective from 01.04.2015 does not apply retrospectively. For the assessment year 2014-15, the assessee's investment of Rs. 50 lakhs each in two financial years within six months was eligible for deduction under Section 54EC.

3. On Legality of the Order:
The Tribunal concluded that the investment in REC Bonds made on 30.06.2014 falls within the six-month period as interpreted under the General Clauses Act, 1897, and thus, the assessee is eligible for the claimed deduction.

Conclusion:
The Tribunal allowed the appeal, holding that the assessee is entitled to the deduction under Section 54EC for the investments made in REC Bonds, both within the stipulated six-month period. The order pronounced in open court on 20/12/2023.

---