54EC allowed to the extent of Rs 1 crore if split equally between 2 financial years – Chennai ITAT


Smt Sriram Indubal v ITO (ITA No: 1950 MDS of 2012 dtd 31.01.2013) – Chennai ITAT

Background:

The assessee had sold a property comprising of land and building for a consideration of Rs. 3,46,50,000. Sale proceeds were invested by the assessee in 54EC bonds in two instalments i.e. first Rs. 50 lakhs in REC Bond on 27.2.2008 and second Rs. 50 lakhs in NHAI Bond on 27.06.2008.

The AO held that investments under section 54EC had to be made within six months from the date of transfer of capital asset. Since the statute pegged the investment for which exemption was allowable in an assessment year to Rs. 50 lakhs, the second sum of Rs. 50 lakhs invested on 30.6.2008 was not eligible for deduction under Section 54EC of the Act.

Assessee’s contentions:

  • Ceiling mentioned in proviso to Section 54EC(1) was applicable for investment made in a financial year only. The ceiling was to be applied year-wise and not transaction-wise.
  • Both the investments, i.e. in REC as well as NHAI were done within six months from the date of transfer of capital asset. Therefore, both of them were eligible for exemption under Section 54EC of the Act
  • Reliance was placed on ruling of Ahmedabad ITAT in the case of Aspi Ginwala Shree Ram Engg. & Mfg. Industries v. Asstt. CIT [2012] 52 SOT 16

Tax Authority’s arguments:

  • The Explanatory Memorandum to Finance Act, 2007 which introduced proviso to Section 54EC(1) was clear in that limitation placed was for ensuring equitable distribution of available exempt assets so that all assessees could take advantage of it.
  • Maximum exemption that could be given was Rs. 50 lakhs for each transaction which gave rise to capital gains.

HELD:

  • The first condition mentioned in Section 54EC(1) is that the investment has to be made within a period of six months from the date of transfer of capital asset. Since the date of transfer in the given is 18.2.2008, six months period will elapse on 17.8.2008.
  • Assessee had purchased REC Bonds worth of Rs. 50 lakhs on 27.2.2008 and Bonds of NHAI for Rs. 50 lakhs on 30.6.2008.
  • Proviso to section 54EC(1) mentions that investment on which an assessee could claim exemption under Section 54EC(1) shall not exceed Rs. 50 lakhs during a financial year. So, the exemption provision has to be construed not transaction-wise but, financial year-wise
  • Last sentence of the Explanatory Memorandum clearly states that the exemption for investment cannot exceed Rs. 50 lakhs in a financial year. Therefore, if the assessee is able to keep the six months’ limit from the date of transfer of capital asset, but, still able to place investment of Rs. 50 lakhs each in two different financial years, we cannot say that the restrictive proviso will limit the claim to Rs. 50 lakhs only.

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