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Confusion over exemption through tax-saving bonds

Sandeep Shanbhag / 08 Apr 12 | 12:42 AM

Income tax laws provide exemption on gains from selling property if one invests in Section 54EC bonds. Such investment has to be made within six months of the date of sale of the residential property. In April 1, 2007 , a proviso was introduced whereby a maximum of Rs 50 lakh may be invested in such bonds in one financial year. While by no means the amount of Rs 50 lakh is small, especially with respect to capital gains from property, may just not be enough to cover the entire amount of gains.

However, over the years, investors have found a way around the problem. Since one has six months to invest in the bonds, from the time of earning the capital gain, if the transaction is timed between October and March of a year, the six month period would be spread over two financial years. And this, in turn, would enable the taxpayer to double the investible amount from Rs 50 lakh to Rs 1 crore.

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This is precisely the issue that came up recently, before the Jaipur Income Tax Tribunal in the case of the Assistant Commissioner of Income Tax (CIT), Circle-2, Ajmer and Raj Kumar Jain & Sons, a Hindu Undivided Family (HUF).

The case:
The assessee (HUF) had sold a property for Rs 2.47 crore on December 13, 2007 and earned long-term capital gains of around Rs 1.14 crore. The assessee claimed deduction under Section 54EC of Rs 1 crore by investing Rs 50 lakh on March 31, 2008 and the remaining Rs 50 lakh on June 10, 2008.

Note that the entire amount was invested within a period of six months from date of sale of the property. The assessing officer (AO) denied the exemption claim of the assessee on the back of the assessee exceeding the investment limit prescribed in the Section 54EC. And therefore, restricted the assessee’s deduction to up to Rs 50 lakh only.

First appeal:
Upon an appeal lodged by the assessee, the Commissioner – Income Tax (Appeals) or CIT(A) ruled in favour of the assessee by observing that since the investment fulfilled the conditions as laid out in the relevant section, the full deduction of Rs 1 crore should be allowed. The Revenue Department took up the issue before the Income Tax Tribunal.

The CIT(A) defended his stand by observing that from the the main content of Section 54EC and the proviso together, it is clear that the assessee has to make investment within the period of six months to avail of the exemption, whether falling in one financial year or more than that.

Further the words used in the proviso is 'any' and not 'relevant financial year' which implies that the limit of Rs 50 lakh is meant for each financial year. The plain, literal and unambiguous interpretation of the proviso also makes it clear that the amount of investment should not exceed 50 lakh during any financial year which implies that the assessee is free to make investment within a period of six months. Within this period if more than one financial year falls, the investment may exceed Rs 50 lakh.

The Legislature in various exemption provisions contained under Sections 54, 54B, 54F, 54G and so on, has given the assessee a liberty to invest in the purchase / construction of house property within 2-3 years after the date of transfer. Thus, the activities of investment can extend beyond the relevant financial year.

The Revenue Department’s interpretation that the investment can be made once only and in the financial year relating of the subjected assessment year and not beyond that, is completely ignoring the entire scheme of capital gains.

Tribunal’s ruling:
The Tribunal ruled in favour of the Revenue Department. The Bench observed that in cases where the transfer of assets takes place from October 1 to March 31, an assessee will be able to invest Rs 50 lakh in a financial year in which the transfer has taken place and Rs 50 lakh in the subsequent financial year. However, taxpayer who has earned capital gains between April 1 and September 30, of any financial year, will be able to avail deduction of only Rs 50 lakh. Two interpretations of Section 54EC are not possible.

The government’s notification clearly suggested that assessees are entitled deductions to the extent of Rs 50 lakh under Section 54EC. Investment within six months is the investment for that financial year in which transfer has taken place. Hence, subsequent investment is also to be considered as part of the investment in the financial year in which transfer has taken place. Therefore, the CIT(A) was not justified in allowing deduction to the assessee to the extent of Rs 1 crore and therefore, the original order of the AO is being upheld.

Dispute continues:
It is clear from the above discussion that the issue is not free from doubt. Even the income tax authorities do not seem to have a consensus on the matter. Under the circumstances, it would be advisable for taxpayers to refrain from exceeding the Rs 50 lakh limit.

Taxpayers could use Sections 54 and 54EC together. This would not be feasible for everyone. But where the long-term capital gains is earned from sale of a residential house, exemption from tax payable is available if the capital gain is reinvested in another property. At the same time, nowhere does it say that both property and bonds cannot be invested in together. Therefore, if workable, a part of the capital gains may be invested in a residential property and balance if left, may be invested in Section 54EC bonds.


The writer is director, Wonderland Consultants

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