Deputy Commissioner of Income-tax
IT Appeal Nos. 951 & 963 (Kol.) of 2011 –
Assessment Year 2007-08
Date of Decision – June 1, 2012
Mahavir Singh, Judicial Member – Both these appeals by revenue are arising out of separate orders of CIT(A)-VIII, Kolkata in Appeal No. 286 & 285/CIT(A)-VII1/Kol/09-10 dated 17.02.2011. Assessments were framed by DCIT, Circle-8, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Years 2007-08 vide his separate orders both dated 30.11.2009. Since grounds are common and facts are identical, we dispose of both these appeals together by consolidated order.
2. The only common issue in these two appeals of revenue is, whether the assessee is eligible for deduction u/s. 54EC of the Act 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) of the Act. For this, revenue has raised following three grounds which are common in both the appeals except the quantum:
“1.That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in directing the Assessing Officer to allow deduction u/s. 54EC in the hand of the minor daughter of the assessee before the income from long term capital gains is clubbed with the income of the assessee u/s. 64(1A) of the I. T. Act, 1961.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating the minor as an assessee within the meaning of section 64(1A) read with section 2(7) of the I. T. Act, 1961 even for the Assessment Year 2007-08.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in recording his opinion that the limit of Rs.50,00,000/- under section 54EC of the I. T. Act, 1961 is applicable for investment in eligible bonds with effect from 1st April, 2007.
3. We will take the facts from ITA No. 963/K/2011 in the case of Shri Shankar Sharma. Brief facts are that during the relevant previous year relevant to this assessment year assessee earned LTCG on sale of shares. The assessee’s minor children viz. Master Keshab Sharma and Miss Shakshi Sharma, being beneficial owners of shares, earned LTCG on sale of beneficial shares. The assessee and minor children purchased REC Capital Gain Bonds amounting to Rs.1.39 cr. and claimed deduction u/s. 54EC of the Act. The assessee earned LTCG on sale of 5500 shares of ARC India Ltd. at Rs.5,51,26,780/- and invested a sum of Rs.50,00,000/- in REC Capital Gains Bond and claimed deduction u/s. 54EC of the Act. Similarly, minor daughter Miss Shakshi Sharma sold shares of ARC India Ltd. numbering 495 shares and earned LTCG of Rs.49,73,895/- and invested a sum of Rs.49.50 lacs in REC Capital Gains Bond and assessee claimed equivalent deduction of this amount u/s. 54EC of the Act. Similarly, minor son Master Kesav Sharma sold 400 shares of ARC India Ltd. for a sum of Rs.39,56,570/- and invested a sum of Rs.39.50 lacs in REC Capital Gain Bonds and claimed equivalent deduction u/s. 54EC of the Act. The AO while framing assessment u/s. 143(3) of the Act clubbed LTCG for minor children Miss Shakshi Sharma and Master Kesav Sharm in their hands at Rs.49,73,895/- and Rs.39,56,570/- respectively. But Assessing Officer disallowed the deduction claimed by assessee on account of two minors at Rs.49.50 lacs and Rs.39.50 lacs respectively and restricting deduction u/s. 54EC of the Act at Rs.50 lacs invested by assessee. Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of assessee and deleted the disallowance. Aggrieved, revenue is in appeal before us.
4. Before us Ld. Sr. DR Shri P. S. Dutta relied on section 54EC of the Act and argued that as per explanation to section 54EC(3)(b) of the Act and as per CBDT Notification no. 380/2006 dated 22.12.2006 providing limit on the amount of investment by an assessee in REC Bond and maximum limit prescribed at Rs.50 lacs, which is to be adhered by the Assessing Officer and he rightly allowed the claim of assessee by restricting the deduction u/s. 54EC of the Act at Rs.50 lacs. According to Ld. Sr. D.R., benefit of deduction is available to an assessee and in the present case there is only one assessable entity being the individual Shri Shankar Sharma, the present assessee, for the purpose of computation of total income under the Act. According to him, his daughter Miss. Shakshi Sharma and his son Master Kesav Sharma cannot be termed as independent assessee or independent person for the purpose of this Act being minors and their income is only clubbed in the hands of the assessee. Hence, he urged that the order of Assessing Officer be restored and that of CIT(A) be cancelled.
5. On the other hand, Ld. counsel Shri S. M. Surana, appearing for assessee, first of all drew our attention to the provision of section 54EC of the Act prior to its amendment from 01.04.2007, which reads as under:
“54EC Capital gain not to be charged on investment in certain bonds.
“(1) Where the capital gain arises from the transfer of a long-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, —
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall, not be charged under section 45.”
Ld. Counsel for the assessee argued that the original section did not put any limit with regard to investment made in specified assets for claiming deduction u/s. 54EC of the Act from LTCG but the proviso was added to this section 54EC of the Act w.e.f. 01.04.2007 and the relevant proviso reads as under:Online GST Certification Course by TaxGuru & MSME- Click here to Join
“Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset “by an assessee” during any financial year does not exceed fifty lakh rupees.
According to Ld. Counsel the aforesaid proviso restricted the deduction at Rs.50 lacs but the same was added and is applicable only in case investments made on or after 01.04.2007 and in the present case the assessee has made investment prior to 01.04.2007. Ld. Counsel for the assessee further relied on the CBDT Notification No. 380 of 2006 dated 22.12.2006 and he referred to the relevant Notification which reads as under:
“In exercise of the powers conferred by sub”-clause (ii) of clause (b) of the Explanation to section 54EC of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the bonds for an amount of Rupees three thousand five hundred crores (redeemable after three years) to be issued by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), during the period from 26th day of December, 2006 to 31st day of March, 2007 (both days inclusive), as ‘long-term specified asset’ for the purposes of the said section subject to the following conditions, namely :—
(i) a person who has made an investment of an amount aggregating more than fifty lakhs rupees in the bonds notified as long-term specified asset by the Central Government for the purposes of section 54EC of the Income-tax Act 1961 (43 of 1961) in the Official Gazette vide notification number S.O. 963(E), dated the 29th June, 2006 or notification number S.O. 964(E), dated the 29th June, 2006, shall not be allotted any bonds notified as long-term specified asset by this notification.
(ii) a person who is not covered by clause (i), shall not be allotted the bonds notified as long-term specified asset’ by this notification, for any amount which exceeds the amount of fifty lakhs rupees as reduced by the aggregate of the investment, if any, made by him in the bonds notified as long-term specified asset’ by the Central Government for the purposes of section 54EC of the Income-tax Act 1961 (43 of 1961) in the Official Gazette vide notification number S.O. 963(E), dated the 29th June, 2006 or notification number S.O. 964(E) dated the 29th June, 2006.”
He also referred to the Notification no. 143 of 2006 dated 29.06.2006 issued by Rural Electrification Corporation Ltd., which reads as under:
“In exercise of the powers conferred by sub-clause (ii) of clause (b) of the Explanation to section 54EC of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the bonds for an amount of Rupees four thousand five hundred crores (redeemable after three years) to be issued by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), during the financial year 2006-07 as long-term specified asset for the purpose of the said section.”
6. In view of the above, Ld. Counsel for the assessee stated that notification says that a person shall not be allotted bonds more than Rs. 50 lacs. According to him, word ‘person’ has been defined in section 2(31) of the Act which includes an individual and there cannot be any dispute that minor children is an individual separate from his parent who is also an individual and a person as per the provisions of section 2(31) of the Act. According to him, there is no limit for separately allotting the bond upto Rs.50 lacs for each of such person nor there is any limit mentioned for claiming deduction of an assessee. Ld. Counsel for the assessee referred to the provision of section 54 of the Act for clubbing of income of spouse, minor child etc. He also referred to definition of person as mentioned u/s. 2(31) of the Act. Ld. Counsel also referred to the decisions of ITAT, Banglore Bench in the case of Bajaj Ashok Chunnilal v. DCIT  293 ITR 48 (Banglore), ITAT, Mumbai Bench in the case of Smt. Babita P. Kanungo v. DCIT  277 ITR 177 (Mum), in the case of JCIT v. Govind Rohira Alias Srichand Rohra  95 ITD 77 (Mum) and of Chandigarh Bench in the case of ACIT v. Madan Lal Bassi  88 ITD 557 (Chd.).
7. We have heard rival submissions and gone through facts and circumstances of the case. We find from the notification issued by Rural Electricity Corporation Ltd. dated 29.06.2006 (reproduced above in para 5) that there is nothing in the above notification in so far as the deduction is to be allowed u/s. 54EC of the Act. From the above notification issued by Rural Electricity Corporation Ltd., which says that “a person” shall not be “allotted” bonds more than Rs. 50,00,000/-. This word “Person” has been defined in sec. 2(31) of the Act, which includes an individual. The relevant definition of 2(31) reads as under:
“(31) “person” includes —
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses; Explanation – For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains”
From the above definition of ‘person’ it is clear that in case minor is an assessable entity even though his income is clubbed u/s. 64(1) of the Act in the hands of his parents, he is to be considered separate than his parents who is also an individual and a person as per this definition. There was no limit in separately allotting bonds up to Rs. 50,00,000/- to each of such person nor there is any mentioned limiting the deduction to an assessee. Section 54EC (3) Explanation (b) of the Act, suggests that the conditions for providing a limit on the amount of investment by an assessee can be notified or could have been notified by the Central Govt. But in the notification relied on the by the AO as aforesaid, no limit of investment by an “assessee” is prescribed. But the condition for allotment of bonds to a single person is specified. In fact the issuing authority was fully aware of the notification and taking into account the fact that it was being issued to three different “persons” the allotment was made. The deduction or otherwise was not the subject matter of notification rather it was out of the purview of the aforesaid notification. In view of the above even if section 54EC(3) Explanation (b) of the Act is considered, assessee’s case falls outside the embargo put on by the amendment made in this section. Even section 64(1A) speaks of the addition of the total income of minor child and income of a minor child for the purpose of inclusion u/s 64(1A) will be his total income. The relevant provisions of section 64 (1A) of the Act reads as under:
64 Income of individual to include income of spouse, minor child, etc.
“(1A) In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child not being a minor child suffering from any disability of the nature specified in section 80U”.
8. We find that this section says that in computing the “total Income” of an Individual all such income as arises or accrues to the minor child. The word ‘such’ means the total income of the minor, because ‘such’ is preceded by the word total income. The word ‘such’ means the “same” or of the “same nature” as has been defined in all the dictionaries and here the word ‘such’ is preceded by the word total income. The word total income has been defined U/s. 2(45) of the Act which is as under:
(45) “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act;”
From the above definition of total income, it is clear that it is not the gross total income but the income of any person, who is an assessee, as computed under the provisions of the Act, means the total income as computed under the provisions of the Act is to be added. As referred by Ld. Counsel CBDT Circular No. 636, dated 31-8-1992 and scope of this sections is explained in para-36 page 31 of said circular reported in 198 ITR(St.)1 which reads as under :-
“Clubbing of Minor’s Income”
“36. Section 64 of the Income-tax Act provided that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to a minor child of such individual from, –
9. We further find support from the decision of Bangalore Bench of this ITAT in the case of Bajaj Ashok Chunnilal (supra), wherein it is held as under:
“Considering all the aforesaid decisions it can be held that unless and until the income of the minor child is computed, the clubbing provision will not apply.”
Further, Mumbai Bench of this Tribunal in the case of Smt. Babita P. Kanungo (supra), held as under:
“From the above, we find that in computing total income of an assessee, all such income as arises or accrues to his minor child is to be clubbed. The words “all such income” in this section refer to total income and we are of the considered opinion that for giving effect to this section, first the total income of the minor children is to be computed and then such total income only of the minor children is to be clubbed with the income of the parent.”
We after going through provisions of the Act are of the view that capital gain which is the subject matter of this appeal is to be computed under Chapter IV-E of the Act. Section 54EC provides that capital gain not to be charged on investment on certain bonds. Therefore the investments made in certain bonds shall be outside the scope of capital gain for the purpose of computation of total income itself. It is not a deduction under Chap. VIA which comes into picture only after computing the total income and the deductions are being allowed from gross total income as per section 80A(l). As stated earlier for the purpose of computation of gross total income from capital gain, any amount invested as per the provision of section 54EC is outside the computation of total income itself. It may also be mentioned that there is difference between the word “assessee” and the word “person”. The notification on which the AO relied upon 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. The bonds have been allotted to the three persons as per the notification itself and the assessee is entitled to the benefits as per provisions of sec. 54EC under which restriction have been put only for investments from 1.4.2007. Further we have drawn support from JCIT v. Govind Rohira Alias Srichand Rohra  095 ITD 0077 (Mum), wherein it is held as under:
Firstly, it is to be noted that a minor is entitled to have his own income. Minor could be an owner of house of his own. If the minor in case was having such a house of his own, there was no difficulty in allowing his claim under section 54F of the Act. Only because minor is not having a house of his own, it cannot be said that he is not entitled for the benefits contemplated under this section. The business is carried on behalf of the minor by his parent. The CIT (A) in para 3 records that shares were held by assessee in Ramani Hotels Pvt. Ltd. bought on different dates between 1988 and 1993. Such shares were sold on 21.4.1994 for a consideration of Rs. 37,21,000. The capital gain worked out to Rs. 31,37,392, but, a residential house was bought for Rs. 31,99,000 in the name of assessee’s minor son and it was claimed the benefit under section 54 of the Act. The income arises from the sale of the shares stood in the name of the assessee’s minor son. If he could legally purchase and sell the shares through his father, the income realized from this sale also can be utilised for the purchase of the house property acting through his father. Merely because the income is clubbed with the income of the assessee’s father, there is no meaning in saying that he is not entitled for the benefits contemplated under the section as rightly contended by the assessee. The minor son is not a non-entity, but, he acts only through his parent. In the case of S. K. Naik (supra), the Hon’ble High Court held that “it would be contrary to the scheme of the Act itself not to allow deductions before clubbing the income of the wife with that of her husband.”
This was the case where we find income was clubbed in the hands of her husband and where the revenue did not allow the standard deduction. The Hon’ble High Court held concurring with the Tribunal that the standard deduction is to be allowed. Further more in the case of Segu Harnath (supra), the Hon’ble A.P. High Court held “Where the assessee was a partner in a firm and his minor daughter was. admitted to the benefit of partnership in the firm and assessee borrowed funds and invested the same in the partnership firm in the name of his minor daughter, the interest payable by the assessee on capital borrowed by the assessee on behalf of the minor daughter was deductible under section 67(3) from the share income arising to the minor child and it was only the resultant income, after deduction which was to be included in the total income of the assessee under section 64(1) (iii)”. The above judgment clearly shows that even if the income of the minor is clubbed with the income of the other individual, all the deductions are to be allowed while computation of income of the minor/spouse and only the net taxable income is to be clubbed under section 64. In view of the above, we allow the claim of assessee and direct the AO to recompute the long term capital gains accordingly. The facts and circumstances in ITA No.951/K/2011are exactly similar, hence, taking a consistent view, we allow the claim in this appeal also.
10. In the result, appeals of revenue are dismissed.