SECTION 54E – EXEMPTION OF LONG-TERM CAPITAL GAINS WHEN CONSIDERATION IS INVESTED IN SPECIFIED ASSETS
- Assessee investing earnest money in specified assets before date of transfer – Whether amount so invested qualifies for exemption
- Section 54E provides for exemption of long-term capital gains if the net consideration is invested by the assessee in specified assets within a period of six months after the date of such transfer. A technical interpretation of section 54E could mean that the exemption from tax on capital gains would not be available if part of the consideration is invested prior to the date of execution of the sale deed as the investment cannot be regarded as having been made within a period of six months after the date of transfer.
- On consideration of the matter in consultation with the Ministry of Law, it is felt that the foregoing interpretation would go against the purpose and spirit of the section. As the section contemplates investment of the net consideration in specified assets for a minimum period and as earnest money or advance is a part of the sale consideration, the Board have decided that if the assessee invests the earnest money or the advance received in specified assets before the date of transfer of asset, the amount so invested will qualify for exemption under section 54E.
Circular : No. 359 [F. No. 207/8/82-IT(A-II)], dated 10-5-1983.
JUDICIAL ANALYSIS
EXPLAINED IN – In Ramesh Narhari Jakhadi v. ITO [1992] 41 ITD 368 (Pune-Trib.) it was observed that inasmuch as the above circular has been issued by the Board keeping in view the purpose and spirit of section 54E, same consideration would apply for relief under section 54B also, because if an agriculturist is dispossessed of his agricultural land and obtains possession of another agricultural land for the purpose of being used for agricultural purposes, the same benefit available under the Board’s circular should be extended to the assessee governed by section 54B also. In this connection, it is also necessary to consider the question whether the investment should be made in new agricultural land necessarily within a period of two years after the date of transfer or not. Applying the spirit of the circular of the Board, it could be said that the investment made prior to the date of transfer would also be eligible and should be considered as investment made out of sale proceeds. The limit of two years’ period after transfer is an outer limit, while the investments made earlier to the date of transfer out of the earnest money or advances should be considered to fall within two years’ time limit period and which would be the inner limit, so to say.
REFERRED TO IN – The above circular was referred to in B.K. Chadha v. ITO [1987] 27 TTJ (Del. – Trib.) 485, with the following observations :
“. . . . The Circular No. 359 issued by the CBDT on 10-5-1983 also does not help the assessee’s case. That circular of CBDT applies to a situation where a part of net consideration received on sale of property is invested in a specified asset prior to the date of the execution of the sale deed. It has been stated by the Board that even when the investment in specified assets is made on a date prior to the date of the execution of the sale deed the exemption under section 54E should not be denied on the ground that the investment is not made within a period of six months after the date of transfer. That situation does not obtain in the present case. . . .” (p. 489)
EXPLAINED IN – Dy. CIT v. Tollygunj Club [1995] 52 ITD 166 (Cal.) with the following observation
“The CBDT’s Circular No. 240, dated 17-5-1978 advisedly and significantly did not stipulate that sub-section (3) would be applicable from the assessment year 1978-79, which was normally done in such circulars explaining the newly introduced statutory provisions. It only stated that the provision would take effect from 1-4-1978 which meant that the benefit thereof would be available to all assessees who received additional compensation after that date. Even as a matter of construction, sub-section (3) of section 54E has to be construed only as procedural and having retrospective application, having regard to the object for which it was introduced. Therefore, the additional compensation having been invested entirely in specified assets in accordance with section 54E(3), the capital gains, even if considered assessable, were exempt from income-tax”
