Where An Assessee Makes Investment In The Specified Bonds On Receipt Of Advance As Per An Agreement To Sale, Whether He Is Entitled To Claim The Benefit Under Section 54EC Of The Income Tax Act, 1961? Yes
Section 54EC of the Income Tax Act, 1961(for short ‘the Act’), according to its conditions, exempts capital gains from taxation in case of investment in specified bonds therein.
Recently, in CIT-II, Pune vs. Subhash Vinayak Supnekar [ITA No. 1009 of 2014, decided on 14.12.2016],the short question that arose for consideration before Bombay High Court was whether an amount received on sale of a capital asset as an advance on the basis of Agreement to Sale and the same being invested in specified bonds before the final sale, would entitle the respondent assessee to the benefit of Section 54EC of the Act.
Facts & Decision in brief:
An Agreement to Sale for the captioned property was entered into on 21.02.2006. The final sale took place under a Sale Deed dated 05.04.2007. The respondent assessee had invested an amount of Rs.50 lakhs from the advance received under the Agreement to Sale in the Rural Electrification Corporation Ltd. bonds on 02.02.2007. The AO as well as the CIT(A) held that the assessee was not entitled to the benefit of Section 54EC of the Act as the amounts were invested in the bonds prior to the sale of the subject property on 05.04.2007. The order of the ITAT placed reliance upon the decision of its coordinate Bench in Bhikulal Chandak HUF vs. ITO, 0126 TTJ 545, wherein it was held that where an assessee makes investment in bonds as required under Section 54EC of the Act on receipt of advance as per the Agreement to Sale, then the assessee is entitled to claim the benefit of Section 54EC of the Act.
The grievance of the Revenue before Bombay HC was that the Agreement to Sale dated 21.02.2006 was never produced before the authorities. Therefore, the respondent assessee was not entitled to the benefit of Section 54EC of the Act.
The learned judges of the Bombay High Court found that the Sale Deed was dated 05.04.2007 and that the Agreement to Sale had been entered into on 21.02.2006 in respect of the subject property and the amounts in question were received by the vendor (respondent assessee) under that Agreement to Sale and these amounts when received as advance under an Agreement to Sale of a capital asset are invested in specified bonds, the benefit of Section 54EC of the Act is available. On almost identical facts, Bombay High Court in Ms. Parveen P. Bharucha vs. DCIT [(2012)348 ITR 325], held that the earnest money received on sale of asset, when invested in specified bonds under Section 54EC of the Act, is entitled to the benefit of Section 54EC of the Act. This was in the context of reopening of an assessment and reliance was placed upon CBDT Circular No. 359 dated 10th May, 1983 in the context of Section 54E of the Act.
The learned judges of the Bombay High Court held that the question as proposed for consideration in the present facts did not give rise to any substantial question of law and they dismissed the appeal by Revenue.