Section 54EC Exemption cannot be denied merely because bonds are in joint names

ITO Vs Smt. Saraswati Ramanathan (ITAT Delhi)

The assessee is an individual. During the previous year relevant to the assessment year 2004-05 she sold 500 shares of ITC Ltd. for Ea.5,43,125 and credited the proceeds to her bank account with ICICI Bank, Gurgaon. She had inherited the shares from her husband who passed away on 1-4-1993. She invested Rs. 5,00,000 out of the sale proceeds in Rural Electrification Bonds- REC 54EC Series III on 24-3-2004. The investment was in the joint names of herself, being the first name, and her son A.R. Sridhar. She claimed exemption from capital gains tax under Section 54EC which was negatived by the Assessing Officer on the ground that the investment in the bonds was in the joint names which is not permitted under the above section under which it is the assessee who has to invest the gains in her own name. The CIT(A) however held that there is no such requirement in the section and the assessee having invested the sale proceeds of the shares in the REC bonds without any contribution from her son the section was complied with and the exemption cannot be denied. He further noted that the assessee was 69 years old and it was merely a matter of convenience on her part and to ensure that there would be no hassles in future that she made the investment in the joint names, her name being the first name and the son’s name being second. 

ITAT agreed with the view taken by the CIT(A) that the assessee is eligible for the exemption under Section 54EC. I further find that the Mumbai bench, ITAT has held in the case of JCIT v. Smt. Armeda K. Bhaya (2005), 95 ITD 313 (copy filed) that for the purpose of Section 54 of the Act, it is sufficient compliance with the section that the assessee purchased the new flat in the names of himself, his father and mother and that it was not the requirement of the section that the new flat should be in the assessee’s exclusive name. It was held that the main condition of the section was that the sale consideration should be invested in the new house. I respectfully follow the ratio of the above decision. I accordingly confirm his order and dismiss the appeal filed by the revenue with no order as to costs.

In the following decisions also, exemption has been allowed to the assessee for investment in the sole/joint name with wife :

(1) CIT v. V. Natrajan, 287 ITR 271 (Mad.)

(2) CIT v. Gurnam Singh, 327 ITR 278

(3) JCIT v. Smt. Armeda K. Bhaya, 95 ITD 313 (Mum.)

Income Tax Appellate Tribunal – Delhi

Ito Vs Smt. Saraswati Ramanathan on 19 July, 2007

Equivalent citations: 2008 300 ITR 410 Delhi, (2008) 114 TTJ Delhi 803

ORDER

R.V. Easwar, Vice President

1. This appeal by the department is directed against the order of the CIT(A) by which he directed the Assessing Officer to allow exemption under Section 54EC of the Income Tax Act to the assessee.

2. The assessee is an individual. During the previous year relevant to the assessment year 2004-05 she sold 500 shares of ITC Ltd. for Ea.5,43,125 and credited the proceeds to her bank account with ICICI Bank, Gurgaon. She had inherited the shares from her husband who passed away on 1-4-1993. She invested Rs. 5,00,000 out of the sale proceeds in Rural Electrification Bonds- REC 54EC Series III on 24-3-2004. The investment was in the joint names of herself, being the first name, and her son A.R. Sridhar. She claimed exemption from capital gains tax under Section 54EC which was negatived by the Assessing Officer on the ground that the investment in the bonds was in the joint names which is not permitted under the above section under which it is the assessee who has to invest the gains in her own name. The CIT(A) however held that there is no such requirement in the section and the assessee having invested the sale proceeds of the shares in the REC bonds without any contribution from her son the section was complied with and the exemption cannot be denied. He further noted that the assessee was 69 years old and it was merely a matter of convenience on her part and to ensure that there would be no hassles in future that she made the investment in the joint names, her name being the first name and the son’s name being second. He thus allowed the appeal.

3. The department is in appeal. I have heard the rival contentions and perused the section, but I find that there is no requirement in the section that the investment should be in the name of the assessee. The requirement, as I see it, having regard to the object of the section to exempt capital gains if the sale proceeds find their way into certain specified assets, is that the sale proceeds of the capital asset must be invested certain specified assets such as bonds of NABARD, National Highways Authority of India, Rural Electrification Corporation Ltd., National Housing Bank etc. These are corporations established by the Government of India for development of infrastructure in the country and to muster funds for the purpose an incentive to invest in these corporations carrying out infrastructure development activities was given in the form of exemption from capital gains tax if the sale proceeds are invested in the bonds issued by these corporations. Section 54EC was inserted with effect from 1-4-2001 by the Finance Act, 2000. In the Circular No. 794 dated 9-8-2000 (See 245 ITR St/.21), in para.30.1 thereof it was observed that the object of Sections 54EA 54 EC, which were being replaced by Section 54EC, was “to give an incentive to the development of infrastructure”. In para.30.2, it was stated that Section 54EC is being introduced in the place of Sections 54EA and EB which were being terminated and that Section 54EC “will allow exemption from tax on long-term capital gains, if invested in bonds, targeted exclusively on agricultural finance and highway infrastructure”. In 2001 the section was widened to include bonds issued by Rural Electrification Corporation Ltd. and while explaining the amendment made by the Finance Act, 2001 by Circular No. 14/2001 dated 12-12-2001 (252 ITR St.65) the Board stated in paragraph 39.2 that “since rural electrification, including electrification of villages and energisation of pump sets in rural areas is a matter of priority for the Government” the Act was being amended to include the said bonds. If development of infrastructure is the object, it would hardly matter whether the investment is made in the name of the assessee exclusively or in the joint names of the assessee and somebody else. The only condition is that the funds used for the investment must be traceable to the sale proceeds of the capital asset. That condition is satisfied in this case. In this case, even the investment is in the name of the assessee as the first name; the son’s name appears only as a joint name. The CIT(A) has found that the son did not contribute anything to the investment and this finding is not in dispute. The consequences that flow from including the son’s name as a joint name are not relevant for the purpose of granting exemption under Section 54EC to the assessee. At best or worst, it may perhaps be stated that the assessee had made a gift of 50% of the REC bonds to his son. But the exemption cannot, in my humble opinion, be denied altogether.

4. The CIT(A) has further noted that the assessee was 69 years old at the relevant time and it was only a matter of convenience and to avoid any problem in future that the son’s name was included. While availing of the exemptions under the Act of the nature of Section 54EC, it is better to remember that the assessee is required to make an investment. In doing so, the assessee must be accorded the freedom to be practical and wise. Normally, when an investment is made, particularly if it is made by a person of advanced age, precautions are taken to include another name – the name of a much younger person, preferably a heir (may be spouse or children) – is included so that no problems arise in future in case the person investing dies. It is quite common to find a person investing in a house to include the name of the spouse as a joint name. Even in case of financial assets such as bank deposits it is quite common to find people investing in joint names, more often including the name of the spouse or children. The object in doing so is merely to avoid any problem in future in case anything untoward should happen to the investor. I find it difficult to imagine that it would have been the intention of the Act to place restrictions on such freedoms given to the citizens of the country or on their right to take such precautions in the interests of a secure future. Income-tax is only one aspect of life, and that too for a miniscule part of the citizens of this country; while everyone is given the freedom to make investments in any name he likes, there is no reason why such freedom should be taken away in the case of income-tax assessees, when the substantial ingredients of the section are complied with and the sale proceeds of the capital asset are channeled into the assets in the national interest which is the main and vital requirement of the section. In any case, the provisions of the Act cannot be interpreted in an unreasonable manner, for, tax laws “like all other laws, have to be interpreted reasonably and in consonance with justice” as held by His Lordship Justice K.S. Hegde, speaking for the Supreme Court in R.B. Jodha Mal Kuthiala v. CIT ; again His Lordship  observed in CGT v. N.S. Getti Chettiar (1971) 82 ITR 599 (Supreme Court) that: “Words in a statute are not to be interpreted by having those words in one hand and the dictionary in the other. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose they are intended to serve”. Further it is a well-settled rule of interpretation in income-tax law that a beneficial section has to be construed liberally, having due regard to the object which it intends to serve. The Assessing Officer has interpreted the word “invested” in Section 54EC to mean “invested in the assessee’s name”, an approach which has no justification as it adds words into the section and also ignores the purpose which the section is intended to serve.

5. For the above reasons, I agree with the view taken by the CIT(A) that the assessee is eligible for the exemption under Section 54EC. I further find that the Mumbai bench, ITAT has held in the case of JCIT v. Smt. Armeda K. Bhaya (2005), 95 ITD 313 (copy filed) that for the purpose of Section 54 of the Act, it is sufficient compliance with the section that the assessee purchased the new flat in the names of himself, his father and mother and that it was not the requirement of the section that the new flat should be in the assessee’s exclusive name. It was held that the main condition of the section was that the sale consideration should be invested in the new house. I respectfully follow the ratio of the above decision. I accordingly confirm his order and dismiss the appeal filed by the revenue with no order as to costs.

Order pronounced in open court this 19th day of July 2007 after conclusion of the hearing and in the presence of the parties.

NF