Mumbai ITAT has held in an important case namely Kumarpal Amrutlal Doshi vs. DCIT (ITAT Mumbai) that relief u/s 54EC shall be available even if the bonds are issued after the requisite period of 6 months for investment, if the cheque is issued within the period of 6 months but cheque is en cashed after the requisite period and bonds are also issued after the requisite period of 6 months.
Brief Facts: On 9.8.2005 (AY 2006-07) the assessee earned LTCG on sale of land. U/s 54EC, NABARD bonds were a “specified asset” till 31.3.2006 and the assessee had time till 9.2.06 (6 months) to make the investment. The assessee issued a cheque on 7.2.06 and sent it by courier to NABARD. The cheque was encashed on 13.2.2006 and the bonds were allotted on 15.2.06. The AO & CIT(A) rejected the claim on the ground that (i) NABARD bonds were not a “specified asset” as of 1.4.06 & (ii) the investment was not within 6 months of the transfer.
(i) The department’s argument that for AY 2006-07 only the “specified assets” as of 1.4.06 should be considered is not acceptable. Instead, the law as it stood on the date of transfer of the capital asset has to be applied;
(ii) When a payment is made by cheque, then the ‘date of payment‘ is the ‘date of the cheque‘ even though the cheque may be encashed subsequently. As the cheque was issued within 6 months of the transfer, s. 54EC relief was available even though the cheque was encashed, and bonds were allotted, later.
Full Judgment Text of above is given Below:-
Kumarpal Amrutlal Doshi Vs. DCIT (ITAT Mumbai)
ITA NO. 1523/MUM/2010 (A.Y. 2006- 07)
PER N.V.VASUDEVAN, J.M,
This is an appeal by the assessee against the order dated 6/1/2010 of CIT(A) XXXIII Mumbai relating to assessment year 2006-07. Grounds No.3 to 5 were not pressed by the assessee, therefore, they are dismissed as not pressed.
2. Ground No.1 & 2 raised by the assessee read as follows:
“1. The Learned Commissioner of Income Tax has erred in disallowing the exemption u/s. 54EC of the Act. He has failed to appreciate that the assessee has made the said investment as per the provisions of the Income Tax Act.
2. The learned Commissioner of income Tax has erred in considering the NABARD bond as not eligible for exemption u/s. 54EC.”
3. The assessee is an individual. He filed his return of income declaring long term capital gain on sale of a land at Patlipada in Thane District. There is no dispute that the capital gain on sale of the property by the assessee was Rs. 19,15,972/- and the said capital gain was long term capital gain. The date of transfer of the capital asset was 9/8/2005. The assessee made investment of Rs. 20.00 lacs in NABARD Bonds and claimed exemption from tax on capital gain. The dispute in this appeal is with regard to the eligibility of the assessee for the claim for the claim of exemption as aforesaid. The assessee had originally made a claim under section 54EA of the Income Tax Act, 1961(the Act). Those provisions were admittedly not applicable. The correct provision under which the assessee could claim exemption was section 54EC of the Act. For claiming exemption under section 54EC the assessee had to make investment of the capital gain in long term specified asset within a period of 6 months after the date of transfer of the long term capital asset. The dispute in this appeal is two fold, (i) whether the assessee made the investment in long term specified asset within a period of 6 months from the date of transfer (ii) whether the assessee made investment in long term specified assets.
4. On the dispute with regard to the period of 6 months within which investment in long term specified asset has to be made, the facts were as follows. According to the revenue authorities the Assessee invested the resultant capital gains of Rs.20,00,000 in NABARD bonds allotted on 15/2/2006 vide cheque issued on 7/2/2006 and encashed from the assessee’s account on 13/2/2006. The revenue authorities were of the view that the assessee was entitled for deduction u/s. 54EA of the I.T. Act, if the bonds had been invested by 9/2/2006, which is the period of 6 months time limit from the date of transfer. The claim of the Assessee in this regard was that he sent the application for purchase of NABARD bonds by courier along with cheque dated 7/2/2006 and the application was delivered at the office of NABARD on 9/2/2006. NABARD encashed the cheque later on 13/2/2006 and issued the bonds. According to the Assessee therefore the date of investment in NABARD bonds would be 7/2/2006 and therefore the investment should be considered as having been made within the stipulated period of 6 months from the date of transfer. According to the revenue, the claim of the Assessee that investment in the bonds were made on 7/2/2006 the date when the application were sent by courier, could not be accepted for the reason that the assessee had not been able to produce any proof in the form of copy of acknowledgement of the application etc. to show that investment had indeed been done on 7/2/2006. According to the revenue, the date of cheque would not hold good unless corroborative evidence was given for investment within time allowed. The findings of the CIT(A) in this regard were as follows:
“Just by issuing a cheque on 6/2/2006, the time limit allowed in the section does not get complied with. I find in this case, the assessee was required to reinvest in the specified bonds by 9/2/2006. The assessee has issued a cheque dated 6/2/2006 but the same is encashed only on 13/2/2006 and the bonds that have been allowed are dated 15/2/2006. The assessee has filed a photocopy of the documents said to be of the Internet Courier Services through whom he had forwarded the application for the NABARD Bond. However, the original of it has not been produced to verify the genuineness of then same. Neither has acknowledged that the application send by courier was deposited with NABARD before 9/2/2006 has been given. It is also seen that the cheque has been en cashed after the due date of 9/2/2006 i.e. on 13/2/2006. All the issues clearly point to the fact that the assessee has delayed the required investment and thus not fulfilled the mandatory time limit. It is not understood as to why the assessee delayed the reinvestment by a few days specially when the money was available with the assessee well before the due date. In view of the above, it is clear that the benefits of section 54EC would not be applicable to the assessee because the time limit for the purpose of exemption has not been complied with as was mandatory to have been done.”
5. On the question whether NABARD were long term specified securities, the revenue authorities held that Section 54EC of the Act was introduced by Finance Act 2000 w.e.f. 01/04/2001 and has undergone various amendments by the finance Act 2001, 2002,2005, 2006 & 2009. By these amendments the Long term specified assets are described. Upto A.Y 2005-06 the Long term specified assets were defined to mean as under:-
i. Bonds by NABARD or by NHAI redeemable after 3 years issued on or after 1/4/2000.
ii. Bonds by R.E. Corporation Ltd. redeemable after 3 years issued on or after 1/4/2000.
iii. Bonds by N H Bank or SIDBI redeemable after 3 years issued on or after 1/4/2002.
However, with the amendment by Finance Act 2006, Bonds by NABARD, NHB & SIDBI were not eligible for exemption u/s. 54EC. In view of the above, the revenue authorities held that the assessee’s case which falls in the A.Y 2006-07 will not be entitled to the benefit of section 54EC, in respect of investments in NABARD Bonds.
6. Aggrieved by the order of the CIT(A) the assessee has preferred the aforesaid grounds appeal before the Tribunal. We have heard the rival submissions.
7. First we shall take up for consideration as to whether Investment in Nabard Bonds can be considered as investment in long term specified securities within the meaning of Sec. 54EC of the Act. Section 54EC was first inserted by the Finance Act, 2000, w.e.f. 1-4-2001 and it read as follows:
Capital gain not to be charged on investment in certain bonds.
54EC. (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.
Explanation.—For the purposes of this section,—
(b) “long-term specified asset” means any bond redeemable after three years issued, on or after the 1st day of April, 2000, by the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981) or by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988).
8. By Finance Act, 2001 w.e.f. 1-4-2002, clause(b) was substituted as follows:
‘(b) “long-term specified asset” means any bond redeemable after three years, issued,—
(i) on or after the 1st day of April, 2000, by the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981) or by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988);
(ii) on or after the 1st day of April, 2001, by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956).
9. The following sub-clause (iii) shall be inserted after sub-clause (ii) in the Explanation to section 54EC by the Finance Act, 2002, w.e.f. 1-4-2003:
(iii) on or after the 1st day of April, 2002, by the National Housing Bank established under sub-section (1) of section 3 of the National Housing Bank Act, 1987 (53 of 1987) or by the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989).
10. By the Finance Act, 2006, clause (b) was substituted w.e.f. 1-4-2006 as follows:
(b) “long-term specified asset” means any bond, redeemable after three years and issued on or after the 1st day of April, 2006,—
(i) by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988), and notified by the Central Government in the Official Gazette for the purposes of this section; or
(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section.
11. It can be seen from the above provisions as it existed from time to time that investment in Nabard Bonds was considered as investment in long term specified assets upto 3 1-3-2006. The Assessee made investments on 9-2-2006. Thus as on that date investment in Nabard bonds was a permitted investments. The learned D.R. however submitted that the law as it existed on the 1st day of the Assessment year should be applied and as on 1-4-2006, the 1st day of Assessment year for AY 06-07 investment in Nabard Bonds was not a permitted investment to claim exemption u/s.54EC.
12. Capital gain is charged to tax in the assessment year relevant to the previous year in which transfer of the capital asset which resulted in the capital gain is made. The transfer of the capital asset in this case took place on 9-8-2005. The period of 6 months from the date of transfer would therefore be 9-2-2006. Therefore as on the date when the Assessee made the investment in Nabard Bonds, they were long term specified assets within the meaning of expln-(b) to Sec. 54EC of the Act. We are of the view that on the facts and circumstances of the present case, the contention of the learned D.R. that the law as on the 1st day of the Assessment year has to be applied, cannot be accepted. The law as it stood on the date of transfer of the capital asset which results in the capital gain has to be applied.
13. In this regard, we derive support from the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Nirmal Textiles 224 ITR 378 (Guj). The facts of the case were that the Assessee in the above case had opted for Samvat Year as his accounting period ending on Diwali every year. The controversy relates to asst. yr. 1975-76, the previous year relevant to which ended on Diwali of 1974, i.e., the accounting period commencing on next day of Diwali 1973 and ending on Diwali 1974 is the previous year relevant to the assessment year in question for which income-tax payable by the assessee was to be assessed. He sold certain plots of land between 26th Dec., 1973 and 25th March, 1974. As on the date of such transfers, the assessee had held the said immovable property for the period of more than 24 months, but less than sixty months. The assessee claimed that as on the date of transfer of the capital assets concerned, the definition of short-term capital asset under s. 2(42A) of the IT Act, 1961, it was required that the assessee should have held the capital asset for not more than 24 months immediately preceding the date of transfer, it was a transfer of long-term capital assets by the assessee. He, therefore, claimed that income arising out of the said transaction is liable to be assessed to tax as long-term capital gains. He claimed deductions as are applicable in the case of capital gains arising out of transfer of long-term capital asset under s. 48 of the Act. The claim of the assessee was rejected by the ITO by taking into consideration that the definition of the short-term capital asset had been amended by the Finance Act, 1973 w.e.f. 1st April, 1974 extending the period of holding upto which the capital asset would remain a short-term capital asset to sixty months instead of 24 months. The ITO rejected the claim of the assessee on the ground that under the IT Act, tax is to be assessed for the assessment year as per law prevailing on the first day of the commencement of the assessment year, though income in respect of which tax is to be assessed is such which has been earned during the previous year ending before commencement of such assessment year. As the asst. yr. 1975-76, undisputedly for which the capital gains chargeable to tax was to be assessed, commenced as on 1st April, 1975 and any income which accrued, earned or received by an assessee during the previous year relevant to that assessment year had to be computed in the manner prescribed in accordance with the provisions of the IT Act as they were in force on 1st April, 1975, including the various definition clauses under s. 2 of the Act. The Hon’ble Gujarat High Court had to decide the question whether nature of capital asset has to be determined in terms of definition of short-term capital asset which was in force w.e.f. 1st April, 1974 or it will have to be determined in accordance with the provisions as standing on the date of transfer. The Hon’ble Gujarat High Court held:
(i) the nature of levy under the IT Act which is annual charge on the income earned during the previous year relevant to the assessment year and in a way it is prospective levy for the operation of which requisite action, namely, accrual of income is at a time antecedent to it.
(ii) There are three stages in imposition of a tax. There is the declaration of liability that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But the assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay.
(iii) In so far as the first part of imposition of tax is concerned, namely what persons in respect of what property are liable to pay tax is to be determined with reference to law as on the date on the occurrence of event which creates or attracts the liability to tax, unless the statute by express or by necessary implication provides otherwise. In computing such liability what is to be excluded, or included or conditions or allowances of deductions or exemptions and like matters of law as it exists on 1st of April of the relevant assessment year govern the assessment.
(iv) Applying the aforesaid principles, if we view the facts of the present case the taxable event which attracted liability to tax was the transfer of immovable property as a result of which the income in the nature of capital gain arose during the previous year.
(v) The next question which calls for consideration is whether the charge having attracted on the date of transfer, further question whether the transfer is of long-term capital assets or short-term capital assets is to be determined as per law in force on the 1st of April, 1975, or, as the case may be, 1974 when the assessment year commenced or in accordance with law on the date of the taxable event.
(vi) All receipts under the IT Act are not chargeable to tax. Receipts of consideration on transfer of capital asset is capital receipt. But for the provisions of charging capital gains, to tax the capital receipts would not have been at all subject to tax liability. Where the scheme of the Act itself envisaged two distinct nature of capital gains arising from long¬term holding and short-term holding, for which the definition has been provided, liability to tax or the charge is directly related to the nature of capital gains earned by the assessee as on the date of transfer subjecting him not only to the charge of tax but to various other provisions as well, giving him certain rights and benefits for which he is under obligation to act in a particular manner within a particular time from the date of transfer dependent upon the nature of capital gains earned by him on the date of transfer makes the determination of nature of capital gains as on the date of transfer as integral part of determination of charge itself and does not make it merely a tax computation for crystallizing the liability. That being the position the principle aptly stated in Rawji Dhanji & Co. In re (1940) 8 ITR 1 (Bom), applies, “as you have to impose the tax for the year of assessment on the actual income of the previous year, it seems to me plain that you must take the facts as they existed during that previous year; otherwise you are not ascertaining the actual income of the previous year, you are only ascertaining what would have been the income of the previous year if the facts had been as they existed in a subsequent year”.
(vii) True ambit of the general principle referred to hereinabove is that ordinarily the law applicable on the first day of assessment year governs the assessment of that year, i.e., the liability having been declared ex hypothesi determined on the occurrence of taxable event which will be in accordance with the facts existing in the previous year, all the machinery provisions for crystallising that liability and recovering the sum to make the levy effective will be governed by the law as at the commencement of the assessment year for which the assessment has to be made.
13. In a case of this nature, the Assessee can never claim deduction u/s.54EC if the contention of the learned D.R. is to be accepted, because the period of 6 months from the date of transfer would expire well before the 1st day of the Assessment Year. We therefore reject the argument of the learned D.R. in this regard. We hold that investment in Nabard Bonds by the Assessee at the relevant point of time has to be regarded as investment in Long term specified asset within the meaning of Sec.54EC of the Act.
14. The next issue whether the assessee had made investment within a period of 6 months from the date of transfer of the long term capital asset has to be examined. In this regard there is no dispute that the date of transfer of the long term capital asset is 9/8/2005. There is also not dispute that the period of 6 months from the date of transfer is on or before 9/2/2006. The assessee sent the application to NABARD by courier on 7/2/06. The assessee along with the application for investment in NABARD bonds of the value of Rs. 20.00 lacs also enclosed a cheque dated 7/2/06 drawn on Mandvi Company-operative Bank Ltd., Mumbai. The said application had reached the office of NABARD on 9/2/2006. The NABAD had issued bonds worth Rs.20.00 lacs. The date of allotment as per this bond is mentioned as 15/2/2006. This is because the cheque issued by the assessee had been realized later only on 13/2/2006 and thereafter the bonds were issued. According to the assessee it had sufficient balance in its bank account on 7/2/2006 till 15/2/2006 to honour the cheque that he had issued to NABARD. In those circumstances the stand of the assessee is that the investment had been made on 7/2/2006. In this regard the ld. Counsel for the assessee had relied on the following decisions.
(1) CIT vs. Ogale Glass Works Ltd., 25 ITR 529(SC)
(2) Vardhaman Chemcials vs. CCEC & Another, 263 ITR 460 (Mum),
(3) K. Saraswati Vs. P.S.S.Somasundaran Chettiar, Vol.67 Company cases pg.67 (SC).
15. We have considered his submissions. In the case of CIT vs. Ogale Glass Works Ltd. (supra) it was held by the Hon’ble Supreme Court that payment by cheque realized subsequently on the cheque being honoured and encashed relates back to the date of the receipt of the cheque and in law the date of payment is the date of delivery of the cheque. In the present case admittedly the period of 6 months for making investment in long term specified asset was 9/2/2006. As on that date the cheque for Rs. 20.00 lacs had been delivered to NABARD. Therefore, the date of payment of the cheque would be the date of delivery of the cheque. The dated on which subsequently the cheque was en cashed in the ordinary course by NABARD on 15/2/06 cannot be said to be the date of investment. In our view the assessee has substantially complied with the provisions of section 54EC of the Act and was, therefore, entitled to exemption under section 54EC of the Act. We, therefore, hold that the exemption under section 54EC should be allowed to the assessee. Grounds No.1 & 2 raised by the assessee is accordingly allowed. The other grounds of appeal were not pressed and they are dismissed as not pressed.
16. In the result, the appeal of the asses see is partly allowed.
Order pronounced in the open court on the 9th day of February 2011.
Mumbai, Dated. 9th Feb.2011