Ramesh V. Shetty Vs ACIT (ITAT Bangalore)
₹50 Lakh Section 54EC Limit Applied Per Financial Year Before AY 2015-16: ITAT Allows ₹71 Lakh Invested Across Two Financial Years
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that, prior to the insertion of the second proviso to Section 54EC(1), the investment limit of ₹50 lakh applied separately to each financial year. Therefore, where investments falling within the statutory period of six months were made in two different financial years, the exemption could exceed ₹50 lakh.
The Tribunal accordingly allowed the assessee’s entire investment of ₹71 lakh in NHAI bonds for Assessment Year 2013-14.
Facts of the case
The assessee was an individual who filed his return of income for Assessment Year 2013-14 declaring total income of ₹1,07,42,030.
During the relevant year, the assessee sold a residential property and disclosed long-term capital gains of ₹70,90,317. To claim exemption under Section 54EC, the assessee invested the capital gains in specified bonds issued by the National Highways Authority of India.
The investments were made in two tranches:
- ₹50 lakh was invested in March 2013; and
- ₹21 lakh was invested in July 2013.
The NHAI allotment letters reflected allotment of the bonds on 31 March 2013 and 31 July 2013, respectively. The corresponding bonds were credited to the assessee’s demat account subsequently.
Thus, the first investment fell in Financial Year 2012-13, whereas the second investment fell in Financial Year 2013-14. Both investments were, however, made within six months from the date of transfer of the original capital asset.
Disallowance by the Assessing Officer
The Assessing Officer restricted the exemption under Section 54EC to ₹50 lakh and disallowed the balance claim of ₹21 lakh.
According to the Assessing Officer, both investments were to be regarded as having taken place in Financial Year 2013-14. The assessee’s total income was consequently recomputed at ₹1,28,42,030.
The CIT(A) confirmed the restriction of exemption to ₹50 lakh by relying upon the Jaipur Tribunal’s decision in ACIT v. Ram Kumar Jain & Sons (HUF).
The assessee carried the matter in appeal before the Bangalore Tribunal.
Contention of the assessee
The assessee contended that Section 54EC, as applicable to Assessment Year 2013-14, required the investment to be made within six months from the date of transfer of the long-term capital asset.
The first proviso prescribed a ceiling of ₹50 lakh on investment made by an assessee during any financial year. It did not prescribe an aggregate ceiling of ₹50 lakh for investments made across two financial years, even if both investments arose from the same transfer.
Since the transfer took place at a point that permitted the statutory six-month investment period to extend into the next financial year, the assessee was entitled to invest up to ₹50 lakh in each of the two financial years.
The aggregate investment of ₹71 lakh was, therefore, claimed as eligible for exemption.
Findings of the Tribunal
The Tribunal examined Section 54EC(1) and its first proviso as applicable to the relevant assessment year. It found that two conditions were relevant:
First, the investment in specified bonds had to be made within six months from the date of transfer.
Secondly, the investment made in a particular financial year could not exceed ₹50 lakh.
The provision did not then prescribe an overall ceiling of ₹50 lakh for investments relating to the same transfer but made in two different financial years. Consequently, if the six-month statutory period extended over two financial years, an assessee could invest in specified bonds during both financial years, subject to the ceiling applicable to each year.
The Tribunal further noticed that the Finance (No. 2) Act, 2014 inserted a second proviso to Section 54EC(1). Under that proviso, the total investment made by an assessee in the financial year in which the asset was transferred and in the immediately succeeding financial year could not exceed ₹50 lakh.
However, the amendment applied prospectively from Assessment Year 2015-16. It could not be applied to Assessment Year 2013-14 involved in the assessee’s case.
The Tribunal followed its earlier decisions in:
- Vivek Jairazbhoy v. DCIT (International Taxation), ITA No. 236/Bang/2012; and
- DCIT v. Borkatte Ganapathi Hegde, ITA No. 964/Bang/2016.
As the assessee had invested ₹71 lakh in two different financial years and both investments were made within six months from the date of transfer, the Tribunal held that the entire amount was eligible for deduction under Section 54EC.
The assessee’s appeal was accordingly allowed.
Author’s comments
The decision deals with a well-known planning opportunity that existed under the unamended Section 54EC. The first proviso restricted investment to ₹50 lakh “during any financial year.” Therefore, where the transfer took place between October and March, the six-month investment period could extend into the following financial year. This enabled an assessee to invest ₹50 lakh before 31 March and another amount, potentially up to ₹50 lakh, after 1 April.
The Legislature subsequently closed this window by inserting the second proviso through the Finance (No. 2) Act, 2014. The amended provision imposed an aggregate ceiling of ₹50 lakh for investments made in the financial year of transfer and the immediately succeeding financial year.
The crucial aspect is that the amendment was held to be prospective from Assessment Year 2015-16. Consequently, it could not be used to restrict a legitimate claim arising in an earlier assessment year.
This ruling is, therefore, principally relevant to Assessment Years 2014-15 and earlier. For Assessment Year 2015-16 onwards, splitting the investment between two financial years does not increase the exemption beyond the statutory aggregate ceiling of ₹50 lakh for one transfer.
The judgment also reinforces that the crucial requirement is investment within six months from the date of transfer. The fact that the bonds were credited to the demat account subsequently should not ordinarily defeat the exemption where the application and investment were made within the prescribed time and the bonds were thereafter duly allotted.
Thus, the legal position may be summarised as follows: before AY 2015-16, ₹50 lakh was the limit per financial year; from AY 2015-16 onwards, ₹50 lakh is the aggregate limit across the financial year of transfer and the immediately succeeding financial year.
Cases Discussed
- ACIT Vs. Ram Kumar Jain and sons (HUF)
- Shri Vivek Jairazbhoy Versus Deputy Commissioner of Income-tax (International Taxation) — ITA No.236/Bang/2012
- Deputy Commissioner of Income-tax Vs. Borkatte Ganapathi Hegde — ITA No.964/Bang/2016
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE
This appeal at the instance of the assessee is directed against CIT(A) order dated 26.11.2018. The relevant assessment year is 2013-14. The solitary effective ground raised reads as follows:
“Ground No.2: The learned CIT(A) erred in upholding the addition of Rs.21,00,000/- and also failed to appreciate the facts and the provisions of the act under section 54E(1) and first proviso, that the investment was made in two different financial years which are well within the six months’ period from the date of transfer of long-term capital asset as stipulated u/s 54EC.”
2. Brief facts of the case are as follows:
Assessee is an individual. For the assessment year 2013-14, return of income was filed by the assessee declaring total income of Rs.1,07,42,030/-. Assessee had sold a residential property and declared capital gains for a sum of Rs.70,90,317/-. Assessee had claimed deduction u/s 54EC of the Income Tax Act, 1961 (hereinafter ‘the Act’) for investment made in NHAI bonds. From the documents submitted by the assessee, it is evident that assessee had made application for allotment of bonds worth Rs.50 lakhs on 21.3.2013 and Rs.21 lakhs on 17.7.2013. Further, the letter of allotment received from NHAI also reflects the date of allotment at 31.3.2013 and 31.7.2013 respectively. However, the credit of the same was reflected in the Demat account of the assessee on 10.5.2013 and 5.9.2013 respectively.
3. The A.O. passed an order of assessment u/s 143(3) of the Act (order dated 29.1.2016), wherein he did not give deduction for a sum of Rs.21 lakhs u/s 54EC of the Act and he recomputed the assessee’s total income at Rs.1,28,42,030/-. The A.O. concluded that both the investment in NHAI bonds happened in the same financial year i.e. in the financial year 2013-14.
4. Aggrieved by the order of the assessment in denying exemption u/s 54EC of the Act in respect to Rs.21 lakhs, assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view taken by the A.O. in restricting the exemption of capital gains for 54EC bonds to sum of Rs50 lakhs. The CIT(A) relied on the order of Jaipur bench of the Tribunal in the case of ACIT Vs. Ram Kumar Jain and sons (HUF).
5. Aggrieved by the order of the CIT(A) assessee has preferred this appeal before the Tribunal. The Ld. A.R. has filed a paper book enclosing therein NHAI allotment letter of Rs.50 lakhs and Rs.21 lakhs on 23.3.2013 and 20.7.2013 respectively, copy of the sale deed, computation of income for assessment year 2013-14, the case laws relied etc.
6. The Ld. D.R. on the other hand strongly supported the order of assessment and the CIT(A) in restricting the claim of deduction to a sum of Rs.50 lakhs.
7. We have heard the rival submissions and perused the materials available on record. As per the provision of section 54EC(1) of the Act and its first proviso, it is clear that the time limit for investment is six months from the date of transfer and even if such investment falls under two financial years, the benefit claimed by the assessee cannot be denied. The amendment in Finance (No.2 Act) 2014 relate to assessment year 2015-16 (i.e. insertion of second proviso to section 54EC(1) and the same applies prospectively for and from assessment year 2015-16. A similar view was held by the Bengaluru Bench of the Tribunal in the following cases:
2) Deputy Commissioner of Income-tax Vs. Borkatte Ganapathi Hegde in ITA No.964/Bang/2016 of ITAT Bangalore.
8. Since assessee had invested Rs.71 lakhs in two different financial years and within six months from the date of transfer of the capital assets, the limit of Rs.50 lakhs is per financial year. Hence, the assessee is eligible for deduction of Rs.71 lakhs u/s 54EC of the Act. It is ordered accordingly.
9. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 11th Sept, 2020
