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ITAT Ahmedabad holds capital gains of Rs.1 crore exempt u/s.54EC, where investment is split in two financial years

             Section 54EC of the Income-tax Act provides for exemption of taxable long term capital gains (LTCG) arising from the transfer of an asset, to the extent the amount of such gains are invested in notified bonds within a period of six months from the date of transfer. Notified for this purpose are the three year bonds issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).

            Until FY 2006-07, there was no monetary ceiling prescribed in regard to investment in such capital gains bonds and hence a taxpayer could virtually invest his entire taxable gain, even running into crores of rupees, in these bonds and avail the benefit of 100% exemption under Section 54EC.

            However, the Finance Act, 2007 amended Section 54EC so as to provide that this exemption would be available subject to the condition that the investment in the notified capital gains bonds made on or after 1st day of April, 2007 does not exceed Rs.50 lakhs during any financial year.

           Does this mean that every taxpayer earning more than Rs.50 lakhs by way of taxable LTCG on sale of property would have no option but to give away income-tax at the rate of 20.6% on the amount earned over Rs. 50 lakhs? Readers will recall the write up on Section 54EC in AM Tax Clues on 22nd August, 2011, when your columnist had shared some ‘out of the box thinking’ for extra tax saving in respect of long term capital gains (LTCG), by opining that where a taxpayer has planned the timing of his sale beyond 30th September in the financial year, he would be in a position to invest Rs.50 lakhs before the end of the year and invest another Rs.50 lakhs in the early part of the subsequent financial year, but still maintaining the stipulated time limit of investment within six months from the date of transfer.


            Infact, very recently, the Ahmedabad Bench of the Income Tax Appellate Tribunal was required to decide this very issue in the case of ‘Aspi Ginwala vs. ACIT’ [2012] 20 75. The taxpayer in this case had sold his house property in October, 2007 and claimed exemption of Rs.1 crore by making investment in the eligible capital gains bonds of Rs.50 lakhs each in FY 2007-08 and FY 2008-09.  Both the Assessing Officer and the Commissioner (Appeals) held that the taxpayer was entitled for exemption u/s 54EC upto Rs. 50 lakhs only.

            It was, however, pleaded on behalf of the taxpayer that as per the proviso to Section 54EC, investment made on or after 1st April, 2007 in the specified bonds during any financial year should not exceed Rs. 50 lakhs and since the taxpayer had not violated this condition, there was no reason why he should not be allowed the benefit of exemption upto Rs.1 crore on the facts of his case.

           The Tribunal after carefully noting the language of the proviso to Section 54EC held that it is clear from this proviso that where a taxpayer transfers his capital asset after 30th September of the financial year, he gets an opportunity to make an investment of Rs. 50 lakhs each in two different financial years and is able to claim exemption upto Rs. 1 Crore u/s 54EC. The Tribunal noted that, “Since the language of the proviso is clear and unambiguous, we have no hesitation in holding that the taxpayer is entitled to get exemption upto Rs. 1 Crore in this case.”

           It also observed that its view gets support from the finding of the Hon’ble Supreme Court in the case of IPCA LAB 266 ITR 521 (SC), wherein it has been held by the Hon’ble Supreme Court that, “even though a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wording of the section.” The Hon’ble ITAT finally concluded that since the wording of the proviso to section 54EC is clear, the benefits which are available to the taxpayer cannot be denied.

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