Capital gains - Whether for the purpose of computing relief, assessee is required to first take recourse to Sec 70(3) and then only look at Sec 54EC - NO: Madras HC

THE issues before the Bench are - Whether for the purpose of computing relief, the assessee is required to first take recourse to Sec 70(3) and then only look at Sec 54EC and Whether provisions of Sec 54EC specify any particular nature of transfer of long-term capital asset. And the verdict goes against the Revenue.

Facts of the case

Assessee made a long term capital gain to the tune of Rs.6,42,22,435/- on the sale of shares. Admittedly, the assessee had invested the long term capital gains in REC Bonds to the tune of Rs.6,50,00,000/-. Apart from this, there were long term capital loss on sale of shares and immovable properties which were claimed to be carried forward to the subsequent years. The Assessing Officer apparently agreed with the assessee on this state of affairs. However, in exercise of jurisdiction under Section 263 of the Income Tax Act, 1961, the Commissioner of Income Tax (Appeals) viewed that as per Section 74(1) of the Income Tax Act, the loss relating to the long term capital asset shall be first set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset not being a short term capital asset and then only the exemption under Section 54EC would apply. He thus held that the assessment completed under Section 143(3) of the Income Tax Act was thus erroneous and prejudicial to the interest of the Revenue requiring revision of assessment. While summarily rejecting the assessee's reply based on Section 54EC, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to redo the assessment.

On appeal, the Tribunal pointed out that even though Section 45(1) did not specify Section 54EC as had been done by erstwhile Sections 54, 54A, 54B, 54EA, 54EB and 54F, yet, going by the import of Section 54EC(1)(a) and (b), the assessee was entitled to take advantage of the said provisions even before working out Section 70. Pointing out to the scheme of Sections 45 to 55A which provided for the computation of capital gains, the Tribunal held that effect had to be given first to the provision of capital gains as given under the above scheme and then apply the provisions of Section 70. It viewed that Section 70 would come into play only when the capital gains have been computed in accordance with the provisions contained in Sections 45 to 55A. Irrespective of whether Section 54EC(1) was found in Section 45 or not, in terms of Section 54EC, the effect of it cannot be ignored, as the investment in REC bonds takes the capital gains out of the charging provision. Since the amount invested in REC bonds did not enter into the computation at all, the revision done was not sustainable in law. Consequently, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals).

On appeal, the HC held that,

++ consequent on insertion of Section 54EC, sunset clauses were inserted under the Finance Act, 2000 dated 1.4.2001 in Section 54 EA and Section 54 EB to cover cases of transfer of long term capital asset made before 01.04.2000. Explaining the introduction of the said provisions, the Board had issued the Circular No.794 dated 9th August, 2000. Going by the circular issued, the insertion of Section 54EC is only a substitute in the place of Section 54EA and Section 54EB to cover cases of transfer of long term capital asset on and from 01.04.2001, we do not find that the argument of the Revenue by reason of Section 45, not excluding the operation of Section 54EC, the other provisions under Section 54EC would stand at different footing from that of similarly worded other provisions under the said Chapter. It may further be seen that as per Section 54EC(1)(a) on the capital gains arising from the transfer of long term capital asset invested in accordance with the said Section, capital gains shall not be charged under Section 45;

++ secondly, one may also note that Section 54EC does not specifically mention about specified nature of transfer or of any specified long term capital asset. On the other hand, it merely speaks about the "capital gain arising out of a long term capital asset";

++ contrast this with Section 54 which deals with capital gains arising on sale of property used for residence. Section 54 specifically provides that in the case of capital gains arising from the transfer of long term capital asset, being a residential house, exemption would be available if the assessee has purchased within a period of one year before or two years after the date on which the transfer took place, a residential house or within a period of three years after that date, constructed the residential house. Section 54(2) provides that the amount of capital gains not appropriated by the assessee towards the purchase of the new asset or purchase and construction of the new asset before the date specified in Section 54(1), shall be deposited in the specified Bank or institution and utilised in accordance with any scheme which the Central Government may notify. Section 54B deals with capital gain on transfer of land used for agricultural purposes not to be charged. Section 54D deals with Capital gain on compulsory acquisition of lands and buildings not to be charged. Section 54E deals with capital gain on transfer of capital assets not to be charged. Section 54EA deals with Capital gain on transfer of long-term capital assets not to be charged in the case of investment in specified bonds or debentures and Section 54EB deals with capital gain on transfer of long-term capital assets not to be charged;

++ a reading of Section 54EC shows that it replaced Sections 54EA and 54EB by the Finance Act, 2000 with effect from 01.04.2001, with the result that the benefit of Section 54EA and 54EB ceased to be available with reference to transfer of long term capital assets before 01.04.2000. Thus relief of transfer under Section 54EC is available in respect of transfers from the accounting year relevant to the assessment year 2001-02 to preserve the continuity of the benefit of deduction with the only difference that Section 54EC limits the available bonds for purposes of reinvestment benefit with the minimum lock in the period of three years. The bonds available for benefit under Section 54E are part of the statute itself. Thus Section 54EA and 54EB would have relevance to the transfer of long term capital before 01.04.2000 and Section 54EC, to the transfer made on or after 01.04.2001;

++ thus, if, for working out the relief under Section 54, the Revenue does not insist upon the applicability of Section 70(3), we do not find any acceptable reason as to how Section 70(3) would stand attracted in the case of Section 54EC. Thus, we reject the argument of the Revenue that for the purpose of working out the relief under Section 54 EC, one has to take recourse first to Section 70(3) and then only look at Section 54EC. A reading of Section 70(3) shows that the loss that has to be looked at first is not with reference to the loss arising in respect of any new capital asset, but in the totality of the loss suffered on the sale of capital asset chargeable to tax under Section 45. On the other hand, Section 54EC is specific with reference to investment in specified bonds as regards the capital gain arising from and out of a long term capital asset. Thus going by the scheme of the Act and the Board circular, we accept the plea of the assessee that for taking benefit under Section 54E, it is not necessary that one should first apply Section 70(3) and thereafter only, the assessee could invest the capital gain arising from the long term capital asset to any specified bond as specified under Section 54EC.

++ we find no error in the order of the Tribunal in setting aside the order of the revision made by the Commissioner of Income Tax (Appeals).