THE issues before the Bench are - Whether when the tax-exempt bonds were not available during the entire period of six months after the accrual of long-term capital gains, the assessee cannot claim Sec 54EC benefits on investments made in REC bonds made later; Whether the assessee can be expected to perform the impossible and Whether Revenue can force the assessee to invest only in the bonds of one in preference to the other. And the verdict goes in favour of the assessee.
Facts of the case
The assessee filed its return of income claiming deduction u/s 54EC of the Act. On 22/3/2006, the assessee sold its factory building earning a long term capital gain of Rs.49.36 lacs. The assessee sought to avail of the exemption from payment of tax on long term capital gain of Rs.43.36 lacs u/s 54EC of the said Act by purchasing bonds of the Rural Electrification Corporation Limited ( “REC Bonds”).
To avail of the exemption u/s 54EC, the assessee had to invest the sale proceeds in the REC bonds within six months from the date of the sale of the factory building i.e. on or before 21/9/2006. However, the assessee purchased the REC bonds only on 31/1/2007, since the bonds were not available throughout the period of six months commencing from the date of the sale of the factory by the respondents and even thereafter till the extended date of 31/12/2006 under the CBDT Circular (however, the bonds were available for a limited time during this period between 1/7/2006 to 31/8/2008).
The AO disallowed the benefit of Section 54EC to the assessee on the ground that the bonds were purchased after the expiry of stipulated time period of six months. The CIT (Appeals) dismissed the assessee's appeal and held that even in terms of the said Circular the investments in the bonds for the benefit of Section 54EC of the Act had to be made on or before 31/12/2006, whereas the assessee admittedly purchased the REC bonds only thereafter on 31/1/2007. The Tribunal allowed the respondent's appeal. The Tribunal held that it was impossible for the assessee to comply with the condition of Section 54EC of the said Act as the REC bonds were not available and for that reason the CBDT had issued the Circular dated 30/6/2006 extending the time. Further, the Tribunal held that the fact that the assessee had deposited the amount of Rs.50/- lacs with the State Bank of India with a specific direction that the bonds would be purchased out of the aforesaid amount as soon as they were available, supported the stand of the respondents that the REC bonds were not available.
On further appeal by the Revenue, the High Court held that,
++ Section 54EC entitles a person to avail of the right conferred thereby at any time during the period of six months from the date of sale of the asset. The respondents cannot be deprived of this right conferred by the Act for no fault of theirs. Thus, the availability of the bonds only for a limited time during this period cannot prejudice the assessee's right to exercise the same upto the last date. The bonds were admittedly not available except during the said period;
++ Lex not cogit impossibila (law does not compel a man to do that which he cannot possibly perform) and impossibilum nulla oblignto est (law does not expect a party to do the impossible) are well known maxims in law and would squarely apply to the present case. The statue viz. Section 54EC of the Act provides for exemption from tax to long term capital gain provided the same is invested in bonds of Rural Electrification Corporation Limited or National Highway Authority of India. However, as the bonds were not available, it was impossible for the respondent-assessee to invest in them within six months of the sale of their factory building. Therefore, in the circumstance one would have to interpret Section 54EC of the Act to ensure that it does not lead to injustice. Therefore, in the present facts, the six months provided for investing in bonds may be reasonably extended in view of the non availability of bonds till 22/1/2007;
++ a person is entitled to invest in the said bonds upto the last available date. If that be so, it must follow that the extension ought to be granted at least for the period prior to the expiry of six months when the bonds were not available and upto the date on which they were ultimately made available. In any event, in such a case an assessee would be entitled to a reasonable extension which must then be decided, depending upon the facts of each case. A person cannot be expected to make the investment on the first possible date on which the bonds were made available after the expiry of the six months period or any extended date prescribed by the CBDT. During the period the bonds were unavailable a person is likely to invest the amount elsewhere. To expect or require him not to do so would be unjust for reasons too obvious to state. He cannot then be expected at a day's notice to break the investment and transfer the same to the bonds stipulated in Section 54EC;
++ in the present case, the bonds were not available from 4/8/2006 to 22/1/2007. The last date for investment in the normal course would have been 21/9/2006 which was extended upto 31/12/2006. The respondents ought to be entitled to an extension of the number of days between 4/8/2006 to 21/9/2006 at the very least and, in any event, to a reasonable extension. The respondents admittedly invested in the bonds on 31/1/2007 i.e. within nine days of their being available once again from 22/1/2007. Considering that the bonds were not available for such a long period, an extension of merely nine days is extremely reasonable in the present facts;
++ the statue itself provides that the assessee, who is subject to long terms capital gain tax, can avail of exemption u/s 54EC of the Act if he invests in bonds of either the National Highway Authority of India or the Rural Electrification Corporation Limited. The choice of investing in one of the two organizations is with the respondent and the appellant revenue contrary to the statue cannot force the respondent to invest only in the bonds of one in preference to the other. The choice of which bonds to purchase is entirely with the respondent and in case the bonds of respondent's choice are not available as is proved in the present case, the time to invest in the bonds get automatically extended till the bonds are available in the market and the assessee can purchase the same. view of the above, the question referred was answered in favor of the respondent assessee and against the appellant-revenue
To avail of the exemption u/s 54EC, the assessee had to invest the sale proceeds in the REC bonds within six months from the date of the sale of the factory building i.e. on or before 21/9/2006. However, the assessee purchased the REC bonds only on 31/1/2007, since the bonds were not available throughout the period of six months commencing from the date of the sale of the factory by the respondents and even thereafter till the extended date of 31/12/2006 under the CBDT Circular (however, the bonds were available for a limited time during this period between 1/7/2006 to 31/8/2008).
The AO disallowed the benefit of Section 54EC to the assessee on the ground that the bonds were purchased after the expiry of stipulated time period of six months. The CIT (Appeals) dismissed the assessee's appeal and held that even in terms of the said Circular the investments in the bonds for the benefit of Section 54EC of the Act had to be made on or before 31/12/2006, whereas the assessee admittedly purchased the REC bonds only thereafter on 31/1/2007. The Tribunal allowed the respondent's appeal. The Tribunal held that it was impossible for the assessee to comply with the condition of Section 54EC of the said Act as the REC bonds were not available and for that reason the CBDT had issued the Circular dated 30/6/2006 extending the time. Further, the Tribunal held that the fact that the assessee had deposited the amount of Rs.50/- lacs with the State Bank of India with a specific direction that the bonds would be purchased out of the aforesaid amount as soon as they were available, supported the stand of the respondents that the REC bonds were not available.
On further appeal by the Revenue, the High Court held that,
++ Section 54EC entitles a person to avail of the right conferred thereby at any time during the period of six months from the date of sale of the asset. The respondents cannot be deprived of this right conferred by the Act for no fault of theirs. Thus, the availability of the bonds only for a limited time during this period cannot prejudice the assessee's right to exercise the same upto the last date. The bonds were admittedly not available except during the said period;
++ Lex not cogit impossibila (law does not compel a man to do that which he cannot possibly perform) and impossibilum nulla oblignto est (law does not expect a party to do the impossible) are well known maxims in law and would squarely apply to the present case. The statue viz. Section 54EC of the Act provides for exemption from tax to long term capital gain provided the same is invested in bonds of Rural Electrification Corporation Limited or National Highway Authority of India. However, as the bonds were not available, it was impossible for the respondent-assessee to invest in them within six months of the sale of their factory building. Therefore, in the circumstance one would have to interpret Section 54EC of the Act to ensure that it does not lead to injustice. Therefore, in the present facts, the six months provided for investing in bonds may be reasonably extended in view of the non availability of bonds till 22/1/2007;
++ a person is entitled to invest in the said bonds upto the last available date. If that be so, it must follow that the extension ought to be granted at least for the period prior to the expiry of six months when the bonds were not available and upto the date on which they were ultimately made available. In any event, in such a case an assessee would be entitled to a reasonable extension which must then be decided, depending upon the facts of each case. A person cannot be expected to make the investment on the first possible date on which the bonds were made available after the expiry of the six months period or any extended date prescribed by the CBDT. During the period the bonds were unavailable a person is likely to invest the amount elsewhere. To expect or require him not to do so would be unjust for reasons too obvious to state. He cannot then be expected at a day's notice to break the investment and transfer the same to the bonds stipulated in Section 54EC;
++ in the present case, the bonds were not available from 4/8/2006 to 22/1/2007. The last date for investment in the normal course would have been 21/9/2006 which was extended upto 31/12/2006. The respondents ought to be entitled to an extension of the number of days between 4/8/2006 to 21/9/2006 at the very least and, in any event, to a reasonable extension. The respondents admittedly invested in the bonds on 31/1/2007 i.e. within nine days of their being available once again from 22/1/2007. Considering that the bonds were not available for such a long period, an extension of merely nine days is extremely reasonable in the present facts;
++ the statue itself provides that the assessee, who is subject to long terms capital gain tax, can avail of exemption u/s 54EC of the Act if he invests in bonds of either the National Highway Authority of India or the Rural Electrification Corporation Limited. The choice of investing in one of the two organizations is with the respondent and the appellant revenue contrary to the statue cannot force the respondent to invest only in the bonds of one in preference to the other. The choice of which bonds to purchase is entirely with the respondent and in case the bonds of respondent's choice are not available as is proved in the present case, the time to invest in the bonds get automatically extended till the bonds are available in the market and the assessee can purchase the same. view of the above, the question referred was answered in favor of the respondent assessee and against the appellant-revenue
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