SRI AKBER AYUB ,BANGALORE vs. INCOME TAX OFFICER WARD-5(2)(3), BANGALORE

Date of Hearing : 11-9-2017 Date of Pronouncement : -9-2017 O R D E R PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER:

This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals) -5, Bengaluru dated 16/1/2017 for asst. year 2013-14.

2.1 The assessee filed his return of income for asst. year 2013-14 declaring income of Rs.2,73,990/-from rental income, LTCG from sale of residential property and income from other sources. The case was selected for scrutiny and the assessment was completed u/s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) vide order dated 17/2/2016 wherein the income of the assessee was determined at Rs.66,74,510/- in view of the re-computation of long term capital gains (‘LTCG’) on sale of property at Rs.64,00,526/- as against Nil LTCG declared by the assessee and thereby denied the assessee the exemption claimed u/s 54EC of the Act.

2.2 Aggrieved by the order of assessment dated 17/2/2016 for asst. year 2013-14, the assessee preferred an appeal before the CIT(A)-5, Bangalore on the issue of the AO’s computation of LTCG on sale of land at Rs.64,00,526/- by denying the assessee’s claim for exemption u/s 54EC of the Act. The ld CIT(A) dismissed the assessee’s appeal vide the impugned order dated 16/1/2017.

3.1 The assessee being aggrieved by the order of the CIT(A)-5, Bangalore dated 16/1/2017 for asst. year 2013-14, has filed this appeal wherein it has raised the following grounds:- “1. The order of CIT (A) insofar as it is prejudicial to the interest of the appellant, is bad and unsustainable in the eye of law as the same is passed without application of mind.

2. The CIT(A) ought to have appreciated that the investment made by the appellant in Bonds within the meaning of S.54EC of Rs.91,36,734/- was in order and therefore, he ought to have deleted the additions/ disallowances made by the AO in entirety.

3. Without prejudice, the CIT(A) having observed all along the developments and interpretations on the issue on hand by various courts across the country, erred in dismissing the appeal without any discussion whatsoever, which only establishes the total Non-application of mind, on his part. 4. For these and such other grounds that may be urged at the time of hearing, the Appellant prays that the appeal may be allowed.”

The grounds raised by the assessee (Supra), all pertain to the single issue of denial of the assessee’s claim for exemption u/s 54EC of the Act.

3.2.1 The facts of the matter before us, as emanate from the record are that in the year under consideration, the assessee sold a property measuring 3163.59 sq. ft. for consideration of Rs.1,50,00,000/- as per registered sale deed dated 1/2/2013. As per the assessee’s computation, the LTCG earned by him on this transaction was Rs.91,36,734/-, after taking into consideration the indexed cost of acquisition. The assessee submitted that since he had invested Rs.50,00,000/- in NHAI Bonds on 28/3/2013 and another sum of Rs.50,00,000/- in REC Bonds on 29/7/2013, within the specified due dates, he was entitled to exemption of Rs. 1 crore u/s 54EC of the Act and therefore the net taxable LTCG on sale of the aforesaid property was Nil. On examination of the assessee’s claim of net taxable LTCG at Nil, the AO disallowed the assessee’s claim for exemption to the extent of Rs.41,36,734/- u/s 54EC of the Act. The AO further allowed the assessee only proportionate exemption of Rs.27,36,207/- u/s 54EC of the Act in respect of the balance Rs.50,00,000/- he had invested in NHAI Bonds.

3.22 On appeal, the ld CIT(A), after discussions at para 5 to 6.5 and para 6.6 of the impugned order, dismissed the assessee’s claim by holding as under:-

“6.6 However, it is understood from the language used in the CBDT circular that the \cap of Rs.50 Lakhs in the proviso to section 54EC(1) was only an investment cap and not a deduction cap. In order to get over such argument which appears to be restorable and in the above stated decision the proposed amendment restricting the claim to Rs 50 takhs is brought through necessary amendment to Sub-Section (1) of section 54EC by adding one more proviso by restricting the total deduction to just Rs.50 lakhs. The proposed amendment has been carefully worded in such a way to cover even cases of transfer of capital asset in the second half of the financial year whereby the assessee gets time till the beginning of the next financial year to make investment under section 54EC of the IT Act. However, the assessees who resorted to this kind of planning by disposing of capital asset in the second half of financial year 2013-14 are still not affected by this proposed amendment as they can invest additional sum in the current financial year. (2014- 15) provided such investment is made within 6 months from the date of transfer as the proposed amendment would take effect only from the Assessment Year 2015-16 corresponding to the Financial Year-2014-15. The assessees who would have resorted to tax planning as stated above are liable for capital gains subject to available exemption, for the assessment year 2014-15 and as a policy principle none of the proposed .amendments have been given retrospective effect. With the insertion of the second proviso to restrict a deduction of Rs.50 Lakhs whether invested in one or two financial years it has become very clear that it can be invested Rs.50 lakhs each in two financial years within six months period. I am of the opinion that the investment made of Rs.50 lakhs each in two consecutive financial years within six months period from the date of transfer of the original asset is not eligible for deduction u/s. 54EC as the proposed amendment would take effect only from the Assessment Year 2015-16 corresponding to the Financial Year-2014-15. Therefore, the grounds of appeal is hereby dismissed.”

3.2.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The basic facts of the matter as laid out in para 3.2.1 of this order (Supra) are not in dispute i.e, that the assessee has made an investment of Rs.1crore within the stipulated period as provided u/s 54EC(1) of the Act. The issue in dispute for adjudication before us is whether the proviso to sec. 54EC of the Act restricts the exemption to Rs.50 lakhs or does it merely restrict the investment that can be made in a single financial year to Rs.50 lakhs? We find that the co-ordinate bench of this Tribunal in its order in the case of Vivek Jairazbhoy in dated 14/12/2012 had occasion to consider and adjudicate on the very same issue, as is the one before us. At paras 9.5 to 9.8 thereof the co- ordinate bench, after considering the decisions of various tribunals on the matter, CBDT Circular No.3/2008 dated 12/3/2008 and following the propositions/ratios laid down by various Hon’ble Courts, held that the assessee is entitled to total exemption u/s 54EC of the Act spread over two financial years @ 50 lakhs each on investments made in specified instruments with the stipulated period of 6 months from the sale of the property. The operative portion of the order of the co-ordinate bench at para 9.5 to 9.8 is extracted hereunder:-

9.5 The learned counsel for the assessee has placed reliance on the decision of the ITAT, Ahmedabad Bench in the case of Aspi Ginwala & Others Vs. ACIT in & 3227/Ahd/2011 dt.30.3.2012 wherein on similar facts i.e investment of Rs.50 lakhs each was made in two different financial years but within the period of six months from the date of sale, it was held in para 8 of the said order that the assessee is entitled to exemption of Rs.1 Crore as the six months period for investment in eligible investments involved in two financial years. 9.6 The learned Departmental Representative however placed before us an earlier judgment, contrary to the decision of the Ahmedabad Bench of the ITAT, rendered by the ITAT, Jaipur Bench in the case of ACIT Vs. Raj Kumar Jain & Sons in ITA No.648/JP/2011 dt.30.1.2012 wherein the Tribunal on similar facts, was of the view that a liberal interpretation will lead to discrimination adversely affecting those who sell a property at any time from April to September of a financial year vis-à-vis those who sell property in the period October to March of the same financial year. In this view of the matter, they came to the conclusion that for the investment to be made within a period of six months, the exemption under section 54EC of the Act is to be restricted to Rs.50 lakhs only. 9.7 The learned counsel for the assessee placed reliance on circular No.3/2008 dt.12.3.2008 issued by CBDT, being an explanatory note on the provisions relating to Direct Taxes in Finance Act, 2007. In the said para 28.2 thereof the reason for it to set a limit on the quantum of investment by a person in a financial year, reads as under : “ 28.2 The quantum of investible bonds issued by NHAI and REC being limited, it was felt necessary to ensure that the benefit was available to all the investors. For this purpose, it was necessary to ensure that the limited number of bonds available for subscription is also available for small investors. Therefore, with a view to ensure equitable distribution of benefits amongst prospective investors, the government decided to impose a ceiling on the quantum of investment that could be made in such bonds. Accordingly, the said section has been amended so as to provide for a ceiling on investment by an assessee in such long- term specified assets. Investments in such specified assets to avail exemption under section 54EC, on or after 1st day of April, 2007 will not exceed fifty lakh rupees in a financial year.”

It is clear form the Circular no.3/2008 of CBDT (supra) that the Government only intended to restrict the investment in a particular financial year and thus has fixed a limit of Rs.50 lakhs as permissible investment in a particular financial year. It also appears clear that the Government did not intend to restrict the maximum amount of exemption permissible under section 54EC of the Act. The fact that the Legislature has consciously used the words “in a financial year” in the proviso to section 54EC of the Act also fortifies the same. If the Legislature wanted to restrict the exemption itself to Rs.50 lakhs it could have simply dispensed with using the words “in a financial year.” 9.8 The judicial decisions relied upon by the learned counsel for the assessee also support the stand of the assessee. The Hon'ble Apex Court while deciding the case of Vikrant Tyres Ltd Vs. First ITO reported in 247 ITR 821 have already laid down the law on interpreting of statutes by holding thereof that :- “ It is settled principle in law that the courts while construing Revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statute and the so called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the tax payer is brought within the net he is caught, otherwise he has to go free.”

In the case of CWT Vs. Hashmatunnisa Begum reported in 176 ITR 98 (SC), the Hon'ble Apex Court held that while interpreting statutes, literal construction has to be applied regardless of results and that only in a situation where two views are reasonably possible, should reference be given to that view which promotes constitutionality and not where the statute can be read only in a particular way. The following decisions of the Hon'ble Apex Court have laid down the proposition that provisions for deduction, exemption or relief are to be construed liberally in order to advance the objective and not to frustrate it. (i) CIT Vs. Gwalior Rayon Silk Manufacturing Co. Ltd. (196 ITR 149)(SC) (ii) CIT Vs. Vegetable Products Ltd. ( 88 ITR 192) (iii) Bajaj Tempo Ltd. Vs. CIT (196 ITR 188)(SC) Taking into consideration the overall facts and circumstances of the case, the CBDT’s Circular No.3/2008, and the principles laid down by the Hon'ble Apex Court for interpreting statutes, we are of the considered view that it would be in the fitness of things, to follow the decision of the ITAT, Ahmedabad Bench in the case of Aspi Ginwala & Others (supra) relied on by the assessee and hold that the assessee is entitled to total deduction under section 54EC of the Act spread over a period of two financial years @ Rs.50 lakhs each on investments made in specified instruments within a period of six months from the date of sale of the property.

3.2.4 The Hon’ble Madras High Court in the case of CIT Vs. C Jaichander and Another in its order in TCA No.419 & 533 of 2014 dated 15/9/2014 has held that the provisions of sec. 54EC(1) of the Act mandates the time limit for investment as 6 months and the benefit that flows from the first proviso is available to the extent of Rs.50 lakhs in any financial year. Even if such investment falls under two financial years, the benefit claimed by the assessee cannot be denied. The Hon’ble High Court after considering the latest amendment in the provisions w.e.f 1/4/2015 has upheld the decision of the ITAT, Chennai in allowing exemption to the extent of Rs.50 lakhs for each financial year, if the investment is made within the stipulated period of six months. In this case, the question that fell for consideration of the Hon’ble High Court was as under:- “2. These appeals were admitted on the following substantial questions of law: (i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is eligible for deduction of Rs.1 Crore under Section 54EC, in respect of investment of Rs.50 Lakhs made in two different financial years? ii) Whether on the facts and circumstances of the case, the Tribunal was right in not referring the matter to the Special Bench under Section 255(4), when there are conflicting views by different benches?"

3.2.5 The Hon’ble Madras High Court while upholding the decision of the Chennai Bench of ITAT at para 7 to 11 of its order (Supra) held as under:- “7. On a plain reading of the above said provision, we are of the view that Section 54EC(1) of the Act restricts the time limit for the period of investment after the property has been sold to six months. There is no cap on the investment to be made in bonds. The first proviso to Section 54EC(1) of the Act specifies the quantum of investment and it states that the investment so made on or after 1.4.2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees. In other words, as per the mandate of Section 54EC(1) of the Act, the time limit for investment is six months and the benefit that flows from the first proviso is that if the assessee makes the investment of Rs.50,00,000/- in any financial year, it would have the benefit of Section 54EC of the Act.

asset, the proportionate capital gains so invested in the long-term specified asset out of total capital gain shall not be charged to tax. The proviso to the said sub-section provides that the investment made in the long term specified asset during any financial year shall not exceed fifty lakh rupees. It is proposed to insert a proviso below first proviso in said sub-section (1) so as to provide that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 201516 and subsequent years. Memorandum: Explaining the provisions in the Finance (No.2) Bill, 2014: Capital gains exemption on investment in Specified Bonds. The existing provisions contained in: sub-section (1) of section 54EC of the Act provide that where capital gain arises from the transfer of a long-term capital asset and the assessee has, at any time within a period of six months, invested the whole or any part of capital gains in the long term specified asset, out of the whole of the capital gain, shall not be charged to tax. The proviso to the said subsection provides that the investment made in the long-term specified asset during any financial year shall not exceed fifty lakh rupees. However, the wordings of the proviso have created an ambiguity. As a result the capital gains arising during the year after the month of September were invested in the specified asset in such a manner so as to::split the investment in two years i.e., one within the year and second in the next year but before the expiry of six months. This resulted in the claim for relief of one crore rupees as against the intended limit for relief of fifty lakhs rupees. Accordingly, it is proposed to insert a proviso in sub- section (1) so as to provide that. investment made by an assessee in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, during the financial year in Which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years."

3.2.6 Following the decision of the Hon’ble Madras High Court in the case of CIT Vs. C Jaichander & Another (Supra) and the decision of the co-ordinate bench of this Tribunal in the case of Vivek Jairazbhoy (Supra), we hold that as per the unamended provisions of sec. 54EC of the Act, the assessee is entitled for exemption of Rs.1 crore, when the assessee has satisfied both the conditions of investment in specified bonds of Rs.50 laksh in each financial year and the said investment is within the stipulated period of 6 months. In the factual matrix of the case, as discussed above, the AO is accordingly directed to allow the assessee exemption u/s 54EC of the Act to the extent of LTCG of Rs.91,36,734/- arising on sale of the said property. We hold and direct accordingly. Consequently, the grounds raised by the assessee are allowed.

Order pronounced in the open court on 27th September, 2017.