DCIT CIR 6(1), MUMBAI vs. NILESH RAMESH GANJWALA, MUMBAI

Date of Hearing –27.04.2017 Date of Order -27.04.2017 O R D E R PER: SHAMIM YAHYA This appeal by the assessee is directed against order of Ld. CIT-A dated 16.09.2014 and pertains to assessment year 2012-12.

1. Whether on the facts and circumstances of the case and in law, the Ld. CIT-A erred in allowing exemption u/s. 54EC of the I.T. Act, 1961 on the basis of investment in REC Bonds Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 made two times spanning two different financial year ignoring the fact that the total investment made by the assessee exceeded the statutory limit of Rs.50 lakhs in respect of capital gains offered for tax of impugned the assessment year.

2. The appellant prays that the order of CIT-A on the above grounds be set aside to the file of AO or confirm the order of the AO. 3. ―The appellant craves leave to amend or later any granted or add a new ground which may be necessary.‖ 3. In this case the assessee had claimed exemption u/s.54EC at Rs.1,00,00,000/- out of the Long Term Capital Gains. During assessment proceedings, the assessee was asked to justify the said exemption of Rs.1,00,00,000/- as against the limit Rs.50,00,000/- specified under that section. The A.O further observed that investment of Rs.50,00,000/- each were made within 6 months from the date of sale of capital assets twice in the year, and the investments in bonds of REC Bonds do not exceed Rs.50,00,000/- per FY. It was contended by the assessee before A.O. that there is no restriction on the quantum of deduction allowable u/s.54EC of the Act. That the limit prescribed under the first proviso to the section is only in respect of investment during a financial year. That it is only the investment during a financial year which is restricted to Rs.50,00,000/- and not the deduction u/s.54EC of the Act. That in view of the above, the assessee submitted that deduction of Rs.1,00,00,000/- was correctly claimed u/s.54EC of the Act.

Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 However the A.O was not satisfied he referred to the provisions of section 54EC and the proviso there to. A.O concluded as under:-

―The case of the assessee is squarely covered by the decision of Hon‘ble ITAT, Jaipur ‗A‘ Bench in the case of ACIT Vs. Shri Raj Kumar Jain & sons (HUF)(2012) 20 ITR(T) 212 (Jaipur), wherein a similar case of the assessee, the deduction u/s. 54EC, in respect of investments in long term specified assets of Rs.100 lakhs spread over two financial years, was restricted to Rs.50 lakhs only. In view of the aforesaid discussion, it is established that the assessee had made a wrong interpretation of the provisions of Section 54EC, and consequently claimed double deduction amounting to Rs.100 lakhs Instead of Rs.50 lakhs as allowable) and hence, the excess claimed amount of Rs.50,00,000/- is added back to the total income of the assessee.‖ 4. Upon assessee’s appeal Ld. CIT-A decided the issue in favour of assessee by placing reliance upon several other decisions. He concluded as under:-

―Adverting to the instant case the fact on record clearly demonstrates that the assessee had made investment of Rs.1 crore split into Rs.50 lacs each in two financial year on 21.01.2011 and 06.07.2011 respectively. Hence the ratio of the decision, supra, is applicable in the assessee‘s case. In view of the aforesaid discussion, the factual and legal matrix of the case the addition of Rs.50 lacs u/s. 54EC stands deleted.‖ 5. Against this order revenue is in appeal before us. We have heard both the counsel and perused the records. Ld. D.R relied upon the order’s of the A.O and the grounds of appeal

. Per contra Ld.

3. Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 Counsel of the assessee submitted that identical issue was considered by Hon’ble Madras High Court in the case of CIT vs. C. Jaichander 370 ITR 579. Ld. Counsel submitted that after elaborate consideration the Hon’ble High court has found that second provisio to section 54EC is effectively from 11.04.2015. Hence Ld. Counsel submitted that the said proviso is not applicable in assessee’s case and hence the A.O’s order is unsustainable.

―The key issue that arises for consideration is whether the first proviso to Section 54EC(1) of the Act would restrict the benefit of investment of capital gains in bonds to that financial year during which the property was sold or it applies to any financial year during the six months period. For better understanding of the issue, it would be apposite to refer to Section 54EC(1) of the Act, which reads as under: ―Section 54EC. Capital gain not to be charged on investment in certain bonds.— (1) Where the capital gain arises from the transfer of a long term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,— (a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45 ; (b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long term specified asset bears to the whole of the capital gain, shall not be charged under section 45. Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees.‖ 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(1) of the Act. The legislature noticing the ambiguity in the above said provision, by Finance (No.2) Act, 2014, with effect from 1.4.2015, inserted after the existing proviso to sub-section (1)

Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 of Section 54EC of the Act, a second proviso, which reads as under: ―Provided further 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.‖ At this juncture, for better clarity, it would be appropriate to refer to the Notes on Clauses – Finance Bill 2014 and the Memorandum explaining the provisions in the Finance (No.2) Bill, 2014, which read as under: ―Notes on Clauses – Finance Bill 2014: Clause 23 of the Bill seeks to amend section 54EC of the Income-tax Act relating to capital gain not to be charged on investment in certain bonds. The existing provisions contained in sub-section (1) of section 54EC provide that where capital gain arises from the transfer of a long-term capital asset and the assessee has within a period of six months invested the whole or part of capital gains in the long-term specified 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.

Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent years. Memorandum explaining the provisions in the Finance (No.2) Bill, 2014 (see[2014] 365 ITR (St.) 149, 184). 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 the 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.

Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years.‖ The legislature has chosen to remove the ambiguity in the proviso to Section 54EC(1) of the Act by inserting a second proviso with effect from1.4.2015. The memorandum explaining the provisions in the Finance (No.2)Bill, 2014 also states that the same will be applicable from 1.4.2015 in relation to assessment year 2015-16 and the subsequent years. The intention of the legislature probably appears to be that this amendment should be for the assessment year 2015- 2016 to avoid unwanted litigations of the previous years. Even otherwise, we do not wish to read anything more into the first proviso to Section 54EC(1) of the Act, as it stood in relation to the assessees. In any event, from a reading of Section 54EC(1) and the 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. It would have made a difference, if the restriction on the investment in bonds to Rs.50,00,000/- is incorporated in Section 54EC(1) of the Act itself. However, the ambiguity has been removed by the legislature with effect from 1.4.2015 in relation to the assessment year 2015-16 and the subsequent years. For the foregoing reasons, we find no infirmity in the orders passed by the Tribunal warranting interference by this Court. The substantial questions of law are answered against the Revenue and these appeals are dismissed. No costs.‖ 7. On the touchstone of above said case law we find that assessee is eligible for exemptions as per the extant provision of Section 54EC for the whole of the amount of Rs. One Crores invested. As held by the Hon’ble High court the second proviso was Nilesh Ramesh Ganjwala ITA no.7112/Mum./2014 not applicable in the assessment year we are dealing with. Hence it was permissible on the part of assessee to make investment of Rs. 1 crore split into Rs. 50 lakh each in two financial years that is on 21.01.2011 and 06.07.2011 respectively. Accordingly we do not find any infirmity in the order of Ld. CIT-A. Accordingly we uphold the same.