P.V.GOPALAKRISHNA,VELLORE vs. ACIT, VELLORE

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The appeal filed by the assessee is directed against order of Commissioner of Income Tax (Appeals)-13, Chennai, dated 19.10.2015 for the assessment year 2011-12 passed u/s.143(3) and 250 of Income Tax Act, Act, 1961 (herein after referred to as ‘the Act’).

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At the time of hearing, the assessee has not pressed ground 2.

no.3.1 and 3.2 for credit of TDS and also ground no.4 and made an

endorsement in the appeal petition.

The first ground raised by the assessee is that 3.

Commissioner of Income Tax (Appeals) erred in upholding the order of

Assessing Officer on denying the exemption u/s.54EC of the Act

investment in REC capital gains bonds falling in two financial years.

having income from salary, rental income, capital gains and interest

income and filed e-return on 28.09.2011 declaring total income

�4,97,77,530/- and same was processed u/s.143(1) of the Act and

subsequently the case was selected for scrutiny through CASS and

notices u/s.143(2) and 142(1) of the Act was issued with

questionnaire. In compliance, the ld. Authorised Representative of

assessee appeared from time to time and filed details and produced

books of accounts and written submissions. The Assessing Officer

verified the source of income and Assessing Officer found that

assessee has made investments in REC bonds �50,00,000/- on

14.03.2011 and �50,00,000/- on 27.04.2011 and also assessee filed

explanation that assessee has complied with the provisions of

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Sec.54EC as investment was made within the period of six months

from the date of transfer and relied on the Tribunal decisions. But the

Assessing Officer though accepted Tribunal decision in the cases of

Coromandel Industries (P) Ltd vs. ACIT, Company Circle I(3), Chennai

36 taxmann.6 (Chennai) and Smt. Sriram Indubal vs. ITO 32

taxmann.com 118 (Chennai) as under:-

"The ITAT has held that the first condition mentioned in section 54EC(1) is that the investment has to be made within a period of six months from the date of transfer of capital asset. Said proviso mentions that investment on which an assessee could claim exemption under section 54EC(1) shall not exceed ₹.50 lakhs during a financial year. So the exemption provision has to be construed not transaction wise but, financial year wise. Explanatory memorandum does say that limitation has view to ensure equitable distribution of benefits among the prospective investors. Last sentence of the Explanatory memorandum clearly states that the exemption for investment cannot exceed ₹50 lakhs in a financial year. Since the assessee here has placed ₹50 lakhs in two difference financial years but within six months period from the date of transfer of capital assets, assessee was definitely eligible to claim exemption upto ₹1 crore’’.

but deferred with the decisions of Tribunal as the Department has filed

appeal against the order of Tribunal in the High Court and made

elaborative finding in his order and came to a arbitrary conclusion

that the investment of �50,00,000/- in bonds should be restricted as

per exemption u/s.54EC of the act and dealt on the provisions of

Sec.45 as under:-

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‘’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 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’’.

The ld. Assessing Officer based on the action of Department in filing

an appeal in High Court, disallowed exemption of �50,00,000/- and

assessed total income of �.6,48,77,528/- and raised demand.

Aggrieved by the order of Assessing Officer, the assessee filed an

appeal before Commissioner of Income Tax (Appeals).

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In the appellate proceedings, the ld. Authorised 5.

Representative of assessee explained the facts and argued the grounds

and supported his arguments with judicial decisions and produced

supporting documents in respect of sale of shares and allotment letter

of REC bonds u/sed. 54EC of the Act as on 31.03.2011 and second

allotment letter dated 30.04.2011. The ld. Commissioner of Income

Tax (Appeals) considered the submissions on the provisions of Sec.

54EC of the Act and Department circular no.3/2008 and but made

distinction on the decision relied by the assessee and deferred the

judgment of High Court and come to a unilateral conclusion that

assessee is eligible only for �50,00,000/- as investment u/sec. 54EC of

the Act and concurred with the findings of the Assessing Officer and

dismissed the appeal of the assessee. Aggrieved by the order of

Commissioner of Income Tax (Appeals), the assessee filed an appeal

before Tribunal.

Before us, the ld. Authorised Representative urged the 6.

grounds and explained that there is no dispute on calculation of long

term capital gains and investments by the assessee except

understanding the provisions of Sec.54EC (1) of the Act were assessee

has made investments in REC bonds of �50,00,000/- each on

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14.03.2011 and 27.04.2011 in two financial years. The ld. Assessing

Officer and Commissioner of Income Tax (Appeals) has expressed his

own opinion in interpreting the definition and the dictionary meaning

of ‘’any’’ in the provisions further Assessing Officer suo-motu took the

decision by distinguishing judicial decision and restricted �50,00,000/-

is for one financial year only and excess claim was disallowed. The

provisions of Sec. 54EC of the Act are beneficial provision and to be

construed liberally. The investment by the assessee in Sec. 54EC

Bonds within the period of six months from date of sale of property is

as per law and supported the submissions with the jurisdictional High

Court decisions and prayed for allowing the appeal.

Contra, the ld. Departmental Representative relied on the 7.

orders of the lower authorities, CBDT circular and spirit of amendment

of Sec. 54EC of the Act vehemently opposed to the grounds of the

assessee.

record and judicial decisions. The assessee has invested long term

capital gains within six months from the date of transfer of Asset in

Rural Electrification Corporation bonds (REC) under Sec.54EC of the

Act and complied with the provisions of law by purchasing the bonds in

March, 2011 �50,00,000/- and �50,00,000/- in April, 2011 both falls

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within six months from date of transfer of asset and there is no dispute

about the investment and the provisions u/s.54EC of the Act in

investment in bonds is as under:-

’’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’’

this provision has been amendment by Finance Act, 2014 w.e.f.

1.04.2015 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 rupeees’’.

On combined reading of both the provisions, the legislative intent in

the subsequent amendment is to restrict the investment of

�50,00,000/- to one financial year only. There was ambiguity and

confusion on interpreting the provisions as the Commissioner of

Income Tax (Appeals) examined the issue on the interpreting the

word ‘’any’’ referring to dictionary meaning because there was no

certainty was visualized considering the provisions, CBDT circulars and

facts of the case. The Assessing Officer tried to make a distinction of

provisions for restricting investment of �50,00,000/- only in one

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financial year. The assessee has invested in two installments falling in

two financial years and availed tax exemption. Amendment of

provisions of Sec.54EC in Finance Act, 2014 are prospective and apply

from 01.04.2015 effective from assessment year 2015-16 onwards.

We considering the facts and amendment of provisions rely on the

jurisdictional High Court decision of CIT vs. C. Jaichander 370 ITR

579 (Mad) and CIT vs. Coramandel Industries Ltd 370 ITR 586 (Mad)

and setaside the order of the Commissioner of Income Tax (Appeals)

and direct the Assessing Officer to delete the addition and allow the

grounds in favour of the assessee.

The second ground raised by the assessee is that 9.

Commissioner of Income Tax (Appeals) erred in enhancement of

income on investments made by the assessee’s two minor children in

REC Bonds and denial of exemption u/s.54ECof the Act. The Assessing

Officer in the assessment order of the assessee u/s.143(3) of the Act

dated 26.03.2014 clubbed the income of minor children Luka Pullela

and Nethra Pullela u/s.64(1A) of the Act determined in the assessment

order dt. 16.12.2013. Aggrieved the assessee raised grounds against

action of Assessing Officer before Commissioner of Income Tax

(Appeals) alongwith other grounds.

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The ld. Commissioner of Income Tax (Appeals) under the 10.

powers u/s.251(1) & 251(2) of the Act issued show cause notice for

enhancement of income of minor children aggregated u/s.64(1A) of

the Act. In the opinion of the Commissioner of Income Tax (Appeals)

all such income should be clubbed irrespective of any benefit or

exemption to be granted to the minors. In compliance to the show

cause notice, the assessee filed objections on enhancement and

denial of exemption u/s.54EC of the Act to minor children.

The ld. Authorised Representative has filed and explained 11.

elaborately by petition dated 16.10.2015 on the facts with judicial

decisions. At the time of hearing assessee submitted copy of allotment

letter of REC bonds of �50,00,000/- as on 31.03.2011 to Luka and

Nethra and another �50,00,000/- allotted on 30.04.2011 and also

produced copy of assessment orders of the minor children were

deduction u/s.54EC of the Act was restricted only to �50,00,000/-

instead of �1,00,00,000/-. The contention of the ld. Authorised

Representative that the clubbing provisions u/sec. 64(1A) of the Act

shall be applicable on aggregating of total income after allowing

exemption u/s.54EC of the Act. The ld. Commissioner of Income Tax

(Appeals) considered the submissions on denial of exemption u/s.54EC

of the Act of two minor children and enhancement u/s.251(1) of the

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Act and observed at para 6 of his order and relied on written

submissions filed by the assessee on 13.10.2015. The ld.

Commissioner of Income Tax (Appeals) considered the submissions

and accepted the principles based on jurisdictional High Court and

Karnataka High Court decision but deferred on clubbing of total

income and relied on Sec. 64(1A) of the Act observed at page 16 of

his order and interpreted the computation of total income should

include all such income and not total income on which tax is levied

and dismissed the ground of the assessee observed at page 16 of his

order as under:-

’I have carefully considered the contentions of the appellate on the above issue. The relevant portion of Sec. 64(1A) reads under:- [(1A) In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor children suffering from any disability of the nature specified in section 80U: Provided that nothing contained in this sub-section shall apply in respect of such income as arises or accrues to the minor child on account of any-

(a) Manual work done by him or (b) Activity involving application of his skill, talent or specialized knowledge and experience. Explanation:- For the purposes of this sub- section, the income of the minor child shall be included, a) where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub- section) is greater ; or

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(b) where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year, and where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do] Thus in computing the total income of an individual, there shall be included ‘’All such income ‘’ as .............’’ and All such income is not ‘’the total income’’ the total income is the one on which tax is levied. Moreover after clubbing the minor's income with the father i.e. what deduction is eligible are allowed in the hands of father only i.e. the assessee. thus relying on the total income and all such income are not same because the total income is the one on which tax is computed as applicable where as after allowing exemptions/deductions etc the all such income leads to total income. so all such income arising in the minor's case will be clubbed u/ s 64(1A) in the father's gross income and exemptions and deductions eligible will be allowed accordingly to the sum of income i.e. that is income of the father aggregated with the income of the minor. In the instant case Capital gain which arose in the case of minor will be aggregated with the capital gain that arose in the hands of father and from there the eligibility of see 54EC will be decided.

Thus facts of the cases sighted above and insant case are distinguishable therefore as discussed above in the case of father the eligibility of claim of sec 54EC based on the statute proviso to sec 54EC and Departmental circular no 3 j 2008 where in clarification is clearly given that claim of sec 54 EC should not exceed 50lacs in any FY based on this Assessing Officer is directed to add "all such income" of the minor's in

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the hands of father u/.s 64(1A) and not the TOTAL INCOME of the minors and from the TOTAL INCOME arrived thereafter father alone will be eligible for exemption u/s 50EC based on the findings given above. Thus in view of see 251(1) & (2) of the It Act 1961 The income of the appellant is enhanced and the assessing officer is directed that the all such income of the minor children be aggregated u/s.54(1A) without allowing exemption u/s.54EC, Thus this ground of appellant is dismissed. Aggrieved by the order of Commissioner of Income Tax (Appeals), the

assessee assailed an appeal before Tribunal.

Before us, the ld. Authorised Representative argued on the 12.

denial of exemption u/s.54EC of the Act and substantiated the

arguments that Commissioner of Income Tax (Appeals) erred in

enhancing income of the assessee by denying exemption u/sec. 54EC

of �50,00,000/- allowed to two minor children and whose income has

been aggregated with parents. Further, the observations of

Commissioner of Income Tax (Appeals) that clubbing of income

should be before allowing any exemption u/s. 54EC of the Act on the

interpretation of word ‘’All such income‘’. But the total income of the

minor should be clubbed after allowing relief and prayed for allowing

the ground.

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Contra, the ld. Departmental Representative relied on the 13.

orders of the lower authorities and vehemently opposed the grounds

of the assessee and prayed for dismissal of appeal.

records and judicial decisions cited. It is nobody case that father has

invested in shares in the name of two minor children. The issue on

the investment u/sec 54EC of the Act has been pindown on two

aspects, the Commissioner of Income Tax (Appeals) has denied

exemption to the minor child and second issue being whether

income to be clubbed with parents ‘’total income’’ or ‘’such income’’

contested by the Revenue. We highlight the provisions of Sec. 64(1A)

of the Act were income of the minor has to be computed before

application of clubbing provisions. In respect of clam of exemption of

capital gain, the computation has to be worked out in the hands of

the minor and allow the exemption and subsequent income should be

added in the hands of the father u/s.64(1A) of the Act. The ld.

Authorised Representative supported his arguments with the judicial

decisions were

(i) JCIT vs Govind Rohira Alias Srichand Rohra 95 ITD 0077 were it was held that residential house property purchased by father in the name of minor son, out of capital gains arising from sale of shares held in the name of minor, is eligible for exemption u/s.54F.

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(ii) M.A.C. Khaleeli vs. DCIT 48 ITD 0191 were it was held that capital gains liable to be clubbed u/sec 64(1)(iv) are also eligible for exemption u/s.54F of the Act.

(iii) CIT vs. V.S. Chelliah 147 ITR 590 were it was held that the income of wife out of which insurance premium of her life was paid being includible in the hands of husband, deduction u/s.80C(2)(a)(i) is allowable in husband’s hand

(iv) CIT vs. S.K. Nayak 145 ITR 0791 were it was held that only the net salary income of spouse after providing Sec. 16(1) deduction and not the gross salary is liable to be clubbed with that of the assessee u/sec.64(1)(ii) of the Act.

(v) Smt. Babita P. Kunungo vs. DCIT 96 ITD 0091 were it was held that agricultural income not being a part of total income as defined in Sec. 2(45) r.w.s. 10(1), S. 64(1A) canoe be applied to agricultural income of minor nor the agricultural income of the minor children of the assessee can be said to be agricultural income of the assessee and therefore, agricultural income of the minor children of the assessee canoe be included in the income of the assessee for rate purposes.

So, considering the definition, interpretation of statutes, judicial

provisions of law applicable for minor children. We rely on the

decision of Tribunal DCIT vs. Rajeev Goyal, Kolkata in ITA No.951/Kol/2011, dated 1st June, 2012 were held as under:-

‘’there is nothing in the notification issued by Rural Electricity Corporation Ltd, dated 29.06.2006, in so far as deduction is to be allowed u/s.54EC. Section 64(1A) speaks of addition of total income of minor child and income of a minor child for purpose of inclusion u/s.64(1A) will be his total income. From above

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definition of total income as given u/s.2(45), it is clear that it is not gross total income but income of any person, who is an assessee, as computed under provisions of the Act, means total income as computed under provisions of the Act is to be added. Capital gain is to be computed under Chapter IV-E. Section 54EC provides that capital gain not to be charge on investment on certain bonds. Therefore investments made in certain bonds shall be outside scope of capital gain for purpose of computation of total income itself, It is not a deduction under Chap. VIA which comes into picture only after commuting total income and deductions are being allowed from gross total income as per Sec. 80A(1). Notification on which Assessing Officer relied upon have not put on any embargo on investments by an assessee but embargo is on allotment of bonds to a ‘’person; and such embargo is on allotting authority. Bonds have been allotted to three persons as per notification itself and assessee is entitled to benefits as per provisions of Sec. 54EC under which restriction have been put only for investments from 01.04.2007. Therefore, in view of judgment in the case of Segu Harnath 171 ITR 318 (AP), wherein income was clubbed in hands of her husband and where revenue did not allow standard deduction. Where assessee was a partner in a firm and his minor daughter was admitted to benefit of partnership in firm and assessee borrowed funds and invested same in partnership firm in name of his minor daughter, interest payable by assessee on capital borrowed by assessee on behalf of minor daughter was deductible u/s.67(3) from share income arising to minor child and it was only resultant income, after deduction which was to be included in total income of assessee u/s.64(1)(iii). Even if income of the minor is clubbed with income of other individual, all deductions are to be allowed while computation of income of minor /spouse and only net taxable income is to be clubbed u/s.64. Claim of assessee is allowed and Assessing Officer is directed to recomputed long term capital gains accordingly. Appeal dismissed.’’

the observations of Commissioner of Income Tax (Appeals) is bad in

law and minor children should be eligible for claim of exemption

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u/s.54EC of the Act and remaining amount has to be clubbed with the income of the assessee .

On the issue of investments u/sec. 54EC of the Act by minor 15. children falling in two financial years were allotment of REC bonds of �50,00,000/- in month of April, 2011, we have already decided the issue in favor of the assessee referred at para 8 of this order and same provision shall apply to minor children also and allow the ground of the assessee.

In the result, the appeal of the assessee in ITA 16. No.2254/Mds/2015 is allowed.

Order pronounced on Wednesday, the 4th day of May, 2016, at Chennai.

Sd/- Sd/- (चं� पूजार�) (जी. पवन कुमार) (CHANDRA POOJARI) (G. PAVAN KUMAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:04.05.2016 venu आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF