Commissioner Of Income Tax Circle Xiv, Chennai - 6 v. Vijay M.mahtaney

In the High Court of Judicature at Madras Dated: 18.06.2013 Coram The Honourable Mrs.JUSTICE CHITRA VENKATARAMANandThe Honourable Ms.JUSTICE K.B.K.VASUKI Tax Case (Appeal) No.152 of 2010 Commissioner of Income Tax Circle XIV, Chennai - 6. ....Appellant Vs. Vijay M.Mahtaney ....Respondent APPEAL under Section 260 A of the Income Tax Act against theorder dated 4.9.2009 made in I.T.A.No.1017/Mds/2008 on the file ofthe Income Tax Appellate Tribunal 'C' Bench for the assessment year2003-04. and against the Commissioner of Income Tax, Chennai-X,Chennai-34. Dt.10.12.2007 Made in C.No.10113/4/CIT-X/06-07againstP.A.NO./G.I.R.NO.617164-V Dated 24.01.2006 on the file of theAsst.Commissioner of Income Tax Circle XIV, Chennai-6. For Appellant : Mr.J.NarayanaswamyFor Respondents : Mr.R.Vijayaraghavan forM/s.Subbaraya Aiyar------- J U D G M E N T (Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) The above Tax Case (Appeal) is filed at the instance of theRevenue against the order of the Income Tax Appellate Tribunal forthe assessment year 2003-04 by raising following substantial questionof law: "Whether, on the facts and circumstances of the case, theTribunal was right in deciding that, first, the computationof capital gain has to be given effect to and then onlyapply the provisions of Section 70 of the Income Tax Act?" https://hcservices.ecourts.gov.in/hcservices/ 2. It is seen from the facts narrated that the assessee hereinmade a long term capital gain to the tune of Rs.6,42,22,435/- on thesale of shares. Admittedly, the assessee had invested the long termcapital gains in REC Bonds to the tune of Rs.6,50,00,000/-. Apartfrom this, there were long term capital loss on sale of shares andimmovable properties which were claimed to be carried forward to thesubsequent years. The Assessing Officer apparently agreed with theassessee on this state of affairs. However, in exercise ofjurisdiction under Section 263 of the Income Tax Act, 1961, theCommissioner of Income Tax (Appeals) viewed that as per Section 74(1)of the Income Tax Act, the loss relating to the long term capitalasset shall be first set off against income, if any, under the head"Capital gains" assessable for that assessment year in respect of anyother capital asset not being a short term capital asset and thenonly the exemption under Section 54 EC would apply. He thus heldthat the assessment completed under Section 143(3) of the Income TaxAct is thus erroneous and prejudicial to the interest of the Revenuerequiring revision of assessment. While summarily rejecting theassessee's reply based on Section 54 EC, the Commissioner of IncomeTax (Appeals) directed the Assessing Officer to redo the assessment. 3. Aggrieved by the same, the assessee went on appeal before theIncome Tax Appellate Tribunal. The Tribunal pointed out that eventhough Section 45(1) does not specify Section 54EC as had been doneby erstwhile Sections 54, 54A, 54B, 54EA, 54EB and 54F, yet, going bythe import of Section 54EC(1)(a) and (b), the assessee was entitledto take advantage of the said provisions even before working outSection 70. Pointing out to the scheme of Sections 45 to 55A whichprovide for the computation of capital gains, the Tribunal held thateffect has to be given first to the provision of capital gains asgiven under the above scheme and then apply the provisions of Section70. It viewed that Section 70 would come into play only when thecapital gains have been computed in accordance with the provisionscontained in Sections 45 to 55A. Irrespective of whether Section54EC(1) is found in Section 45 or not, in terms of Section 54EC, theeffect of it cannot be ignored, as the investment in REC bonds takesthe capital gains out of the charging provision. Since the amountinvested in REC bonds does not enter into the computation at all, therevision done was not sustainable in law. Consequently, the Tribunalset aside the order of the Commissioner of Income Tax (Appeals).Aggrieved by this, present appeal has been filed by the Revenue. 4. Before going into the contentions raised herein, the relevantprovisions of Sections 45(1), 54EC and 70 of the Income Tax Act,relevant to the assessment years, have to be noted, which read asfollows:- Capital gains. Section 45(1) Any profits or gains arising from thetransfer of a capital asset effected in theprevious year shall, save as otherwise provided insections 54, 54B, 54D, 54E, 54 EA, 54 EB, 54F, 54Gand 54H, be chargeable to income tax under the head"capital gains", and shall be deemed to be theincome of the previous year in which the transfertook place. Capital gain not to be charged on investment incertain bonds. Section 54 EC (1) Where the capital gain arisesfrom the transfer of a long term capital asset (thecapital asset so transferred being hereafter inthis section referred to as the original asset) andthe assessee has, at any time within a period ofsix months after the date of such transfer,invested the whole or any part of the capital gainsin the long term specified asset, the capital gainshall be dealt with in accordance with thefollowing provisions of this Section, that is tosay- (a) if the cost of the long term specified asset isnot less than the capital gain arising from thetransfer of the original asset, the whole of suchcapital gain shall not be charged under Section 45. (b) if the cost of the long term specified asset isless than the capital gain arising from thetransfer of the original asset, so much of thecapital gain as bears to the whole of the capitalgain the same proportion as the cost of acquisitionof the long term specified asset bears to the wholeof the capital gain, shall not be charged underSection 45. Set off, or carry forward and set off.Set off of loss from one source against income fromanother source under the same head of income. Section 70. (1) Save as otherwise provided in thisAct, where the net result for any assessment yearin respect of any source falling under any head ofincome, other than "Capital gains", is a loss, theassessee shall be entitled to have the amount ofsuch loss set off against his income from any othersource under the same head. (2) Where the result of the computation made forany assessment year under Sections 48 to 55 inrespect of any short term capital asset is a loss,the assessee shall be entitled to have the amountof such loss set off against the income, if any, asarrived at under a similar computation made for theassessment year in respect of any other capitalasset. Section 70. (1) Save as otherwise provided in thisAct, where the net result for any assessment yearin respect of any source falling under any head ofincome, other than "Capital gains", is a loss, theassessee shall be entitled to have the amount ofsuch loss set off against his income from any othersource under the same head. (2) Where the result of the computation made forany assessment year under Sections 48 to 55 inrespect of any short term capital asset is a loss,the assessee shall be entitled to have the amountof such loss set off against the income, if any, asarrived at under a similar computation made for theassessment year in respect of any other capitalasset. (3) Where the result of the computation made forany assessment year under sections 48 to 55 inrespect of any capital asset (other than a shortterm capital asset) is a loss, the assessee shallbe entitled to have the amount of such loss set offagainst the income, if any, as arrived at under asimilar computation made for the assessment year inrespect of any other capital asset not being ashort term capital asset. 5. Thus consequent on insertion of Section 54 EC, sunset clauseswere inserted under the Finance Act, 2000 dated 1.4.2001 in Section54 EA and Section 54 EB to cover cases of transfer of long termcapital asset made before 01.04.2000. Explaining the introduction ofthe said provisions, the Board, by its Circular in Circular No.794dated 9[th] August, 2000, in paragraph 30, stated as follows:- 30.Sunset Clauses to Sections 54EA and 54EB andintroduction of a new Section 54EC to ensurefocussed investment of capital gains inagricultural finance and highway infrastructure. 30.1 Under the existing provisions, sections 54EAand 54EB of the Income Tax Act offer a basket ofinvestment options to absorb taxable capital gainsarising from transfer of long term capital assets.The notified instruments providing the roll-overto capital gains include shares, bonds, units anddeposits of banks and various other instruments.The two sections were introduced in 1996 to givean incentive to the development of infrastructure.However, the objective has been diluted in thepresence of a large number of varied and diverseinstruments. Further, incentives to infrastructureare also available under other sections of theIncome Tax Act such as sections 80-IA, 80-IB and10(23G). In a regime of low tax rate on long termcapital gains, there is very little justificationfor having such an omnibus basket of exemptions.Therefore, it has been decided to insert sun-setclauses to sections 54EA and 54EB limiting their application to transfers of long term capitalasset made on or before 31[st] March 2000. Where thecapital gain has arisen on transfers made before31[st] March, 2000, the investments in notifiedsecurities can be made under Sections 54EA and54EB beyond that date but within the stipulatedperiod. 30.2.In place of sections 54EA and 54EB, which arebeing terminated, a new section namely, 54EC, hasbeen inserted for transfer of capital assets madeon or after 1[st] April, 2000. The new section willallow exemption from tax on long term capitalgains, if invested in bonds, targeted exclusivelyonagriculturalfinanceandhighwayinfrastructure. The instruments in question shallbe bonds, redeemable after three years, to beissued by the National Bank for Agriculture andRural Development (NABARD) and the NationalHighway Authority of India (NHAI). The exemptionfrom long term capital gains shall be to theextent of investment in these bonds. 30.2.In place of sections 54EA and 54EB, which arebeing terminated, a new section namely, 54EC, hasbeen inserted for transfer of capital assets madeon or after 1[st] April, 2000. The new section willallow exemption from tax on long term capitalgains, if invested in bonds, targeted exclusivelyonagriculturalfinanceandhighwayinfrastructure. The instruments in question shallbe bonds, redeemable after three years, to beissued by the National Bank for Agriculture andRural Development (NABARD) and the NationalHighway Authority of India (NHAI). The exemptionfrom long term capital gains shall be to theextent of investment in these bonds. 30.3. These bonds will have a lock in period ofthree years. Any transfer or conversion of bondsinto money during the lock-in period will make theamount so converted as deemed capital gainstaxable in the year of transfer or conversion.Such deemed capital gain will also arise, if anyloan or advance is taken on the security of thesebonds. Further, any amount invested in these bondswill not be eligible for deduction under Section88 of the Income Tax Act. 30.4 These amendments will take effect from 1[st] dayof April, 2001 and will accordingly apply to theassessment year 2001-2002 and subsequent years. 6. Thus, going by the circular issued and the insertion ofSection 54EC is only a substitute in the place of Section 54EA andSection 54EB to cover cases of transfer of long term capital asset onand from 01.04.2001, we do not find that the argument of the Revenueby reason of Section 45, not excluding the operation of Section 54EC,the other provisions under Section 54EC would stand at differentfooting from that of similarly worded other provisions under the saidChapter. It may further be seen that as per Section 54EC(1)(a) onthe capital gains arising from the transfer of long term capitalasset invested in accordance with the said Section, capital gainsshall not be charged under Section 45. 7. Secondly, one may also note that Section 54EC does notspecifically mention about specified nature of transfer or of anyspecified long term capital asset. On the other hand, it merelyspeaks about the "capital gain arising out of a long term capitalasset". 8. Contrast this with Section 54 which deals with capital gainsarising on sale of property used for residence. Section 54specifically provides that in the case of capital gains arising fromthe transfer of long term capital asset, being a residential house,exemption would be available if the assessee has purchased within aperiod of one year before or two years after the date on which thetransfer took place, a residential house or within a period of threeyears after that date, constructed the residential house. Section 54(2) provides that the amount of capital gains not appropriated by theassessee towards the purchase of the new asset or purchase andconstruction of the new asset before the date specified in Section 54(1), shall be deposited in the specified Bank or institution andutilised in accordance with any scheme which the Central Governmentmay notify. Section 54B deals with capital gain on transfer of landused for agricultural purposes not to be charged. Section 54D dealswith Capital gain on compulsory acquisition of lands and buildingsnot to be charged. Section 54E deals with capital gain on transferof capital assets not to be charged. Section 54EA deals with Capitalgain on transfer of long-term capital assets not to be charged in thecase of investment in specified bonds or debentures and Section 54EBdeals with capital gain on transfer of long-term capital assets notto be charged. 9. A reading of Section 54EC shows that it replaced Sections54EA 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 tobe available with reference to transfer of long term capital assetsbefore 01.04.2000. Thus relief of transfer under Section 54EC isavailable in respect of transfers from the accounting year relevantto the assessment year 2001-02 to preserve the continuity of thebenefit of deduction with the only difference that Section 54EClimits the available bonds for purposes of reinvestment benefit withthe minimum lock in the period of three years. The bonds availablefor benefit under Section 54E are part of the statute itself. ThusSection 54EA and 54EB would have relevance to the transfer of longterm capital before 01.04.2000 and Section 54EC, to the transfer madeon or after 01.04.2001. 10. Thus, if, for working out the relief under Section 54, theRevenue does not insist upon the applicability of Section 70(3), wedo not find any acceptable reason as to how Section 70(3) would standattracted in the case of Section 54EC. Thus, we reject the argumentof the Revenue that for the purpose of working out the relief underSection 54 EC, one has to take recourse first to Section 70(3) and then only look at Section 54 EC. A reading of Section 70(3) showsthat the loss that has to be looked at first is not with reference tothe loss arising in respect of any new capital asset, but in thetotality of the loss suffered on the sale of capital asset chargeableto tax under Section 45. On the other hand, Section 54EC is specificwith reference to investment in specified bonds as regards thecapital gain arising from and out of a long term capital asset. Thusgoing by the scheme of the Act and the Board circular, we accept theplea of the assessee that for taking benefit under Section 54E, it isnot necessary that one should first apply Section 70(3) andthereafter only, the assessee could invest the capital gain arisingfrom the long term capital asset to any specified bond as specifiedunder Section 54EC. 11. In the light of the above, we find no error in the order ofthe Tribunal in setting aside the order of the revision made by theCommissioner of Income Tax (Appeals). In the circumstances, we rejectthe appeal, thereby, confirm the order of the Tribunal. The above TaxCase (Appeal) is dismissed. No costs. bg Sd/Asst.Registrar//true copy// Sub Asst.RegistrarTo1.The Asst.Registrar, Income Tax Appellate Tribunal 'C' Bench, Mds.2.Commissioner of Income TaxCircle XIV, Chennai.3.Commissioner of Income Tax, Income Tax Department, Chennai X,Chennai-34. 4.The Asst.Commissioner of Income Tax Circle XIV, Chennai-6. + 1 CC TO MR.R.VIJAYARAGHAVAN, ADVOCATE SR.29710.+ 1 CC TO MR.J.NARAYANASAMY, ADVOCATE SR.29950. T.C.(A) No.152 of 2010 KR/18/07/2013