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November 10, 2020

Assessee is eligible for deduction of Rs.1 crore u/s 54EC prior to amendment by Finance Act, 2014 – ITAT

by CA Shivam Jaiswal in Income Tax

Assessee is eligible for deduction of Rs.1 crore u/s 54EC prior to amendment by Finance Act, 2014 – ITAT

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54EC, 54F etc.

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long-term capital asset being land or building or both and invested in NHAI or REC Bonds.

A taxpayer can claim exemption u/s 54EC if all the below conditions are satisfied:

  • Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption.
  • The asset sold is a Long-Term Capital Asset (LTCA) being Land or Building or Both. The asset is long Term if it has been held for more than 24 months.
  • Capital Gains are invested within 6 months from the date of transfer.
  • Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
  • The investment amount cannot be more than Rs. 50 lakhs during the current and succeeding financial year.

The Amount of Exemption under Section 54EC will be least of the following:

  • The Cost of NHAI/REC Bonds
  • The Capital Gains on the sale of land or building.

Withdrawal of exemption claimed under section 54EC

When bonds are sold within 5 years from the date of purchase, then the exemption u/s 54EC is withdrawn. The amount of exemption availed will be reduced from the cost of the asset. Capital Gains will be the total sales value minus the cost of the asset.

Prior to Finance Act, 2014, deduction under Section 54EC was restricted to Rs 50 lakhs. The second proviso was inserted to section 54EC(1) by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015.

According to the said second proviso, 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 should not exceed Rs 50 lakh.

Let us refer to the case of Arun Kumar B M Vs ITO (ITAT Bangalore), where the issue under consideration waswhether investment Rs. 1 crore in two different financial years but within 6 months from the date of transfer of the capital assets, was an allowable deduction under Section 54EC.

Facts of the Case:

  • The assessee is an individual and employee of M/sTata Consultancy Services Limited.
  • During the relevant assessment year, the assessee sold a plot on 20.03.2013 for Rs.2,25,00,000 and declared Rs.83,102 as long-term capital gains.
  • The assessee had claimed the following claim of deductions:
    1. deduction u/s 54F by depositing Rs.1,22,00,000 in the capital gains account scheme on 31.07.2013 towards purchase of a new residential property.
    2. deduction u/s 54EC by investing Rs.1,00,00,000 in REC Bonds amounting to Rs.50 lakh each on 31.03.2013 and 31.07.2013, respectively, within six months from the date of transfer.
  • The assessment was completed u/s 143(3). In the said assessment order, the claim of deduction u/s 54EC was restricted to Rs.50 lakh instead of Rs.1 crore claimed by the assessee.
  • The AO held that the assessee was required to invest Rs.50 lakh in REC Bonds in any financial year. The AO also relied on the amendments made to section 54EC vide Finance Act, 2014 w.e.f. 01.04.2015.
  • Aggrieved by the order of the AO, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view of the AO in restricting the claim of deduction u/s 54EC to Rs.50 lakh.
  • Aggrieved, with the order of the CIT(A), the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT).

Submissions before the ITAT

  • The assessee submitted that Rs1 crore was invested within six months from the date of sale of the asset, which had given rise to long term capital gains.
  • Accordingly, it was submitted that prior to the amendment to section 54EC w.e.f. 01.04.2015, the assessee was entitled to the entire claim of deduction of Rs1 crore.
  • The Departmental Representative supported the orders passed by the Income Tax Authorities.

Observations of the ITAT

  • As per the provisions of section 54EC, it was clear that the time limit for investment was6 months from the date of transfer and even if such investment fell under two financial years, the benefit claimed by the assessee could not be denied.
  • The amendment in Finance (No.2) Act, 2014 related to assessment year 2015-2016 [i.e. insertion of second proviso to section 54EC(1)] and the same applied prospectively for and from assessment year 2015­-2016.
  • A similar view as held by the following judicial pronouncements:
    1. Madras High Court in CIT v. C.Jaichander (370 ITR 579)
    2. Shri Vivek Jairazbhoy v. DCIT (International Taxation) (ITA No.236/Bang/2012 – order dated 14.12.2012)
    3. DCIT v. Borkatte Ganapathi Hegde (ITA No.964/ Bang/2016)

Since the assessee had invested Rs. 1 crore in two different financial years and within 6 months from the date of transfer of the capital assets, the limit of Rs.50 lakh is per financial year. Hence, the assessee was eligible for deduction of Rs.1 crore u/s 54EC.

However, after the amendment,investment made by an assessee during the financial year in which the asset or assets are transferred and in the subsequent financial year does not exceed Rs 50 Lakh.

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