I-T - Sec 54EC benefits cannot be denied if delay in investment of capital gains was on account of non-availability of tax-free bonds: ITAT
By TIOL News Service
NEW DELHI, MAY 16, 2018: THE ISSUE IS - Whether failure to purchase Rural Electrification Bonds before specified time limit of six months from the date of aquiring capital gain, will debar the investor from seeking exemption u/s 54EC if such failure was on account of non availability of bonds in the market. NO IS THE ANSWER.
Facts of the case:
The assessee, an individual, had sold his land situated at Village Bakkarwala, Delhi to M/s Prabhu Ram Buildwell Pvt. Ltd. for a consideration of Rs.1,80,20,833/- in which the assessee had 1/3rd share. The assessee's share came to Rs.60,06,944/- and after allowing the indexed cost of acquisition, the long term capital gains worked out to Rs.41,39,905/-. The assessee claimed that he had purchased capital gain tax exemption bonds issued by the Rural Electrification Corporation Ltd. amounting to Rs.42 lakhs and claimed deduction u/s 54EC. However, the AO pointed out that the assessee had transferred his capital assets on Oct 10, 2006 and the investment for purchase of Rural Electrification bond were required to be made within six months from the transfer of capital assets. Since investment was made beyond this period, the AO did not allow the deduction u/s 54EC. On appeal, the disallowance made by the AO was upheld by the FAA.
On further appeal before the ITAT, the assessee took an additional ground that the land sold by him was not a capital asset and therefore, the capital gain arising on the transfer of land was not taxable. The Tribunal admitted the additional evidence and restored the issue to the file of AO. As the Tribunal had restored the specific issue of additional ground, the AO gave an opportunity to the assessee to submit evidence with regard to the claim that the land sold was not a capital asset. Hence, notice was issued to the assessee specifically asking him to furnish the evidence with regard to the distance of his land from the nearest municipal limit. But, the assessee failed to do so and accordingly, the AO held that transfer of land amounting to Rs.41,39,905/- was chargeable to tax.
During second round of appeal, the CIT(A) dismissed the assessee's contention on the ground that in view of the provisions of Sec. 2(14), the land sold by him fell within the scope of the term 'capital asset' since the said land was situated within the limit of municipal limit of Delhi and was within the jurisdiction of municipality and the land was not rural agricultural land. So far as argument of assessee that he had invested in Rural Electrification Bond u/s 54EC, the FAA held that this was already considered in earlier round of proceedings where he had upheld the disallowance made by AO.
Tribunal held that,
++ the issue that arises in the present appeal is regarding the benefit of deduction u/s 54EC on account of purchase of Rural Electrification Bonds after the specified time. In the present case, the assessee had sold the capital asset on Oct 25, 2006 and, therefore, for claiming deduction u/s 54EC, he should have made the investment on or before Apr 25, 2007 i.e. within six months from the date of earning of the capital gain. However, in the instant case, the assessee has invested in Rural Electrification Bonds on July 23, 2007. The submission of AR that the Rural Electrification Bonds were not available between Mar 31, 2007 to July 02, 2007 could not be controverted by the DR. Under these circumstances, it has to be adjudicated as to whether the assessee is entitled to deduction u/s 54EC when such bonds were not purchased during the time limit as prescribed u/s 54EC but were purchased subsequent to the date when such bonds were made available in the market;
++ it is found that the Pune Bench of the Tribunal in the case of Phansalkar Suman Jaikrishna, under identical facts and circumstances has allowed the claim of deduction u/s 54EC by observing that: "....Lex not cogit impossibila (law does not compel a man to do that which he cannot possibly perform) and impossibilum nulla oblignto est (law does not expect a party to do the impossible) are well known maxims in law and would squarely apply to the present case. The statue viz. Section 54EC provides for exemption from tax to long term capital gain provided the same is invested in bonds of Rural Electrification Corporation Limited or National Highway Authority of India. However, as the bonds were not available, it was impossible for the assessee to invest in them within six months of the sale of their factory building. Therefore, in the circumstance, one would have to interpret Section 54EC to ensure that it does not lead to injustice. Therefore, the six months provided for investing in bonds may be reasonably extended in view of the non availability of bonds...." Since in the instant case, the facts are identical to the facts decided by the Pune Bench, therefore, following the said decision, the assessee is entitled to deduction u/s 54EC.