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Of all those who are going to make a claim for exemption u/s 54EC of Rs. 1 crore in the soon to be filed income tax return for A Y 2014-15 on long term capital gains there is a bad news unless the Finance Minister come out with a clarification no sooner than prior to the due date for filing of Income tax return for A Y 2014-15. In the existing law an assessee is entitled to claim exemption u/s 54EC of the Income tax Act, 1961 if he or she invests a sum of Rs. 50 lacs in specified bonds within the time limit of six months from the date of transfer of a long term capital asset. The proviso thereto however provides that investment in any financial year cannot exceed Rs. 50 lakhs. In other words the proviso provides for making investment of Rs. 50 lakhs in any financial year. Taking advantage of a loophole the assessee so far held the contention that if the period of six months spills over the next financial year then the assessee can make investment of Rs. 50 lakhs in  the financial year in which transfer has taken place and Rs. 50 lakhs in the  subsequent financial year provided the entire investment fall within  the period of  six months from the date of transfer. In this manner the assessee cornered the law legally while meeting with both the stipulations of six months and cap of Rs. 50 lacs per financial year.

Calling it an ambiguity in the existing section an amendment is now proposed to remove such ambiguity by providing 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.

The Explanatory memorandum to the Finance Bill explains the much crucial amendment in section 54EC in Clause 23 of the Finance Bull 2014 as under:

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, 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 the whole of the 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.

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 lakh 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.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 andsubsequent assessment years. [Clause 23]

The Jaipur bench of the ITAT in Assistant Commissioner of Income-tax v. Raj Kumar Jain and Sons (HUF) (2012) 20ITR (Trib) 212 on their interpretation of the Government notification held that the assessees are entitled to deduction to the extent of Rs. 50 lakhs under section 54EC of the Act, if investment is made within 6 months for that financial year in which transfer has taken place. The subsequent investment made had to be considered as part of the investment of the financial year in which the transfer had taken place. In this case the assessee claimed  deduction under section 54EC in respect of the long-term capital gain  amounting to Rs. one crore, i.e., invested in specified capital gain bond  (Rs.50 lakhs on March 31, 2008 + Rs. 50 lakhs was made on June 10, 2008).  The dispute therefore has been with regard to the next investment of Rs. 50 lakhs made  on June 10, 2008, which was not considered by the Assessing Officer by  relying upon the proviso below section 54EC which provided that investment in any financial year cannot exceed Rs. 50 lakhs

On the contrary the Chennai bench of the ITAT in  Smt. Sriram Indubal v. ITO [2013] 32 taxmann.com 118 (Chennai) and Coromandel Industries (P.) Ltd. v. ACIT (2013) 36taxmann.com6 held that if assessee had invested Rs. 50 lakhs each in specified assets in two different financial year but within six months from date of transfer of capital asset, restrictive proviso to section 54EC would not limit exemption claim to Rs. 50 lakhs only. The identical view has been taken by Ahmedabad Bench of this Tribunal in the case of Aspi Ginwala & Others v ACIT (2012) 146TTJ385 who on the basis of wording of the proviso held favorably. The Panaji bench of the ITAT in ITO v. Ms. Rania Faleiro( 2013) 142ITD769 held that the plain reading of section 54EC(1) as well as the proviso thereto clearly suggests that the limit of Rs. 50 lakhs as given under the proviso is per person per financial year and that there is no ambiguity in the interpretation. In this case having also made note of the contrary view by Jaipur bench in Asstt. CIT v. Raj Kumar Jain & Sons (HUF) (supra it ended its judgement by relying on CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 where the Hon’ble Supreme Court has taken view that if there are two views possible, the view favourable to the subject should be taken.

So even while some other benches of the Tribunal have also held likewise but truth remains that there had been an ambiguity and that therefore necessitated an amendment. Now the big question would be how do we look at ambiguities in the interpretation of the subject of law?

Bad News

The amendment in some sense is a kind of clarification or declaration for want of ambiguity. On the subject of clarificatory amendments the Bombay High Court in Commissioner of Income-tax v. Glenmark Pharmaceuticals Ltd. (2010)324ITR199 held that (Page 218):

“Courts are often called upon to decide whether a legislative amendment is clarificatory in nature or declaratory of the law. If it is, the amendment has a retrospective effect. The Legislature which intends to bring clarity to a legislative provision or to remove an ambiguity is inferred to do so at the inception. For, it would be contrary to the grain of human experience to  infer that the Legislature would while removing an ambiguity allow it to  remain in the past, leaving a state of uncertainty to persist. In the Interpretation of Statutes by Justice G. P. Singh (Tenth Edition, 2006), the position of law has been stated as follows: “(i) Declaratory statutes

. . . If a new Act is `to explain’ an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language `shall be deemed always to have meant’ is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect . . .”

Having so stated in the memorandum that the amendment is carried out to do away with the ambiguity perhaps may render the same as declaratory in nature and Courts may therefore follow the same as having retrospective effect.

In Mithy Granite (P.) Ltd. v. Income-tax Officer (2004) 266ITR151 the Karnataka High Court held that subsequent amendment is not relevant when the language given in a provision of law is clear and unambiguous and the interpretation to be placed on such a provision does not lead to any absurdity, in which case it is not permissible for the court to take into account the subsequent amendment made to such a provision, while interpreting such a provision. Whereas the memorandum in specie talk of an ambiguity here so it may not be easily possible to wish away with retrospective application.

Good news

The adverse decision of the Jaipur bench in Raj Kumar Jain is dated 31st January 2012. In other words the Government at the helm at that point in time did not choose to bring out any amendment then to cover up the ambiguity if it really was as is being suggested in the Finance Bill 2014. The proviso limiting investment benefit upto Rs. 50 lacs during any financial year is also introduced by the previous Government. If there was an ambiguity then the previous government may have removed it taking stock of interpretations held by benches of the Tribunal which however did not happen.  Hence it is not correctly appropriate to designate the amendment as one lead by any ambiguity whatsoever. The fact that the amendment is made by inserting a proviso below the first proviso in sub-section (1) give it a color of prospective amendment  but however to make things certain it may have been more appropriate to insert the words ‘ on or after 1.4.2014’  after the words’ original assets’ in the new proviso. I hope some wisdom will prevail and the FM will set right the amendment as only and only prospective with no scope for any other interpretation at the time final enactment.

It is therefore very important that either the FM provide a clarification or bring out the amendment in such a manner as it would have effect only prospectively.


Gopal Nathani





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