An appeal has been filed by the Assessee challenging an order passed by the Learned Commissioner of Income Tax (Appeals) [“Ld. CIT(A)”], National Faceless Appeal Centre (NFAC), Delhi, concerning the assessment year 2014-15. The appeal revolves around the interpretation and application of Section 54EC of the Income Tax Act, specifically regarding the eligibility for exemption on capital gains arising from the sale of a depreciable asset.
Case Background
The brief facts of the case are that the assessee had submitted its return of income for A.Y. 2014-15 on 30.11.2014 declaring total income at Rs. 29,15,800/-. The assessee is engaged in the business of trading of fabrics and carpets. During the course of assessment, it was observed that the assessee had sold office premises for a consideration of Rs. 1,30,00,000/- on 16.12.2013. The assessee claimed deduction under Section 54EC of the Act at Rs. 1,00,00,000/- on account of investment in REC Bonds. The assessee submitted that as per applicable provisions as they existed at the relevant time, the assessee was eligible to claim deduction to a maximum of Rs. 1,00,00,000/- if he invested the sale proceeds in REC Bonds under Section 54EC of the Act. The assessee submitted that according to the then applicable provisions of Section 54EC, capital gains if invested within a period of six months shall not be chargeable to tax, provided the investment during any Financial Year shall not exceed Rs. 50 lakhs. However, the Assessing Officer did not accept the contentions put forth by the assessee and observed that the assessee is claiming that it had made investments of Rs. 1 crore in REC Bonds of two Financial Years, but within six months from the date of transfer of the immovable property, and hence she is eligible for under Section 54EC for a sum of Rs. 1 crore. The Assessing Officer was of the view that an amendment was brought w.e.f. 01.04.2015, which is a clarificatory in nature and which states that deduction under Section 54EC of the Act would not be allowed beyond the maximum limit of Rs. 50 lakhs. As per the certificates submitted by the assessee, the assessee made investments in REC Bonds on 31.03.2014 (50 lakhs) and on 30.06.2014 (50 lakhs). The depreciable assets being office premises was sold by the assessee on 16.12.2013 and therefore, the assessee is aeligible only for benefit of investments made in REC Bonds amounting to Rs. 50 lakhs on 31.03.2014, which has been made within the prescribed time limit of six months from the date of transfer i.e. 16.12.2013. But the investment made in REC Bonds on 30.06.2014 of Rs. 50 lakhs is not within the prescribed time limit of six months from the date of transfer i.e. from 16.12.2013. Further, the Assessing Officer held that the legislature intends to allow maximum deduction of Rs. 50 lakhs under Section 54EC of the Act. This ambiguity has been clarified vide amendment brought w.e.f. 01.04.2014, which is only clarificatory in nature and would apply to the impugned assessment year as well. Accordingly, the Assessing Officer made an addition of Rs. 50 lakhs on account of excess claim of deduction under Section 54EC of the Act.
Assessing Officer’s Stand
The Assessing Officer (AO) disallowed the second ₹50 lakh investment on the grounds that:
- It was made beyond the six-month window from the date of sale (December 16, 2013).
- The amended provision limiting the deduction to ₹50 lakhs, though effective from April 1, 2015, was clarificatory and applied retrospectively.
The AO thus restricted the allowable deduction to ₹50 lakhs and added ₹50 lakhs back to the Assessee’s taxable income.
Findings of the CIT(A)
Upon appeal, the Ld. CIT(A) not only upheld the AO’s decision but also further disallowed the initial ₹50 lakh deduction. It was observed that:
- The sold asset, being depreciable office premises, fell under Section 50, which deems profits from the sale of depreciable assets as short-term capital gains, irrespective of the holding period.
- Section 54EC benefits apply only to long-term capital gains. Consequently, the Assessee was deemed ineligible for any deduction under Section 54EC.
Assessee’s Arguments in Appeal
The Assessee raised the following points:
- Deeming Fiction under Section 50: Reliance was placed on the Gujarat High Court ruling in CIT vs. Aditya Medisales Ltd., which held that where the capital gains arose out of the long term asset was invested in specified asset, exemption under Section 54EC could not be denied on account of the fact that deeming fiction of short term capital gain was created under Section 50 of the Act.
- Two Financial Year Investments: Citing the Madras High Court case CIT vs. C. Jaichander, 53 taxmann.com 466 (Madras) has held that where the assessee invested a sum of Rs. 50 lakhs each in two different Financial Years, within a period of six months from date of transfer of capital asset, he was eligible for deduction under Section 54EC of the Act.
- Definition of Six Months: Based on the General Clauses Act, the Assessee argued that six months should be interpreted as six calendar months, allowing both investments to qualify under the prescribed timeline.
Revenue’s Response
The Department emphasized the following:
- The amendment effective April 1, 2015, explicitly limits deductions to ₹50 lakhs, reflecting the legislature’s intent.
- Section 50 deems the capital gain from the sale of depreciable assets as short-term, precluding any benefits under Section 54EC.
Tribunal’s Observations
The Income Tax Appellate Tribunal (ITAT) referred to various judicial precedents:
- Gujarat High Court Ruling: In Aditya Medisales Ltd., it was established that the deeming fiction of short-term gains under Section 50 does not negate the eligibility for Section 54EC if the asset qualifies as a long-term capital asset.
- Madras High Court Judgment: In CIT vs. C. Jaichander, it was clarified that investments of ₹50 lakhs in two financial years, within six months of transfer, are eligible for full deduction.
- Amendment Applicability: The ITAT Ahmedabad in DCIT vs. Saintfoin Enterprises LLP held that the 2015 amendment to Section 54EC is prospective and does not apply to earlier years.
Decision:
After analyzing the facts, judicial precedents, and legislative provisions, the Tribunal ruled in favor of the Assessee. It observed that:
- The deeming fiction under Section 50 does not override the Assessee’s eligibility for Section 54EC benefits if the asset qualifies as a long-term capital asset based on the holding period.
- Investments of ₹50 lakhs each in two financial years are permissible under the pre-amendment law, provided they are within the stipulated six-month period.
- The 2015 amendment to Section 54EC is prospective and does not impact earlier assessment years.
Citation: Shangar vs Deputy Commissioner of Income Tax, I.T.A. No. 561/Ahd/2023 (Assessment Year: 2014-15)
