LTCG Exemption under Section 54EC of Income Tax Act, 1961

Section 54EC: Long Term Capital Gain not to be Charged on Investment in Certain Bonds

Long Term Capital Gains Tax Deduction under section 54EC will be available subject to the following conditions:

- Where the capital gains arises from transfer of long term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset),

- and the assessee has, at any time within period of six months after the date of such transfer invested the whole of any part of capital gains, in the “long term specified asset“,

- then, the capital gains shall be dealt with in accordance with the following provisions of section, that is to say,-

    1. If the cost of the “long-term specified asset” is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gains shall not be chargeable under section 48;
    2. If the cost of the long term specified asset is less than the capital gain arising from the transfer of the original asset, then the cost of acquisition of the “long-term specified asset” shall not be charged under section 45.

Provided that the invest made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during the financial year does not exceed Rs. 50 lacs.

Where the “long term specified asset” is transferred or converted (other than by transfer) into money at any time withing a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such”long term specified asset” as provided in clause (1) or clause (2) shall be deemed to the income chargeable under the head “Capital Gains” relating to the long term capital assets if the previous year in which the “long term specified asset” is transfeSrred or converted (otherwise than by transfer) into money.

Long Term Specified Assets for making any investment under this section means any bond redeemable after three years and issued by National Highway Authority of India (NHAI) or by the Rural Electrification Corporation Limited (REC).

The above stated deduction under section 54EC is available to all assessees and LTCG on all assets (land, gold, house property etc.)

Thus, the strategy for maximizing the exemption under section 54EC is as under:

•  Transfer long-term capital asset from which taxable capital gains will be Rs. 1 crore or more in the second half of a financial year i.e. after 30th September but on or before 31st March.

•  Invest Rs. 50 lakhs in specified bonds in the financial year of transfer itself.

•  Invest Rs. 50 lakhs in specified bonds in the next financial year within 6 months time-limit i.e. 6 months from the date of transfer of capital asset. If no issue of specified bonds is open during next financial year, then investRs. 50 lakhs on the first day of opening of the first issue of eligible bonds (REC/NHAI bonds) during the next financial year.

Points to Remember:

1. In  a case the original asset is transferred and the assessee invest the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any “long-term specified asset” and such assessee takes any loan or advance on the security of such “long-term specified asset”, he shall be deemed to have converted (otherwise than by transfer) such “long-term specified asset” into money on the date on which such loan of advance is taken.

2. No deduction from the income with reference to such cost shall be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.

3. “Cost” in relation to any “long-term specified asset”, means the amount invested in such specified asset out of the capital gains received or accruing as a result of the transfer of the original asset.

4. Where the assessee has made the payment within the six month period, and the same is reflected in the bank account and a receipt has been issued as on that date, the exemption under section 54EC cannot be denied merely because the bond was issued after the expiry of the six month period or the date of allotment specified therein was after the expiry of the six month period.

Section 54EC5. Exemption in case bonds purchased in joint name: Where the investment in bonds for claiming exemption was made in joint name it was held that there was no requirement in the section that the investment should be in the name of the assessee. The object of insertion of section 54EC was to give an incentive to the development of infrastructure. In 2001 the section was widened to include bonds issued by Rural Electrification Corporation Ltd. If development of infrastructure was the object, it would not matter whether the investment was made in the name of the assessee exclusively or in the joint names of the assessee and somebody else. The only condition was that the funds used for the investment must be traceable to the sale proceeds of the capital asset. That condition was satisfied by assessee. The CIT(A) had found that the son did not contribute anything to the investment and this finding was not in dispute. The consequences that flow from including the son’s name as a joint name were not relevant for the purpose of granting exemption u/s 54EC to the assessee. The CIT(A) had noted that the assessee was 69 years of age at the relevant time and it was only a matter of convenience and to avoid any problem in future that the son’s name was included. The assessee was eligible for the exemption u/s 54EC of the Act-ITO v Saraswati Ramanathan (2008) 300 ITR (AT) 410 (Del.).

6. Benefit u/s 54EC available even in case of depericiable asset: If depericiable asset is held for more than 36 months then capital gain arising therefrom even though is considered as short term capital gain, but in such case there is no denial as to claiming exemption u/s 54EC against such short term capital gain.

It was held in CIT v Assam Petroleum Industries (P) Ltd. (2003) 131 Taxmann 699 (Gau) that although as per section 50 the profit arising from the transfer of depericiable asset shall be gain arising from the transfer of short term capital asset, hence short term capital gain but section 50 nowhere says that depericiable asset shall be treated as short term capital asset. Section 54E is in independent provision which is not controlled by section 50. If the conditions necessary u/s 54E are compiled with by the assessee, he will be entitled to the benefit envisaged in section 54E, even on transfer of depericiable assets held for more than 36 months.

Similarly it was held in CIT v ACE Builders Pvt. Ltd. 2005 -TMI – 9448 – (BOMBAY High Court) “Section 50 makes it explicitly clear that the deemed fiction created in sub-section (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in section 48 and 49. It is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created, it does not apply to other provisions. Thus, the deeming fiction created under section 50 is restricted to sections 48 and 49 only and it is not applicable to section 54E.

The ratio in the above decision shall also be equally applicable to section 54EC and 54F.

7. Exemption allowed where investment was made after 6 months due to non-availability of bonds: Where the assessee could not invest the money due to non-availability of bonds qualifying for deduction under section 54EC it was held there was a reasonable cause for not purchasing the bonds within the time specified in section 54EC. Since the assessee purchased the bonds as soon as same were available it was eligible to claim deduction under section 54EC[Cello Plast v DCIT 2010 -TMI - 208185 – (ITAT, Mumbai)]

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