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LIBERAL v/s. LITERAL INTERPRETATIONS

Courts hold that beneficial provisions of Sec. 54EC must be interpreted liberally & equity should prevail over injustice!

Section 54EC of the Income-tax Act provides for exemption of taxable long term capital gains (LTCG) arising from the transfer of an asset, to the extent the amount of such gains are invested in notified bonds within a period of six months from the date of transfer. Notified for this purpose are the three year bonds issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).

Courts and Tribunals have been liberal in their judicial interpretations while dealing with issues relating to the provisions of Section 54EC holding that “a beneficial section has to be construed liberally, having due regard to the object which it intends to serve.” The following two decisions in this regard merit a careful reading:

INVESTMENT OF ADVANCE RECEIVED

In the case of ‘Bhikhulal Chandak (HUF) vs. ITO’ [2009] (126 TTJ 545), the ITAT Nagpur Bench had to consider a situation where the taxpayer HUF had received sale consideration in advance, even before the execution of the registered sale deed of the property and the money received was soon deposited in the prescribed bonds under Section 54EC. On the basis of the same, the HUF exemption in respect of taxable long term capital gains. The Commissioner, assuming jurisdiction under Section 263, held that exemption under Section 54EC was not available to the taxpayer, as the investment in the bonds was made before the execution of the sale deed instead of within six months from the date of transfer of the property. The ITAT held that where the taxpayer had deposited the advance received under the agreement for sale in the prescribed bonds under Section 54EC, the strict interpretation as sought to be adopted by the Commissioner was not justified and the taxpayer could not be denied the benefit of exemption on the technical count that such investment was required to be made only within a period of six months after the date of sale.

CONSIDERATION RECEIVED IN INSTALMENTS

The Kolkatta Bench of the ITAT, in the case of ‘Chanchal Kumar Sirkar vs. ITO [2012] 18 taxmann.com 304 (Kol.)’, had occasion to deal with a situation where upon execution of the agreement for sale, the taxpayer handed over possession of the property, but received the sale consideration in instalments. The taxpayer invested the consideration received in the capital gain bonds and claimed exemption under Section 54EC, which was denied by the Assessing Officer on the ground that it was beyond 6 months from the date of transfer. The Tribunal held that in case of receipt of sale consideration in instalments, period of six months for claiming exemption under Section 54EC has to be calculated from date of actual receipt of amount.

The ITAT observed that in this type of case, the period of six months for making deposit under section 54EC should be reckoned from the dates of actual receipt of the consideration. If the period is reckoned from the date of agreement and receipt of part payment at the first instance, then it would lead to an impossible situation by asking the taxpayer to invest money in specified asset before actual receipt of the same.

The ITAT noted that this view is supported by the decision of Andhra Pradesh High Court in the case of ‘S. Gopal Reddy v. CIT [1990] 181 ITR 378,’ wherein in a similar situation of delayed receipt of compensation amount on acquisition of property, the High Court observed that if the investment in specified asset was made within a period of six months from the date of receipt of compensation, as against the date of acquisition of the property denoting transfer thereof, the same should be considered to be sufficient compliance for the purpose of claiming exemption under section 54E. The High Court observed that, “a taxing statute or any other statute has to be construed reasonably and every effort should always be made to ascertain the intention of Parliament from the words employed and, as far as possible, an interpretation which leads to absurdity should be avoided. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction would be preferred to the literal construction. The Court also observed that under the provisions of section 54E, what is to be invested in specified assets is ‘the consideration or any part thereof’ and unless the consideration is received, or accrues, there is no question of investing it.”

The Tribunal concluded that in view of the above principle adopted by High Courts in respect to interpretation of a beneficial provision i.e., exemption provision under capital gains tax, one has to take similar approach in deciding the issue in hand i.e., the claim of assessee for exemption under section 54EC because this is exactly similar to section 54E, 54B or 54EA or 54EB.

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