54EC deduction for investment made after 6 months allowed when sales consideration was received late. Tax-payer cannot be asked to do impossible -ITAT

54EC deduction for investment made after 6 months allowed when sales consideration was received late.The tax-payer cannot be asked to do impossible -ITAT

54EC deduction

54EC deduction for investment made after 6 months 

ABCAUS Case Law Citation:
ABCAUS 1211 (2017) (04) ITAT

The Grievance:
The appellant assessee company was aggrieved by the order of the Commissioner of Income Tax (Appeals) in confirming the denial of the deduction u/s 54EC of the Income Tax Act, 1961 (‘the Act”).

for investment made in Rural Electrification Company (REC) and National Highway Authority of India (NHAI) Bonds on the ground that the investment was made beyond the six months from the date of the transfer of the capital asset.

Assessment Year : 2009-10
Date/Month of Pronouncement: April, 2017

Important Case Laws Cited/relied upon:
Mahesh Nemichand Ganeshwade vs. ITO
Chanchal Kumar Sircar vs. ITO
CIT v. B.C.Srinivasa Setty

Brief Facts of the Case:
The assessee was a transport operator. The Assessing Officer (‘AO’) observed that the assessee had sold Transfer of Development Right (‘TDR’) for an amount of Rs. 1,45,92,750/- vide agreement dated 06-08-2008 and long term capital gains to the tune of Rs. 47,35,420/- were computed by the assessee as per provisions of the Act.

The assessee had purchased a flat of Rs. 22,50,000/- for which exemption u/s 54F of 1961 Act was claimed and the balance amount of capital gain of Rs. 24,85,420/- was claimed to be invested in NHAI/REC Bonds on 26-03-2009 and exemption u/s 54EC was claimed by the assessee. The date of agreement for transfer of TDR was dated 06-08-2008. The AO observed that the investments made in Bonds of NHAI and REC  to the tune of Rs. 21,50,000/- and Rs. 22,00,000/- respectively was made on 26-03-2009 which was beyond the prescribed period of 6 months from the date of transfer on 06-08-2008 which is not in accordance with the provisions of Section 54EC and hence claim of the assessee for exemption u/s 54EC was rejected by the AO despite he observed that the investment in NHAI Bonds/ REC Bonds were made within 6 months of receipt of last payment by assessee towards sale consideration on transfer of TDR , which was last received on 15-11-2008.

Aggrieved by the assessment order passed by AO u/s 143(3) of the Act , the assessee filed first appeal before the CIT(A).

The CIT(A) rejected the appeal of the assessee on the ground that the assessee had to make investment within a period of 6 months in long term specified assets from the date of transfer for claiming exemption u/s 54EC. The CIT(A) observed that section 54EC has never used the word ‘consideration’ and  it uses the word ‘transfer’ only, which in the instant case was on 06-08-2008 and the investment in NHAI/REC Bonds should have been made on or before 06-02-2009. He further held that the CBDT circular no. 791 dated 02- 06-2000 covers the situation of conversion of capital asset into stock-in-trade and the time is allowed till when the stock-in-trade is actually sold or otherwise transferred by the assessee which is not the issue in the present case.

Aggrieved by the appellate order passed by the CIT(A), the assessee filed this second appeal before the tribunal.

Contentions of the appellant assessee:
It was submitted that the assessee had realized the sale proceeds of TDR on various dates from 07-08-2008 to 15-11-2008 and investment in REC/NHAI Bonds were made within six months if calculated from the last date of receipt of consideration on 15-11-2008. It was submitted that the CIT(A) had erred in distinguishing the CBDT Circular No. 791 whereby he held that the circular covers only where the capital asset is converted into stock-in-trade and then the period was to be reckoned from the date of actual sale or transfer of stock-in-trade by the assessee. In alternative, it was contended by learned counsel for the assessee that gains arising from sale of TDR are not taxable and relied upon decision of Hon’ble Apex Court.

Observations made by the Tribunal:
The Tribunal observed that against sale of TDR vide agreement for sale dated 06-08-2008, the assessee had received payments of Rs. 1,45,92,750/- as under :


Amount (Rs.)

07-08-2008 19,92,750
26-09-2008 35,00,000
03-10-2008 35,00,000
25-10-2008 21,00,000
08-11-2008 15,00,000
15-11-2008 20,00,000
Total 1,45,92,750

The Tribunal noted that the investments disputed by the Revenue was made by the assessee within six months from the date of receipt of last installment of sale consideration of TDR which was received on 15-11-2008.

The ITAT observed that section 54EC is a beneficial section which encourages making investments in REC/NHAI bonds out of long term capital gains on transfer of original asset earned by tax-payer and is to be construed reasonably to give full effect to the beneficial provisions and it could not be interpreted in a manner to frustrate the intent of legislature. The tax-payer cannot be asked to do impossible , as in cases if the consideration is not received by the tax-payer on sale / transfer of long term capital assets but is received subsequently as provided in an agreement to sale, the tax-payer cannot be expected to invest in REC/NHAI Bonds out of his own other sources or to make borrowings to invest in NHAI/REC Bonds to claim exemption u/s 54EC. The objective of the beneficial provision of Section 54EC is to encourage investments out of sale proceeds received or accruing to the tax-payer from sale of long term capital assets and the tax-payer cannot be asked to do impossible in cases where genuinely the sale considerations are not received at the time of transfer of long term capital asset in terms of agreement for sale/transfer of long term capital asset.

The Tribunal opined that the assesssee had rightly relied upon the various decision of the ITAT as the  section 54EC is a beneficial provision and is to be reasonably interpreted to give effect to the intention of Parliament while legislating the said provision and it cannot be construed in manner to frustrate the intention of legislature.

The Appeal was allowed. It was held that the assessee was eligible for exemption u/s 54EC and addition made by the AO and as confirmed by learned CIT(A) was not sustainable in eyes of law and was ordered to be deleted.

54EC deduction

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