2013 (9) TMI 342 - HC - Income Tax

Waiver of Interest u/s 234B - default in payment of advance tax - bonafide belief - Failure to comply with the conditions of section 54EC for claiming exemption from capital gains - Held that - in order to obviate hardship to the assessees, the CBDT issued the order Annexure N under Section 119(2)(a) of the Income Tax Act, 1961 permitting waiver of interest under Section 234(a), 234(b) and 234(c) of the Act on 26.6.2006. Clause (b) of Subsection (3) of Section 54EC as it stood prior to its substitution by Finance Act 2007 was without any limit over the capital gain investment in capital gains bonds for exemption under Sec. 54EC, from capital gain tax under Sec. 45 of the Act, moreso in the light of the order passed by the CBDT extending the period of limitation for such investment upto 31.3.2007. The substitution by Finance Act 2007 with retrospective effect from 1.04.2006 is to the detriment of the petitioner, dehors which petitioner would have had the benefit of exemption from capital gain tax as the entire capital gain of Rs. 1,82,00,000/-. While there can be no dispute that the tax liability of Rs.29,09,800/- was discharged on 25.9.2007 nevertheless during the period from 1.4.2006 to 31.3.2007 and upto the Finance Act, 2007, receiving the assent of the President of India, petitioner was under the bonafide belief that he would be entitled to exemption from payment of capital gains tax under Section 54EC of the Act on Rs.1,82,00,000/-. In the circumstances, it would be incongruous to hold that paragraph 2(c) of the notification Annexure-N applies to cases where orders are passed by the High Court and are subsequently set-aside by a larger Bench of the Supreme Court or where there is retro activity of an amendment to the statutory provision. The very fact that the words retrospective amendment of law used in paragraph 2(c) to establishes that it is one of the unavoidable circumstance by which an assessee would stand to benefit the waiver of interest under Section 234(b) of the Act. Decision in Bhanuben Panchal And Chandrikaben Panchal Versus Chief Commissioner Of Income-Tax. 2004 (3) TMI 35 - GUJARAT High Court followed wherein it was held that, when the circumstances leading to delay in filing of return of income are also the circumstances resulting into late payment of taxes and when the same set of circumstances are considered to be unavoidable circumstances responsible for the delay in filing of the return of income, ordinarily, such circumstances would also qualify to be considered as unavoidable circumstances responsible for the delay in late payment of taxes. The retro active operation w.e.f. 1.4.2006 of clause (b) of explanation to sub-sec. (3) of Section 54EC of the Act substituted by the Finance Act, 2007, coupled with the voluntary payment of tax liability on 26.9.2007, the Chief Commissioner of Income-tax was not justified in declining the benefit of a waiver of interest under Section 234B. - Interest waived to the extent of 80% - Decided partly in favor of assessee.

Summary

Issues Involved:
1. Validity of the rejection of the petitioner's application for investment in Capital Gains Exemption Bonds.
2. Application of retrospective amendments to Section 54EC of the Income Tax Act, 1961.
3. Entitlement to waiver of interest under Section 234B of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Validity of the Rejection of the Petitioner's Application for Investment in Capital Gains Exemption Bonds:
The petitioner, a retired scientist, sold an immovable property for Rs.1,99,00,000/- and intended to invest Rs.1,82,00,000/- in Capital Gains Exemption Bonds under Section 54EC of the Income Tax Act, 1961. The application to the National Highways Authority of India (NHAI) was initially rejected due to the absence of a PAN number, which was later furnished. Despite this, the application was returned with the Demand Drafts for Rs.1,82,00,000/-. The Central Board of Direct Taxes (CBDT) issued a circular extending the time limit for investment in the bonds up to 31.12.2006 without a ceiling limit and later up to 31.3.2007 with a maximum limit of Rs.50 lakhs, with retrospective effect from 1.3.2006. The petitioner, under the bona fide belief that the investment would be accepted, sought exemption from paying long-term capital gains tax.

2. Application of Retrospective Amendments to Section 54EC of the Income Tax Act, 1961:
The Finance Act 2007 amended Section 54EC, imposing a limitation of Rs.50 lakhs on investments in Capital Gains Bonds with retrospective effect from 1.4.2006. The petitioner was unaware of this amendment and believed he could invest the entire capital gain amount for exemption. The court noted that the substitution of clause (b) to the explanation by the Finance Act, 2007, with retrospective effect from 1.4.2006, was to the detriment of the petitioner. The petitioner made an investment of Rs.50 lakhs in January 2007, in compliance with the amended provisions.

3. Entitlement to Waiver of Interest Under Section 234B of the Income Tax Act, 1961:
The petitioner voluntarily paid capital gains tax of Rs.29,09,800/- on 25.9.2007 after the amendment. The return was processed, and the tax liability was determined, including interest under Sections 234A, 234B, and 234C. The petitioner applied for a waiver of interest under Section 234B, citing the retrospective amendment as an unavoidable circumstance. The CBDT's order dated 26.6.2006 under Section 119(2)(c) provided for waiver of interest in cases of genuine hardship. The court observed that the circumstances leading to the delay in filing the return and payment of tax were beyond the petitioner's control due to the retrospective amendment. The court referred to the Gujarat High Court's decision in Bhanuben Panchal's case, which held that unavoidable circumstances should be considered for waiver of interest.

Conclusion:
The court concluded that the petitioner made out a case for consideration for waiver of interest under Section 234B. The Chief Commissioner of Income Tax's order rejecting the waiver was quashed, and the petitioner was directed to pay only 20% of the interest demanded under Section 234B for the assessment year 2006-07. The challenge to the demand of interest under Section 234A was not pressed. The petition was allowed in part, providing partial relief to the petitioner.