2016 (5) TMI 487 - AT - Income Tax

Exemption u/s.54EC denied - investment in REC capital gains bonds falling in two financial years - Held that - The legislative intent in the subsequent amendment is to restrict the investment of ₹ 50,00,000/- to one financial year only. There was ambiguity and confusion on interpreting the provisions as the Commissioner of Income Tax (Appeals) examined the issue on the interpreting the word any referring to dictionary meaning because there was no certainty was visualized considering the provisions, CBDT circulars and facts of the case. The Assessing Officer tried to make a distinction of provisions for restricting investment of ₹ 50,00,000/- only in one financial year. The assessee has invested in two installments falling in two financial years and availed tax exemption. Amendment of provisions of Sec.54EC in Finance Act, 2014 are prospective and apply from 01.04.2015 effective from assessment year 2015-16 onwards. We considering the facts and amendment of provisions rely on the jurisdictional High Court decision of CIT vs. C. Jaichander (2014 (11) TMI 54 - MADRAS HIGH COURT ) and CIT vs. Coramandel Industries Ltd (2014 (12) TMI 852 - MADRAS HIGH COURT ) and setaside the order of the Commissioner of Income Tax (Appeals) and direct the Assessing Officer to delete the addition and allow the grounds in favour of the assessee. Enhancement of income on investments made by the assessee s two minor children in REC Bonds and denial of exemption u/s.54EC - Held that - It is nobody case that father has invested in shares in the name of two minor children. The issue on the investment u/sec 54EC of the Act has been pindown on two aspects, the Commissioner of Income Tax (Appeals) has denied exemption to the minor child and second issue being whether income to be clubbed with parents total income or such income contested by the Revenue. We highlight the provisions of Sec. 64(1A) of the Act were income of the minor has to be computed before application of clubbing provisions. In respect of clam of exemption of capital gain, the computation has to be worked out in the hands of the minor and allow the exemption and subsequent income should be added in the hands of the father u/s.64(1A) of the Act - Decided in favour of the assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 54EC of the Income Tax Act for investments in REC capital gains bonds falling in two financial years.
2. Enhancement of income by clubbing the investments made by the assessee’s minor children in REC Bonds and denial of exemption under Section 54EC.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 54EC:
The assessee, an individual with various income sources, filed a return declaring total income and made investments in REC bonds in two different financial years within six months from the date of transfer of a capital asset. The Assessing Officer (AO) denied the exemption for the second investment, restricting it to ?50,00,000 per financial year, relying on the Department's appeal against Tribunal decisions and the provisions of Section 54EC. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the AO’s decision, interpreting the term "any" in Section 54EC to restrict the exemption to ?50,00,000 per financial year.

Upon appeal, the Tribunal noted that the assessee had complied with the provisions by investing within six months and that the amendment to Section 54EC by the Finance Act, 2014, which restricts the investment to ?50,00,000 per financial year, is prospective, effective from 01.04.2015. The Tribunal relied on jurisdictional High Court decisions in CIT vs. C. Jaichander and CIT vs. Coramandel Industries Ltd., directing the AO to delete the addition and allow the exemption up to ?1 crore, thus ruling in favor of the assessee.

2. Enhancement of Income by Clubbing Investments of Minor Children:
The AO clubbed the income of the assessee’s minor children from investments in REC bonds under Section 64(1A) and denied the exemption under Section 54EC. The CIT(A) issued a show cause notice for enhancement of income, arguing that all income should be clubbed irrespective of any exemption. The CIT(A) interpreted "all such income" to mean gross income before exemptions, thereby denying the exemption and enhancing the assessee's income.

The Tribunal, however, held that the income of minor children should be computed after allowing the exemption under Section 54EC, and only the net income should be clubbed with the parent's income. The Tribunal relied on judicial decisions, including JCIT vs. Govind Rohira, M.A.C. Khaleeli vs. DCIT, and CIT vs. V.S. Chelliah, which support the view that exemptions should be allowed before clubbing the income. Consequently, the Tribunal ruled that the minor children are eligible for the exemption under Section 54EC, and only the remaining amount should be clubbed with the assessee's income.

Conclusion:
The Tribunal allowed the appeal, directing the AO to delete the additions and grant the exemptions under Section 54EC for both the assessee and the minor children, thus ruling comprehensively in favor of the assessee. The order was pronounced on May 4, 2016, at Chennai.