2019 (3) TMI 1358 - HC - Income Tax

Benefit of deduction u/s 54EC - availability of requisite funds to invest within six months of the transfer to claim the benefit under section 54EC - as per revenue since the assessee had made investment in REC bond on 6.8.2010, i.e. after a period of six months from the date of transfer of the shares irrespective of when the whole or part of sale consideration was actually received, the assessee was not entitled to deduction under Section 54EC - whether amount was deposited in the Escrow Account as a security in respect of future liabilities of the company/ transferor? - Tribunal deleted the addition and held that admittedly the amount was deposited in the Escrow Account - HELD THAT - Both the transferrer and the transferee had common rights over the said amount as the said amount was deposited in the Escrow Account as a security in respect of future liabilities of the company/ transferor. There was no certainty about the quantum of amount likely to be received by transferor or transferee out of the said amount deposited in Escrow Account. - Since, there was no certainty of the time of release of the said amount or the part of the amount to either of the parties as dispute between the parties had occurred and the litigation was going on, it cannot be said that the assessee had got a vested right to receive the amount in question. It was only at the end of the litigation that the rights and liabilities of the transferor and transferee were ascertained and thereupon the share of the assessee was passed on to the assessee for which the assessee offered capital gains in the immediate assessment year 2010-11. Further, the Tribunal had held the assessee entitled to the benefit of deduction under Section 54EC of the Act as the amount was invested by him in the Rural Electrification Corporation Ltd. bonds in the year of receipt which was also the year of taxability of the capital gains so received. No error could be pointed out by learned counsel for the revenue in the findings recorded by the Tribunal warranting interference by this Court. Further, referring to the judgment of the Apex Court in Sanjeev Lal and another v. Commissioner of Income Tax and another (2014 (7) TMI 99 - SUPREME COURT), relied upon by the learned counsel for the revenue, in view of the factual matrix noticed hereinbefore, suffice it to observe that the said pronouncement being based on its own facts does not advance the case of the revenue. - Decided against revenue

Summary

Issues:
1. Interpretation of Section 54EC of the Income Tax Act regarding exemption eligibility.
2. Determination of the assessment year for taxation related to the sale of shares.
3. Application of Section 2(47) in the context of deeming provisions for transfer of capital assets.
4. Comparison of the Tribunal's decision with the judgment of the Apex Court in a specific case.

Analysis:

1. The primary issue in this case revolves around the interpretation of Section 54EC of the Income Tax Act, specifically regarding the eligibility criteria for exemption. The Assessing Officer disallowed the benefit of exemption under Section 54EC to the assessee as the investment in REC bond was made after six months from the date of transfer of shares, irrespective of the receipt of sale consideration. The CIT(A) upheld this decision, but the Tribunal disagreed, stating that the investment was made in the year of receipt and taxability of capital gains, thereby allowing the deduction under Section 54EC.

2. Another crucial issue addressed in the judgment is the determination of the assessment year for taxation related to the sale of shares. The Assessing Officer contended that the sale consideration received during the assessment year 2010-11 should be taxed in the assessment year 2008-09. However, the Tribunal found that the transfer of shares took place in the assessment year 2010-11, leading to a different tax treatment.

3. The application of Section 2(47) in the context of deeming provisions for the transfer of capital assets was also a significant point of contention. The Tribunal analyzed the rights and liabilities associated with an amount deposited in an Escrow Account, concluding that the assessee did not have a vested right to receive the amount until the end of the litigation. This interpretation influenced the decision on the taxability of the capital gains and the eligibility for exemption under Section 54EC.

4. Lastly, the judgment compared the Tribunal's decision with a judgment of the Apex Court in a specific case. The Tribunal's findings were supported by various legal precedents and interpretations of tax laws, leading to the dismissal of the revenue's appeal. The judgment emphasized the factual matrix of the case and highlighted that the Apex Court's judgment did not advance the revenue's case in the present context.

In conclusion, the High Court dismissed the revenue's appeal, finding no error in the Tribunal's decision and no substantial question of law warranting interference. The detailed analysis of each issue highlighted the complexities of tax law interpretation and the importance of factual circumstances in determining tax liabilities and exemptions.