1991 (6) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Claim of exemption under section 54E of the Income-tax Act, 1961.
2. Determination of the date of transfer of the capital asset.
3. Retrospective application of the amendment to section 54E.
4. Interpretation of the substitution of specified assets for investment under section 54E.

Issue-Wise Detailed Analysis:

1. Claim of Exemption Under Section 54E of the Income-tax Act, 1961:
The core issue revolves around the assessee's claim for exemption under section 54E, which provides a proportional abatement of tax on capital gains if the consideration received from the transfer of a capital asset is invested in specified assets. The section was amended by the Finance Act, 1979, to specify that for transfers made after 28th February 1979, the investment must be in National Rural Development Bonds.

2. Determination of the Date of Transfer of the Capital Asset:
The assessee executed the sale deed on 28-2-1979, which was registered on 21-3-1979. The assessee claimed that the transfer took place on the date of execution (28-2-1979), making the investment in a fixed deposit with Canara Bank eligible for exemption. The ITO, however, considered the date of registration (21-3-1979) as the date of transfer, thereby requiring the investment to be in National Rural Development Bonds. The Tribunal referred to Supreme Court rulings which state that a registered document operates from the date of execution, thus supporting the assessee's claim that the transfer effectively occurred on 28-2-1979.

3. Retrospective Application of the Amendment to Section 54E:
The Tribunal examined whether the amendment to section 54E, which changed the specified asset for investment, could be applied retrospectively. The Tribunal noted that income-tax law generally applies as it stands on the first day of the assessment year unless explicitly stated otherwise. The Tribunal found that the amendment was not enacted with retrospective effect and that the law as it stood on the date of the transaction should apply. Therefore, the assessee's right to invest in Nationalised Banks could not be taken away retroactively.

4. Interpretation of the Substitution of Specified Assets for Investment Under Section 54E:
The Tribunal analyzed the substitution mechanism of specified assets under section 54E. It was noted that the amendment could not become effective until the new specified asset (National Rural Development Bonds) was available for investment. The Tribunal concluded that the substitution was ineffective between 1-3-1979 and 1-4-1979 and until 22-6-1979 when the bonds were actually issued. Therefore, the investment in Nationalised Banks should be considered valid for exemption purposes. The Tribunal emphasized that the primary purpose of section 54E was to grant exemption upon reinvestment, and any administrative delay in issuing the bonds should not defeat this purpose.

Conclusion:
The Tribunal allowed the appeal, directing the Income-tax Officer to grant the exemption under section 54E and recompute the total income. The Tribunal's decision was based on the interpretation that the transfer of the capital asset occurred on the date of execution of the sale deed, and the retrospective application of the amendment was not valid. The investment in Nationalised Banks was deemed eligible for exemption as the substitution of specified assets was ineffective during the relevant period.