2024 (11) TMI 896 - HC - Income Tax

Deduction u/s 54EC - premature cancellation of the bonds - Petitioner sought to cancel PFC bonds to utilize the sale proceeds for a property purchase in Noida, claiming mistaken advice regarding tax benefits - legislative intent behind the bonds, lock-in period of 5 years as integral to ensuring long-term capital allocation and financial stability. HELD THAT - The PFC bonds, are known as 54EC Capital Gain Tax Exemption Bonds Series VIII . This is a type of investment instrument authorized by the Income Tax Act, 1961. These bonds provide an opportunity for individuals to save on long-term capital gains taxes incurred from the sale of property or assets. By investing in these bonds, one can defer the payment of capital gains tax and enjoy the potential benefits of a reliable investment option. Such investment is held for 5 years and the bonds so acquired cannot be transferred or converted into money or any loan and neither can an advance be taken on security of such bond within 5 years from date of acquisition. Any such action would result in withdrawal of the capital gain exemption benefit. Thus, the subject bonds issued by the Respondent fall within the category of long-term specified assets , in terms of notification dated 8th June, 2017 issued by the Ministry of Finance, and as defined in Section 54EC of the Act to mean any bond, redeemable after five years and issued on or after the 1st day of April, 2018 . The long term specified assets/bonds can be redeemed only after 5 years from the date of the issuance due to the lock-in period under Section 54EC of the Act as amended by Section 21 of the Finance Act, 2018. Furthermore, this information with regard to the lock-in period is mentioned in Clause 13 of the information memorandum issued by the Respondent regarding the subject bonds. In the opinion of the Court, having regard to the statutory scheme and the terms and conditions of the subject instrument, the Petitioner s request for cancellation or redemption, cannot be accepted. The funds raised through the 54EC bonds are specifically intended to support Respondent s financial objectives. The Object of the Issue of the PFC Capital Gain Tax Exemption Bonds is to augment resources of PFC for meeting fund requirement . These funds are in the nature of long term funds borrowing. This intent, combined with the five year lock-in period, imposes a clear embargo on premature redemption, as it ensures that the investments remain committed to Respondent s financial stability and to meet the object of the Issue. This lock-in period is not a mere formality but a substantive requirement, integral to the legislative intent behind Section 54EC. Terms and conditions governing the bonds, stipulated by the Respondent clearly restrict any withdrawal, redemption, or transfer of these bonds before the completion of the mandated 5-year period. This restriction applies regardless of whether the Petitioner has claimed the capital gains exemption or not, and regardless of any willingness on the Petitioner s part to forgo interest, as these bonds are essentially bound by legislative and contractual rigidity. Permitting any deviation from the stipulated lock-in period would compromise the object and purpose underlying these bonds, creating an avenue for circumventing statutory obligations under Section 54EC. The statutory framework does not just seek to incentivize tax savings but to ensure that these savings result in actual, long-term capital allocation. Allowing premature redemption through judicial intervention would not only be against the contractual terms, but also contravene the statutory intent of encouraging long-term investment. Thus, it is beyond the scope of this Court, particularly under the writ jurisdiction under Article 226 of the Constitution, to modify or rewrite the conditions stipulated for allocation of bond. Court is of the view that the judgment in Major Amandeep Singh 2015 (8) TMI 1585 - DELHI HIGH COURT 3does not apply to the present case. Upon issuance of the bonds to the Petitioner, the rights and obligations of both parties are governed by the specific terms of the financial instrument. Neither party can alter the same unilaterally. Any attempt would not only contravene the contractual terms, but would also be against the statutory purpose underlying the bond scheme. Although not expressly argued, and only vaguely alluded to, the Petitioner s claim for cancellation appears to stem from an alleged mistake of fact and reliance on misguided financial advice. Such grounds, in the opinion of the Court, do not create any enforceable right and cannot be adjudicated under Article 226 of the Constitution.

Summary

Issues:
1. Interpretation of provisions under Section 54EC of the Income Tax Act, 1961 regarding capital gains tax exemption.
2. Validity of premature cancellation and refund request for PFC bonds.
3. Jurisdiction of the Court to grant relief in cases of alleged mistake of fact in financial investments.

Analysis:

1. The judgment primarily deals with the interpretation of Section 54EC of the Income Tax Act, 1961, concerning capital gains tax exemption. The Petitioner sought to cancel PFC bonds to utilize the sale proceeds for a property purchase in Noida, claiming mistaken advice regarding tax benefits. The Court emphasized the legislative intent behind the bonds, highlighting the lock-in period of 5 years as integral to ensuring long-term capital allocation and financial stability. The statutory framework aims to incentivize tax savings while preventing premature redemption to maintain financial objectives.

2. The Court analyzed the terms and conditions of the PFC bonds, noting the explicit prohibition on premature cancellation or redemption before the 5-year lock-in period. Despite the Petitioner's willingness to forgo interest and compensate for any losses, the Court held that allowing premature redemption would undermine the statutory purpose and contractual obligations. The judgment emphasized that judicial intervention to modify the conditions of bond allocation would contravene both contractual terms and statutory intent, thereby dismissing the Petitioner's request for cancellation and refund.

3. Regarding the Court's jurisdiction to grant relief in cases of alleged mistake of fact, the judgment distinguished the present case from precedents like Major Amandeep Singh v. University of Delhi. While acknowledging the Petitioner's reliance on misguided financial advice, the Court held that such grounds do not create enforceable rights under Article 226 of the Constitution. The judgment concluded that the relief sought by the Petitioner, based on alleged mistake of fact, falls outside the Court's authority and cannot be granted under the writ jurisdiction.

In conclusion, the judgment underscores the importance of upholding contractual terms, statutory provisions, and legislative intent in financial transactions involving tax benefits. It clarifies the limitations of judicial intervention in cases of premature redemption requests and highlights the need to adhere to the specified terms and conditions of investment instruments to maintain financial stability and regulatory compliance.