Capital gains – Exemption u/s 54EC of ITA, 1961 – Investment in notified bonds within time specified – Part of consideration for sale of shares placed in escrow account and released to assessee after end of litigation two years later – Amount taxable in year of receipt and invested in specified bonds in year of receipt – Investment within time specified and assessee entitled to exemption u/s 54EC

Capital gains – Exemption u/s 54EC of ITA,
1961 – Investment in notified bonds within time specified – Part of
consideration for sale of shares placed in escrow account and released to
assessee after end of litigation two years later – Amount taxable in year of
receipt and invested in specified bonds in year of receipt – Investment within
time specified and assessee entitled to exemption u/s 54EC

On 28^th
November, 2007, the assessee sold certain shares and received a part of sale
consideration during the previous year relevant to the A.Y. 2010-11. The
assessee made investment in Rural Electrification Corporation bonds on 6^th
August, 2010 and claimed exemption u/s 54EC of the Income-tax Act, 1961 in the
A.Y. 2010-11. The AO held that such income was to be taxed in the A.Y. 2008-09
and that since the assessee had made investment in REC bonds on 6^th
August, 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 u/s 54EC of the
Act.

The Tribunal, inter
alia, held that the amount of Rs. 18 lakhs was deposited in an escrow
account as a security in respect of future liabilities of the company /
transferor, that since there was no certainty of the time of release of the
amount or part of the amount to either of the parties as dispute between the
parties had occurred and the litigation was going on, it could not be said that
the assessee had a vested right to receive the amount in question and that it
was only at the end of the litigation that the rights and liabilities of the
transferor and the transferee were ascertained and thereupon the share of the
assessee was passed on to the assessee for which the assessee had offered
capital gains in the immediate assessment year 2010-11. The Tribunal held that
the assessee was entitled to the benefit of exemption u/s 54EC as the amount
was invested by him in REC bonds in the year of receipt which was also the year
of taxability of the capital gains.

On appeal by the
Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal
and held as under:

‘There was no error in the findings recorded by the Tribunal which
warranted interference. No question of law arose.’