Is It Fair
1. Introduction :
Readers are aware that due to the inflationary tendencies,
huge capital gains result out of sale of capital assets, especially the
immovable properties. There are many practical difficulties and controversies —
such as distinction between capital gain vis-à-vis business income,
fund-flow problems with reference to investments and advance tax, cancellation
or major modification of deals, new house not getting ready within the
stipulated time and so on. Due credit should at the same time be given to the
law-makers as considerable reliefs have been provided in the Act in terms of
indexation, exemptions u/s.54, u/s.54F, u/s.54EC, etc. On the other hand, there
are dragons like S. 50, S. 50C. The purpose of this article is to bring out the
unfairness in provisions of S. 54EC, where despite a genuine intention and
attempt by the assessee, it is not feasible to avail of the benefit.
2. S. 54EC :
2.1 If long-term capital gains are invested in specified
infrastructure bonds within six months from the date of transfer, there is an
exemption to the extent of investment made. There are, occasionally,
difficulties on account of irregular and unpredictable timings of availability
of bonds. But then, the CBDT does allow suitable extensions, though quite late.
2.2 The maximum limit on investment is Rs.50 lakhs in one
financial year. There is an ambiguity as to whether Rs.50 lakhs each can be
invested in two different financial years for the same capital gain.
2.3 The important point is that the investment has to be made
within six months from the date of transfer. Now, S. 2(47), which defines
‘transfer’ includes clause (iv) — conversion of capital asset into stock in
trade, as contemplated in S. 45(2).
2.4 S. 45(2) is quite rational in providing that although the
transfer may have already taken place long ago, the tax is payable when such
converted asset is actually sold. This is equitable as it recognises the reality
that income cannot be generated from oneself — at the time of conversion — that
is — gain arises only on actual transfer and not on deemed transfer.
2.5 As against this, there is a Circular No. 560, dated
18-5-1990 — in the context of S. 54E (predecessor to S. 54EC) that the period
for investment should be counted from the date of conversion and not from the
date of actual sale. This is very unfair. It is quite inherent and obvious in
the scheme of S. 45(2) that in reality, no gains arise merely at the stage of
conversion. Particularly, in respect of immovable properties, there is a long
time-gap between the date of conversion and the date of actual sale of the
constructed units. Amounts involved are also quite sizeable. Thus, it is
impracticable to expect an assessee to make investment at that point of time.
2.6 This may be seen in the context of S. 45(5) which
contemplates practical situations in respect of compulsory acquisition of
properties by the Government. It states that whenever the compensation is
revised and enhanced in subsequent years, the gains will be taxable in the
respective year when revised compensation is actually received. It goes one step
further to state in Explanation (iii) that when such compensation is received by
the legal heir of the assessee or any other person, due to death of the assessee
or other reason, the amount will be taxed in the hands of the heir or such other
person.
2.7 There is a similar, equitable Circular that the amounts
received by the legal heirs from deposit under the capital gains accounts scheme
are not taxable in their hands. (Circular 743, dated 6-5-1996)
2.8 Interestingly, even u/s.54E, there was a Circular No.
349/F No. 207/8/82–IT (AII), dated 10-5-1983 — that if advances or earnest
moneys are received before the actual transfer, investment may be made within 6
months from the date of receipt (even if it is before the transfer).
2.9 Against this background, Circular No. 560 appears to be
illogical and unfair.
3. Suggestion :
It is presumed that since the substance of both the Sections
— viz. S. 54E and S. 54EC is the same, the Circular u/s.54E would be
applicable to S. 54EC as well. The suggestion is obvious. The period of six
months for S. 54EC should be counted from the date of actual sale as
contemplated in S. 45(2).
Equity can be achieved and litigation avoided by issuing a clarificatory
Circular or amending the law.
