Section 54EC: Can an Assessee Claim Rs. 1 Crore Deduction Across Two Financial Years? ITAT Pune Decides
Background and Context
A significant ruling by the Pune Bench of the Income Tax Appellate Tribunal has brought much-needed clarity on the scope and interpretation of Section 54EC of the Income Tax Act, 1961, particularly in situations where the mandatory six-month investment window straddles two separate financial years. The appeals were collectively decided in the matter of Kirankumar Popatlal Shah Vs ITO (ITAT Pune) for Assessment Year 2009-10, alongside two connected appeals involving co-owners of the same property.
The central legal question before the Tribunal was straightforward yet consequential: Can an assessee legitimately claim a deduction of Rs. 1 crore under Section 54EC by investing Rs. 50 lakh each in specified long-term bonds across two consecutive financial years, so long as both investments fall within six months from the date of the original capital asset transfer?
Facts of the Case
Three co-owners — Kirankumar Popatlal Shah, Ajitkumar Popatlal Shah, and Smt. Sarika Sanjaykumar Shah — jointly held a piece of land situated at Baramati. The property was sold for a total consideration of Rs. 3,51,00,000/-, and the transfer took place during Financial Year 2008-09, relevant to Assessment Year 2009-10.
Each co-owner, in order to avail the capital gains exemption under Section 54EC, made the following investments in REC bonds:
- Rs. 50 lakh invested on 30-11-2008 (during Financial Year 2008-09)
- Rs. 50 lakh invested on 30-04-2009 (during Financial Year 2009-10)
Both investments were made within six months from the date of the property transfer, which is the statutory condition prescribed under Section 54EC. Each assessee accordingly claimed a total deduction of Rs. 1 crore in their respective returns of income.
Assessing Officer's Stand
The Assessing Officer (AO) took note of the fact that the underlying capital asset was transferred during Financial Year 2008-09. Observing that all three co-owners had together claimed an aggregate exemption of Rs. 3 crore under Section 54EC (Rs. 1 crore each), the AO held that permitting such a claim would undermine the very legislative intent behind the provision.
The AO restricted the deduction to Rs. 50 lakh per assessee, corresponding only to the investment made in Financial Year 2008-09, and denied the claim for the additional Rs. 50 lakh invested in Financial Year 2009-10. The basis for this restriction was that since the transfer occurred in FY 2008-09, only investments made in that financial year would qualify under the ceiling prescribed by the proviso to Section 54EC.
CIT(A)'s Ruling
On appeal, the Commissioner of Income Tax (Appeals) upheld the Assessing Officer's restrictive interpretation. The CIT(A) placed reliance on the decision of the Jaipur Bench of the Tribunal in ACIT v. Raj Kumar Jain & Sons (HUF) – 50 SOT 213 / 19 taxmann.com 27 (ITAT Jaipur) and distinguished the contrary view taken by the Ahmedabad Bench in Shri Aspi Ginwala v. ACIT – ITA No. 3226/Ahd/2011 (ITAT Ahmedabad). The CIT(A) concluded that the permissible deduction under Section 54EC could not exceed Rs. 50 lakh in any case, thereby affirming the AO's order.
Arguments Advanced Before ITAT Pune
Assessee's Submissions
The learned counsel appearing for the assessees placed reliance on a series of Tribunal decisions that had uniformly interpreted the proviso to Section 54EC in a manner favourable to assessees in similar factual circumstances: