The specific nature of Section 54EC in relation to investment in specified bonds and its impact on the computation of capital gains.

Chitra Venkataraman, J.

1. The above Tax Case (Appeal) is filed at the instance of the Revenue against the order of the Income Tax Appellate Tribunal for the assessment year 2003-04 by raising following substantial question of law:

"Whether, on the facts and circumstances of the case, the Tribunal was right in deciding that, first, the computation of capital gain has to be given effect to and then only apply the provisions of Section 70 of the Income Tax Act?"

2. It is seen from the facts narrated that the assessee herein made a long term capital gain to the tune of Rs.6,42,22,435/- on the sale of shares. Admittedly, the assessee had invested the long term capital gains in REC Bonds to the tune of Rs.6,50,00,000/-. Apart from this, there were long term capital loss on sale of shares and immovable properties which were claimed to be carried forward to the subsequent years. The Assessing Officer apparently agreed with the assessee on this state of affairs. However, in exercise of jurisdiction under Section 263 of the Income Tax Act, 1961, the Commissioner of Income Tax (Appeals) viewed that as per Section 74(1) of the Income Tax Act, the loss relating to the long term capital asset shall be first set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset not being a short term capital asset and then only the exemption under Section 54 EC would apply. He thus held that the assessment completed under Section 143(3) of the Income Tax Act is thus erroneous and prejudicial to the interest of the Revenue requiring revision of assessment. While summarily rejecting the assessee's reply based on Section 54 EC, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to redo the assessment.

3. Aggrieved by the same, the assessee went on appeal before the Income Tax Appellate Tribunal. The Tribunal pointed out that even though Section 45(1) does not specify Section 54EC as had been done by erstwhile Sections 54, 54A, 54B, 54EA, 54EB and 54F, yet, going by the import of Section 54EC(1)(a) and (b), the assessee was entitled to take advantage of the said provisions even before working out Section 70. Pointing out to the scheme of Sections 45 to 55A which provide for the computation of capital gains, the Tribunal held that effect has to be given first to the provision of capital gains as given under the above scheme and then apply the provisions of Section

70. It viewed that Section 70 would come into play only when the capital gains have been computed in accordance with the provisions contained in Sections 45 to 55A. Irrespective of whether Section 54EC(1) is found in Section 45 or not, in terms of Section 54EC, the effect of it cannot be ignored, as the investment in REC bonds takes the capital gains out of the charging provision. Since the amount invested in REC bonds does not enter into the computation at all, the revision done was not sustainable in law. Consequently, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals). Aggrieved by this, present appeal has been filed by the Revenue.

4. Before going into the contentions raised herein, the relevant provisions of Sections 45(1), 54EC and 70 of the Income Tax Act, relevant to the assessment years, have to be noted, which read as follows:-

Capital gains.

Section 45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54 EA, 54 EB, 54F, 54G and 54H, be chargeable to income tax under the head "capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.

Capital gain not to be charged on investment in certain bonds.

Section 54 EC (1) Where the capital gain arises from the transfer of a long term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) a