Invest capital gains in bonds

Recently, the Mumbai Income Tax Tribunal has ruled that to save tax, capital gains should be deployed within six months of sale

Investors, sitting on large capital gains from a property sale or sale of other instruments often find themselves under the tax dragnet, if they do not invest the proceeds in time.One of the ways to save on long-term capital gains taxes is to invest the capital gains in specified bonds. These bonds are popularly known as 54EC bonds, borrowing its name from Section 54EC of the Income Tax (I-T) Act. These provide for exemption from capital gains.

Under Section 54EC, the capital gains need to be invested in specified bonds within a period of six months from the date of sale of the capital asset in order to qualify for the exemption. The entire gains will be exempt if the equivalent amount is invested in these bonds. Presently, there is an upper limit on investment in these bonds at Rs 50 lakh every financial year.

 

In one of the recent cases that came up before the Mumbai Income Tax Tribunal, a taxpayer had sold shares of two private companies for a total of Rs 2.20 crore. He invested an additional Rs 2.10 crore in the 54EC bonds and claimed exemption from the long term capital gains on sale of shares. However, out of the total investment in bonds, Rs 45 lakh was invested on August 30, 2005. 

WHEN IA CAPITAL GAINS TAX EXEMPTED?

* Section 54EC exempts tax on capital gains if these are put in specified bonds within six months from date of sale

* Mumbai Income Tax Tribunal recently ruled that gains are exempt if invested in six months from the month of sale

* Section 54EC does not specify any time period; says 'assessee has, at any time, within six months after such transfer, invested the whole or part of capital gains'

* The Tribunal observed that the I-T Act used the term 'month' in certain sections, wherever needed specifying the number of days

* Hence, it observed that the period of six months should be reckoned from the end of the month in which the sale of shares took place

The tax officer, at the time of assessment, concluded that the shares were sold on February 24, 2005 with inference to the payment of stamp duty and the share transfer form. Based on this, the tax officer rejected the taxpayer's claim for exemption to the extent of Rs 45 lakh. His contention was that the investment was made after the completion of six months from the date of sale of shares, as stipulated under the I-T Act.

The taxpayer filed an appeal against the said order and contended that, the he sold shares of a private company and hence the transfer of shares takes place only after the board of directors approve the same.

In his case, the approval was granted on February 28, 2005 and accordingly he had complied with the condition of investing the proceeds within six months, that is on August 30.

The first appellate authority observed that it was important to refer to the date of payment of stamp duty as the prices of shares (and the resulting stamp duties) has the potential to increase / decrease on a daily basis in tandem with the movement in share price. Thus, the authority agreed with the tax officers view and disallowed the claim to the extent of Rs 45 lakh worth of investment done by the taxpayer.

The taxpayer filed another appeal with the tribunal. This time, he submitted that the stamping of the share transfer forms takes place much before the date of actual execution of transfer, and more so the shares in question, were of a private company. Thus, the question of variation in the market prices on a day-to-day basis did not arise.

The Tribunal noted that for the shares, the transfer is completed only after the approval from the board of directors.

Further, only because the share transfer forms were stamped on February 24, it cannot be concluded that the share transfer process was completed on the same date. All other records, including a confirmation from the buyer of the shares, reiterated that the transfer was completed only on February 28, the tribunal also concluded that the final date of transfer is the same. Consequently, the investment in the bonds made on August 30, 2005 was also held to be made within the specified period of six months, as per the provisions.

However, the Tribunal also noted that even if the date of transfer is taken as February 24, it would be worthy to note the wordings used in Section 54EC.

The relevant portion of the said Section provides that 'the assessee has, at any time, within a period of six months after the date of such transfer, invested the whole or any part of the capital gains’. Relying on previous decisions, the Tribunal noted that as the term month has not been defined under the I-T Act, the same should be understood as per the meaning given under the General Clauses Act. This Act has defined month as one reckoned according to the British calendar.

The Tribunal observed that the I-T Act has used the term month in certain sections and wherever the law required specifying the number of days, it was accordingly stated in those sections.

For example, for an individual to be termed as an Indian resident for tax purposes, the provision clearly states that he / she should be in India for a period of 182 days or more. The Tribunal also observed various other instances in the Act where the words month and days have been provided specifically in the respective sections.

In view of the above, and keeping in mind the language used in Section 54EC, the Tribunal observed that the period of six months should be reckoned from the end of the month in which the sale of shares took place. As the investment in the bonds was made on August 30, it was held that the taxpayer has invested capital gains within a period of six months after the sale of shares.

Here, just knowing about ways to save capital gains may not be enough. You should also know the circumstances in which it will be exempted from tax. And that is equally important as most individual investors are unaware of these clauses and never get to know cases filed or rulings on the subject. This should help such individuals in better planning their investments.

The writer is a certified financial planner