The notifications in the context of Section 54EC need to be substituted by fresh ones, permitting bonds to be on tap and without any investment limits.
Section 54EC allows exemption from tax long-term capital gains if investments are made in bonds issued by Rural Electrification Corporation (REC) and National Highways Authority of India (NHAI).
The conditions precedent for applicability of Section 54EC are:
The assessee shall invest the whole or any part of the capital gains arising from such transfer in long term specified assets (new asset) within six months after the date of such transfer.
The new asset shall not be transferred or converted into money at any time within three years from the date of acquisition thereof.
The amount of exemption allowed is:
If the cost of the long term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain.
If the cost of the long term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain. In other words, amount equal to cost of new asset will be exempt from tax.
No limit prescribed
The section does not prescribe any limit for the investment to be made. Normally, being low-return investments, an assessee would like to invest only to the extent it saves him capital gains tax. Moreover, the I-T Department has no power under Section 54EC to fix any limit for investments in such bonds.
Tinkering with the benefit
Following the Finance Minister stating in his 2005 Budget that the number of eligible bonds would be reduced from five to two, there has been considerable tinkering with the benefit available to taxpayers under Section 54EC. But the order concerning the two categories of bonds was issued only on June 29, 2006, extending the time limit for making investments under Section 54EC and fixing the limits up to which bonds can be issued by the eligible enterprises, that is: NHAI Rs 1,500 crore; and REC Rs 4,500 crore.
The investment limits in these bonds were soon exhausted because of the backlog in 2005-06 and demand in the current year.
Through Notification No. 380/2006 (F.No.142/09/2006-TPL) of December 22, 2006, the Government has again authorised REC to issue additional bonds of Rs 3,500 crore with the following conditions:
An individual cannot invest in these bonds a sum exceeding Rs 50 lakh. Those who have already made investments up to this amount on the basis of past notification dated June 29, 2006, will not be eligible to make any further investment in the new series.
The investment can be made only during the period December 26, 2006 to March 31, 2007.
Issues for consideration
As regards Section 54EC, the tax department has gone beyond its powers by issuing a notification. The well-established legal position is that in exercising the power relating to delegated legislation, inter alia, by way of notifications, the Government cannot go beyond what is there in the legislation or curtail what is available to a person under the law.
Explanation to Section 54EC, as inserted by the Finance Act 2005 w.e.f. April 1, 2006, only defines the phrase "long term specified asset" and does not lay down or delegate any power about the limits for investments therein. Therefore, the limits cannot be prescribed by subordinate legislation by issue of notifications.
This is obviously because the legislature cannot delegate, inter alia, its power to modify the essential features of law. The power to issue notification is derived from the enabling Act and it is fundamental that the delegate on whom such a power is conferred, has to act within the limits of authority conferred by the Act. Hence, power of fixing limits up to which bonds can be issued and also limit for investment by an individual have not been exercised as per Section 54EC and notifications issued for these purposes are beyond authority and need to be withdrawn/struck down.
The notifications issued in the context of Section 54EC need to be substituted by fresh ones, permitting the bonds to be on tap and without any investment limits. Conceptually, placing an outer limit for investment is sound, as it will prevent high net worth individuals from cornering a major chunk of the bonds. But the decision must have legal backing. The apex court, in Dr T. A. Qureshi vs CIT (2006 206 CTR (SC) 499), said that cases are to be decided on legal principles and not on one's own moral views. Hence, if a ceiling is needed, the law must be amended first.
T. N. Pandey (The author is a former Chairman of CBDT.)