KOLKATA, DEC 21, 2012: THE issues before the Bench are - Whether the assessee is eligible for deduction u/s 54EC of the Act on investment in REC Capital Gain Bonds on account of minors’ income from Long Term Capital Gains (LTCG) separately, in case income is clubbed u/s. 64(1A) of the Act and Whether prior to insertion of proviso to section 54EC, the investment is limited to Rs. 50 lacs in respect of a person for the purpose of section 54EC and not relating to an assessee and therefore, the assessee is entitled to exemption for the amount invested in the name of minor child, a separate person, whose income is to be clubbed in the hands of assessee. And the verdict goes against the Revenue.

Facts of the case

The assessee’s minor children being beneficial owners of shares, earned LTCG on sale of beneficial shares. The assessee and minor children purchased REC Capital Gain Bonds and claimed deduction u/s 54EC. Assessee invested Rs. 50 lacs in REC capital gain bond in his own name and also made investment separately in the two minors' names for Rs. 49 lacs and 39 lacs and claimed deduction u/s 54EC. AO while framing assessment clubbed LTCG for minor children but disallowed deduction claimed by assessee on account of two minors and restricted deduction u/s 54EC of the Act at Rs.50 lacs invested by assessee. CIT(A) allowed the appeal of the assessee and deleted the disallowance.

Revenue contended that as per explanation to section 54EC(3)(b) and as per CBDT Notification no. 380/2006 providing limit on the amount of investment by an assessee in REC Bond and maximum limit prescribed at Rs 50 lacs, AO rightly allowed the claim by restricting the deduction u/s. 54EC of the Act at Rs.50 lacs. Benefit of deduction is available to an assessee and in the present case there is only one assessable entity being the assessee for the purpose of computation of total income under the Act. Minors could not be termed as independent assessee or independent person.

Assessee contended that prior to amendment from 1.4.2007 u/s 54EC, the original section did not put any limit with regard to investment made in specified assets for claiming deduction u/s. 54EC and the proviso was added only from 01.04.2007 which provided that the investment made on or after the 1st day of April, 2007 in the longterm specified asset “by an assessee” during any financial year does not exceed fifty lakh rupees. Prior to the insertion of proviso, as per CBDT Notification No. 380 of 2006 the Central Government notified the bonds for an amount of Rupees three thousand five hundred crores to be issued by the Rural Electrification Corporation Limited as ‘long-term specified asset’ for the purposes of the said section subject to the condition that a person shall not be allotted the bonds notified as long term specified asset for any amount which exceeds the amount of fifty lakhs rupees. Further as per notification no. 143 of 2006, the central government notified the bonds for an amount of Rs Four thousand five hundred crores to be issued by REC as specified long term asset. The notification says that a person shall not be allotted bonds more than Rs. 50 lacs and the word ‘person’ has been defined in section 2(31) which includes an individual and there cannot be any dispute that minor children is an individual separate from his parent who is also an individual and a person as per the provisions of section 2(31) of the Act. There is no limit for separately allotting the bond upto Rs.50 lacs for each of such person nor there is any limit mentioned for claiming deduction of an assessee.

After hearing both the parties, the ITAT held that,

++ there is nothing in the notification in so far as the deduction is to be allowed u/s 54EC. From the above notification issued by Rural Electricity Corporation Ltd., which says that “a person” shall not be “allotted” bonds more than Rs. 50,00,000/-. This word “Person” has been defined in sec. 2(31) of the Act, which includes an individual. In case minor is an assessable entity even though his income is clubbed u/s. 64(1) in the hands of his parents, he is to be considered separate than his parents who is also an individual and a person as per this definition. There was no limit in separately allotting bonds up to Rs. 50,00,000/- to each of such person nor there is any mentioned limiting the deduction to an assessee. Section 54EC (3) Explanation (b), suggests that the conditions for providing a limit on the amount of investment by an assessee can be notified or could have been notified by the Central Govt. But in the notification relied on the by the AO as aforesaid, no limit of investment by an “assessee” is prescribed. But the condition for allotment of bonds to a single person is specified. The deduction was not the subject matter of notification rather it was out of the purview of the aforesaid notification. Even if section 54EC(3) Explanation (b) is considered, assessee’s case falls outside the embargo put on by the amendment made in this section;

++ section 64(1A) speaks of the addition of the total income of minor child and income of a minor child for the purpose of inclusion u/s 64(1A) will be his total income. In computing the “total Income” of an Individual all such income as arises or accrues to the minor child. The word ‘such’ means the total income of the minor, because ‘such’ is preceded by the word total income. The word ‘such’ means the “same” or of the “same nature” as has been defined in all the dictionaries and here the word ‘such’ is preceded by the word total income. It is not the gross total income but the income of any person, who is an assessee, as computed under the provisions of the Act, means the total income as computed under the provisions of the Act is to be added;

++ Section 54EC provides that capital gain not to be charged on investment on certain bonds. Therefore the investments made in certain bonds shall be outside the scope of capital gain for the purpose of computation of total income itself. Any amount invested as per the provision of section 54EC is outside the computation of total income itself. There is difference between the word “assessee” and the word “person”. The notification on which the AO relied upon have not put on any embargo on the investments by an assessee but the embargo is on allotment of the bonds to a “person” and such embargo is on the allotting authority. The bonds have been allotted to the three persons as per the notification itself and the assessee is entitled to the benefits as per provisions of sec. 54EC under which restriction have been put only for investments from 1.4.2007. Therefore, the exemption u/s 54EC is also allowable for the investment made in REC bonds in the name of minors.

(See 2012-TIOL-771-ITAT-KOL)