Section 54EC of Income Tax Act lays down provisions for Investment in Specified Bonds. Under Section 54EC, Sale proceeds from a Capital Asset Transfer are exempt from Tax, if they are invested in specified bonds. In order to claim the exemption, Section 54EC also specified the time limit for making the investment. The Investments specified in Section 54EC are the NHAI Bods and RECL Bonds. Also read our earlier articles on Section 54B, Section 41, Section 44AB, Section 33AB, Section 54G, Section 71, Section 73, Section 80GGA, Section 80P, Section 35ABB, Section 35D, Section 35ABA. See below the complete analysis on Section 54EC of the Income Tax Act, in laymen terms.
Scope of Section 54EC Income Tax Act
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) and 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 capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say:
(a) 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 shall not be charged under Section 45;
(b) 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 the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under Section 45.
No Charge – Section 54EC Income Tax Act
Under Section 54EC, Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under Section 45 on the basis of the cost of such long-term specified asset as provided in Clause (a) or, as the case may be, Clause (b) of Sub-section (1) shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money.
Explanation to Section 54EC: In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken
(3) Where the cost of the long-term specified asset has been taken into account for the purposes of Clause (a) or Clause (b) of Sub-section (1) –
(a) a deduction from the amount of income-tax with reference to such cost shall not be allowed under Section 88 for any assessment year ending before the 1st day of April, 2006;
(b) a deduction from the income with reference to such cost shall not be allowed under Section 80C for any assessment year beginning on or after the 1st day of April, 2006.
(a) “cost” under section 54EC, in relation to any long-term specified asset, means the amount invested in such specified asset out of capital gains received or accruing as a result of the transfer of the original asset;
(b) “long-term specified asset” under section 54EC, means any bond redeemable after three years issued on or after 1st day of April, 2006.
Under Section 54EC, It was Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.
Exemption Condition – Section 54EC
Benefit of the exemption will be available only if the gains are invested in bonds of NHAI and RECL that are issued on or after 1-4-2006. (w.e.f. A.Y. 2006-07)
Case Law – Section 54EC Income Tax Act
Section 54EC is attracted where long term capital asset is transferred. So an assessee can avail benefit of Section 54EC with respect to depreciable asset. [CIT v. ACE Builders (P) Ltd. (2005) 144 Taxman 855 (Bom)].