The delay in issuing notification restricting the scope of Section 54EC has deprived many taxpayers of the benefit of this exemption in 2006-07.
Section 54EC of the Income-Tax Act, 1961 allows exemption from tax on long-term capital gains if investment is made in the bonds notified by the government. This Section, inserted by the Finance Act, 2000, provides that if the sale proceeds in whole of the capital assets sold or any part of the capital gains arising from such sales are invested in the notified bonds within six months, there would be exemption from tax to the extent mentioned in the Section.
The only condition to be complied with for getting the exemption benefit was to keep the investment blocked in bonds for the stipulated periods.
Before the Finance Act, 2006, the specified bonds were those redeemable after three years issued by Nabard, the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB).
In his 2006-07 Budget speech, the Finance Minister, Mr P. Chidambaram, restricted Section 54EC benefit to the bonds issued by NHAI and REC: "Section 54EC and Section 54ED are tax shelters. I propose to restrict the scope of Section 54EC to two institutions viz. NHAI & REC... . (para 167)."
It was open to Finance Minister to say at that stage itself that henceforth taxpayers would not get Section 54EC benefit or that it would only be available to a limited extent. But he did not choose to do so and kept the taxpayers' hopes alive that they could still get the tax exemption if they invested in NHAI and REC bonds.
The notifications were issued only on June 29, 2006, and the amount that could have been invested in the bonds of the two companies (NHAI and REC) was also restricted to the following: NHAI Rs 1,500 crore; and REC Rs 4,500 crore. These limits were notified for the entire year 2006-07. But what was done after the Finance Minister's statement tantamounts to breach of trust. No notification for investment in such bonds was issued till June 2006. Because of this, there was a huge backlog of money to be invested in bonds from the financial year 2005-06 (because the investment could be made within six months) and the financial year 2006-07 (for three months).
Because of the huge carried-over backlog, the limits got exhausted soon after the notification was issued and the bonds are no longer on tap for investment.
Section 54EC has become a dead letter by an administrative decision without any change in law. Thus, no exemption benefit can now be utilised under this section because of non-availability of investment avenues.
Creating a bias
This can hardly be considered responsible functioning. It is true that no one can claim, as a matter of right, tax exemptions and benefits. However, once given, these cannot be withdrawn arbitrarily/abruptly causing hardship and discrimination.
The Finance Minister's statement in Parliament did not give any indication that in respect of the two categories of bonds kept open for investment, the availability of tax exemption would be limited and the bonds would not be on tap.
If this had been done, taxpayers would have been on guard and could have thought of other alternatives. Further, it took nearly three months to issue the notifications. As a result, the limited amount available got exhausted and a large number of taxpayers have been deprived of the benefit of this exemption in 2006-07.
The discrimination is apparently manifest because during 2006-07 some taxpayers have been able to utilise the exemption by making investments even as a large number of them could not and, hence, liable to tax. This is, prima facie, unfair.
Obviously, such a way of administering income-tax law shakes taxpayers' confidence. It flagrantly discrimination between similarly placed taxpayers.
The Finance Ministry would do well to issue a notification concerning the two categories of bonds right away, giving exemption benefit even to those who could not invest within six months. Doing so would be just, fair and reasonable.
T. N. Pandey (The author is a former chairman of CBDT.)