The CBDT (Central Board of Direct Taxes) Notification 380 of December 22, 2006, not only pulls the rug from under the feet of those who have earned substantial capital gains but also gives an unpalatable foretaste of things to come.
Through this Notification it has been made clear that one is entitled to invest in Section 54EC bonds issued by the NHAI and REC only to the maximum extent of Rs 50 lakh during the previous year 2006-2007, whereas Section 54EC sets no such limit much less delegate powers to the CBDT to fix one. What this portends is if one has earned long-term capital gain in excess of Rs 50 lakh and is not inclined or entitled to invest in the other tax shelters, he has to willy-nilly pay tax on such gains in excess of Rs 50 lakh at 20 per cent plus surcharge, if applicable, and the education cess.
And there is no guarantee that he would be allotted the coveted bonds because they are no longer on tap, what with the REC bond which is on sale from December 26, 2006 till March 31, 2007, having a cap of Rs 3,500 crore just as the NHAI bond which preceded it had a cap, though of a slightly higher amount.
Pulling the plug
Those unable to invest in the specified bonds within the prescribed time for no fault of theirs but due to the abrupt pulling of plug by the CBDT would most certainly feel cheated and seek judicial redress. But what of the Notification, which is clearly without the authority of the law because Section 54EC has not delegated any such powers nor has it put any cap on the investment one can make in the bonds?
If Parliament feels that Section 54EC has opened the floodgates of legitimate tax avoidance, if one may say so, it can by all means scrap it prospectively because retrospective withdrawal of a tax benefit, besides being innately unfair, is frowned upon by the judiciary. In fact, both the Prime Minister and the Finance Minister have gone on record these last few months hinting at withdrawal of tax exemptions, which is fine so long as it is done prospectively. To be sure, there is every justification for dismantling the Section 54EC regime in particular as it is the easiest way to avoid tax legitimately just park your funds emanating out of long-term capital gains for three years in the specified bonds and you are spared from tax liability on the amount thus invested.
The three-year lock-in period is admittedly too short, which naturally has people falling over themselves to lap up the scheme. But it is one thing to withdraw a benefit after putting the taxpayers on notice but quite another to wrench it away having led them up the garden path.
S. Murlidharan (The author is a Delhi-based chartered accountant.)