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Section 54ec

Shubham Mittal (Student) (24 Points)

01 July 2016

in case sale proceeds of capital asset has been given away as loan. afterwards a loan was taken to purchase a bond. whether exemption under 54ec applicable on borrowed amount.

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CA FARHAT MIYAN (CA) (40 Points)
Replied 01 July 2016

As section 54EC Specified that,

"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.

“LONG-TERM SPECIFIED ASSETS” means,

long-term specified assets for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,—

(i) by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988; or

(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956

Hence as section mentioned that deduction under this section is available, only when the assessee invest the whole or any part of capital gain amount in long term specified assets i.e. in bonds only not in Loan (as mentioned by you in your query)

CA Harshal Totla (Chartered Accountant) (2229 Points)
Replied 01 July 2016

Not agree with the comment of Mr.Farhat. There are case laws in which it was held that borrowed amount can be invested in purchasing bonds u/s 54EC. One such case law i am reproducing "Harishchandra G Kathpal, Mumbai vs Assessee (ITTA, Mumbai)". The relevant portion of verdict is as follows "What the section requires as we understand it, is that it is necessary for the assessee only to invest an amount which is arithmetically equal to the net consideration in the specified assets. It cannot be the intention of the section that the other normal transactions or activities of an assessee should be curtailed or that the sale price should be immobilised. One example which immediately comes to our mind is as to what would happen if the sale price is lost by theft and the deadline of 6 months is about to be crossed. In such a case, the assessee should not be deadline of 6 months is about to be crossed. In such a case, the assessee should not be denied the exemption if he, in a desperate attempt to avail of the exemption, resorts to borrowing and utilises the borrowed amount for investment."
Thanks

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