Madras H.C : the conditions occurring in the Notification No. 380 of 2006, F.No. 142/9/2006-TPL, dt. 22nd Dec., 2006 [(2007) 207 CTR (St) 8] along with the words “subject to the following conditions, namely,” issued by the CBDT are ultra vires s. 54EC

High Court Of Madras

Areva T & D India Ltd. vs. Assistant Commissioner Of Income Tax & Ors.

Section 54EC, Art. 14, Art. 265

K. Raviraja Pandian & P.P.S. Janarthana Raja, JJ.

Writ Petn. No. 1524 of 2007 & M.P. Nos. 1 & 2 of 2007

24th September, 2008

Counsel appeared :

Joseph Prabhakar & Shatiq Mohamed for A. Sathyaseelan, for the Petitioners : Mrs. Pushya Sitaraman, P. Wilson & A. Palaniappan, for the Respondents

ORDER

P.P.S. JANARTHANA RAJA, J. :

Writ petitions are filed by the petitioners seeking the relief of issuance of writ of declaration declaring that the conditions occurring in the Notification No. 380 of 2006, F.No. 142/9/2006-TPL, dt. 22nd Dec., 2006 [(2007) 207 CTR (St) 8] along with the words “subject to the following conditions, namely,” issued by the CBDT are ultra vires s. 54EC of the IT Act, 1961 and arbitrary and violative of Arts. 14 and 265 of the Constitution of India and consequently unenforceable. Since the issues involved in both the writ petitions are one and the same, they are taken up together and disposed of by a common judgment. The brief facts are as follows : Writ Petn. No.1524 of 2007 : The petitioner is a company incorporated under the Companies Act, 1956, engaged in the business of transmission and distribution including manufacturing relays, circuit breakers, power transformers, distribution transformers and switchgear transmission and distribution business (T&D business). Earlier, the petitioner company was also engaged in non-T&D business comprising manufacture of industrial motors, pumps, fans and energy meters for a number of years. The name of the petitioner company until 22nd Sept., 2005 was Alstom Ltd. Areva Group of companies acquired the T&D business of Alstom Group of companies worldwide in January, 2004. Areva T&D SA, France, acquired in August, 2005, the entire 66.35 per cent shareholding in the petitioner company which was earlier held by Alstom Holdings SA. As per SEBI Regulations, Areva T&D SA, France, acquired further 1,19,445 shares and thus Areva T&D SA now holds 2,65,83,845 shares of the petitioner company. The ultimate parent company of the petitioner company, namely, Areva T&D SA is owned by the Government of France to the extent of 88 per cent of the shareholding. After the takeover, since Areva desired to focus only on T&D business and since Alstom Group desirous of retaining its interest in the non-T&D business, it was decided to reorganize and reconstruct the petitioner company by transferring the non-T&D business to its subsidiary company named Alstom Industrial Products Ltd. (AIPL).

The shareholding of the petitioner company in AIPL was to be ultimately acquired by Alstom Group and thus the controlling interest of the subsidiary company would get transferred to Alstom Group. Therefore, the board of directors of the petitioner company approved a scheme of arrangement under ss. 391 and 394 of the Companies Act for reconstruction of the petitioner company by transfer of its non-T&D business as a going concern to its subsidiary for a consideration of Rs. 41.3 crores. The said consideration for transfer was paid by issue of equity shares by the subsidiary to the petitioner company. The appointed date for this transfer was fixed as 1st Jan., 2006 and the scheme was also approved by the High Court of Calcutta and the order was received by the petitioner company on 11th Aug., 2006. The effective date of transfer was 14 Aug., 2006, when the petitioner company filed Form 21 with Registrar of Companies, Kolkata. The capital gains arising out of the sale transaction worked out to Rs. 11,96,95,469 being the difference between the sale consideration received for the transaction and the net worth of the undertaking sold as prescribed under s. 50B of the IT Act. The relevant asst. yr. is 2006-07 and the capital gain worked out to Rs. 10,18,67,615 after setting off the long-term capital loss of the earlier years amounting to Rs. 1,78,27,854. Writ Petn. No. 11506 of 2007 :

The petitioner is engaged in the business of film production, distribution besides owning of studio and laboratory. The petitioner was a allottee/lessee and in possession of industrial unit constructed on leasehold plot No. 6 situated in Block FC of Sector 126A, within New Okhla Industrial Development Area (Noida) District Gautam Nagar, Uttar Pradesh admeasuring 16,571 sq. mts. and a covered area of 2,389.54 sq. mts. The said industrial leasehold plot was allotted in favour of the petitioner by lease deed dt. 21st March, 1988 and duly registered in the office of the Sub Registrar, Noida. The said Noida authority granted permission to the petitioner to transfer the leasehold rights of the said property in favour of M/s Bennett Coleman Co. Ltd. by transfer memorandum No. 10,271, dt. 17th Nov., 2006. The petitioner, by agreement dt. 21st Dec., 2006, has transferred the leasehold rights of the said property in favour of Bennett Coleman & Co. for a total sale consideration of Rs. 42.13 crores. Out of this, Rs. 41.63 crores was towards sale of land and Rs. 50 lakhs was towards sale of building. The capital gain arising out of the transaction worked out to Rs. 40,00,14,349 being the difference between the considerations. So, the taxable capital gains for the asst. yr. 2007-08 worked out to Rs. 39,50,14,349. Both the petitioners decided to invest the capital gains in the bonds for the purpose of availing benefit of exemption under s. 54EC of the Act. Sec. 54EC deals with capital gains not be to be charged on investment in certain bonds. The benefit of tax exemption is only with respect of long-term capital gains invested in the bonds which are redeemable after three years and issued by the National Highways Authority of India or by the Rural Electrification Corporation Ltd. on or after 1st April, 2006. There is no limitation for the investment. However, the Central Government later issued a Notification No. 380/2006, F.No. 142 of 2006-TPL, dt. 22nd Dec., 2006 restricting the investment in bonds to a sum of Rs. 50 lakhs per person. As per the above notification, a person, who is entitled to the benefit under s. 54EC of the Act, the value is restricted to a sum of Rs. 50 lakhs. Aggrieved by the same, both the writ petitioners have filed the writ petitions seeking for issuance of writ of declaration, declaring that the conditions occurring in the Notification No. 380 of 2006 F.No. 142/09/2006-TPL dt. 22nd Dec., 2006 along with the words “subject to the following conditions, namely,” issued by the second respondent herein are ultra vires of s. 54EC of the IT Act, 1961 and arbitrary and violative of Arts. 14 and 265 of the Constitution of India and consequently unenforceable. Both the petitioners have challenged the conditions incorporated in the above impugned notification and contended that it is ultra vires s. 54EC of the Act.

The said notification is contrary to the benefit conferred under s. 54EC of the Act. If the assessee makes investment which arises out of the investment i.e., long-term capital asset, the whole amount is exempted from taxation. By this notification, the assessee’s exemption limit is restricted. Therefore the learned counsel appearing for the petitioner contended that the conditions incorporated in the said notification are ultra vires s. 54EC of the Act. The said notification is arbitrary and violative of Art. 14 of the Constitution of India creating an invidious distinction between the assessees similarly situated and governed by the same assessment year, effecting the same type of transaction and being subjected to an identical gain. The denial of the benefit of the provisions of s. 54EC of the Act to the petitioners by the notification is plainly irrational and discriminatory. The petitioners further contended that the notification takes away the exemption which is conferred under s. 54EC of the Act. Therefore, the impugned notification issued by the Central Government is illegal and without any basis and justification. Hence, the same has to be quashed. Learned counsel for the petitioners relied on number of judgments of the Supreme Court in CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : 1993 Supp. (1) SCC 55, K.T. Moopil Nair vs. State of Kerala AIR 1961 SC 552, State of Andhra Pradesh vs. Nallaraja Reddy AIR 1967 SC 1458, New Manek Chowk Spn. & Wvg. Mills vs. Ahmedabad Municipality AIR 1967 SC 1801, State of Kerala vs. Haji K. Kutty Naha AIR 1969 SC 378, Khandige Sham Bhat vs. Agrl. ITO AIR 1963 SC 591, R.L. Marwaha vs. Union of India (1987) 4 SCC 31, S.K. Dutta, ITO vs. Lawarence Singh AIR 1968 SC 658, CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 2 SCC 460 and Deepak Sibak vs. Punjab University (1989) 2 SCC 145 to support their claim.

Learned counsel appearing for the respondents filed counter and denied the allegations and vehemently contended that the notification issued under s. 54EC of the IT Act, 1961 is not ultra vires the said provisions of s. 54EC. It was further contended that s. 54EC envisages the investor to invest the capital gains on sale of long-term capital assets in specified assets to be eligible to claim exemption. The Finance Act, 2006 restricted the scope and limited the meaning of ‘long-term specified asset’ to bonds notified by the Government of India and issued by National Highways Authority of India and Rural Electrification Corporation with a view to channelise funds towards focused development of roads. He further contended that the limitation was imposed with a view to ensure equitable distribution of benefit amongst the prospective investors and therefore, the restriction is reasonable and justifiable. Further there was also amendment of Expln. (b) to the s. 54EC. The proviso has also been inserted to validate the bond and notified before April, 2007 with the conditions specified in the notification, under the provisions of cl. (b) as they stood immediately before the amendment of Finance Act, 2007. It comes into effect retrospectively from 1st April, 2006. Therefore, the learned counsel has vehemently submitted that the present writ petition is only to challenge the conditions enumerated in the notification which is now incorporated in the section itself by the retrospective amendment and therefore, the writ petitions become infructuous and are liable to be dismissed.

Heard the learned counsel appearing on either side and perused the materials available on record. Sec. 54EC of the IT Act, 1961 is introduced by the Finance Act, 2001 w.e.f. 1st April, 2001. As per the provision, if the amount of long-term capital gain arises from the transfer and is invested in the long-term specified asset, then the petitioner company need not pay capital gains tax. Explanation (b) defines “long-term specified asset”, which reads as follows : “(i) On or after the 1st April, 2000, by the National Bank for Agriculture and Rural Development established under s. 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981) or by the National Highways Authority of India constituted under s. 3 of the National Highways Authority of India Act, 1988 (68 of 1988); (ii) On or after the 1st April, 2001, by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956 (1 of 1956); (iii) On or after the 1st April, 2002, by the National Housing Bank established under sub-s. (1) of s. 3 of the National Housing Bank Act, 1987 (53 of 1987) or by the Small Industries Development Bank of India established under sub-s. (1) of s. 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989).” From a reading of the above, it is clear that long-term specified asset means any bond redeemable after three years and issued on or after the 1st April, 2000 by the National Bank for Agriculture and Rural Development established under s. 3 of the National Bank for Agriculture and Rural Development Act, 1981 or by the National Highways Authority of India constituted under s. 3 of the National Highways Authority of India Act, 1988 or on or after the 1st April, 2001, by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956 and on or after the 1st April, 2002, by the National Housing Bank established under sub-s. (1) of s. 3 of the National Housing Bank Act, 1987 (53 of 1987) or by the Small Industries Development Bank of India established under sub-s. (1) of s. 3 of the Small Industries Development Bank of India Act. There is no limitation imposed for the purpose of the investment. Any amount invested in the bonds issued by the above authorities is exempted from the purview of the capital gains.

9. Subsequently, the s. 54EC of the Act was amended by the Finance Act, 2006, which reads as follows : “Explanation : For the purposes of this section (a) ‘cost’, 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’ means any bond, redeemable after three years and issued on or after the 1st April, 2006. (i) By the National Highways Authority of India constituted under s. 3 of the National Highways Authority of India Act, 1988 (68 of 1988) and notified by the Central Government in the Official Gazette for the purposes of this section; or (ii) by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956 (I of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section.” From this amendment it is clear that the tax benefit under s. 54EC of the Act is not available on long-term capital gains which are invested on or after 1st April, 2006, in the bonds of National Bank for Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India. Because of the amendment, the tax benefit under the said section is available thereafter only on those long-term capital gains which are invested on or after 1st April, 2006, in the bonds of Rural Electrification Corporation Ltd. and National Highways Authority of India and which are notified by the Central Government in the Official Gazette.

10. Both the petitioners wanted to invest in the said bonds. But, at that time there was no availability of notified bonds in the market. Therefore, it was not possible to make any investment by the petitioners. Representations were made by the assessees to the CBDT. Two more notifications in Nos. 963 and 964, dt. 29th June, 2006 were issued specifying the bond amount, which reads as follows : “By Notification No. SO. 963(E), dt. 29th June, 2006, the Central Government has notified the bonds for an amount of rupees one thousand five hundred crores (redeemable after three years) to be issued by the National Highways Authority of India constituted under s. 3 of the National Highways Authority of India Act, 1988 (68 of 1988) during the financial year 2006-07 as ‘long-term specified asset’ for the purpose of s. 54EC. SO. No. 964(E). In exercise of the powers conferred by sub-cl. (ii) of cl. (b) of the Expln. to s. 54EC of the IT Act, 1961 (43 of 1961), the Central Government hereby notifies the bonds for an amount of rupees four thousand five hundred crores (redeemable after three years) to be issued by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956 (1 of 1956), during the financial year 2006-07 as ‘long-term specified asset’ for the purpose of the said-section.”

11. The CBDT issued another circular in F.No. 142/09/2006-TPL, dt. 30th June, 2006 [(2006) 203 CTR (St) 33] extending the time-limit for making investments under s. 54EC of the Act, after taking into consideration of the representation as well as the non-availability of the capital gain bonds. Para 6 of the circular reads as follows : “With a view to removing the hardship caused to taxpayers, the CBDT, in exercise of powers conferred by cl. (a) of sub-s. (2) of s. 119 of the IT Act, 1961, hereby orders that the limitation of six months for making the investment under s. 54EC of capital gains arising from the transfer of a long-term capital asset, is extended— (i) upto 30th Sept., 2006 in case of persons where the long-term capital asset was transferred between 29th Sept., 2005 and 31st Dec., 2005 (both dates inclusive); (ii) upto 31st Dec., 2006 in case of persons where the long-term capital asset was transferred between 1st Jan., 2006 and 30th June, 2006 (both dates inclusive).”

12. Subsequently, the Central Government also issued another Notification No. 380 of 2006, F.No.142/09/2006TPL, dt. 22nd Dec., 2006, which reads as follows : “SO. No. 2146(E). (1) In exercise of the powers conferred by sub-cl. (ii) of cl. (b) of the Explanation to s. 54EC of the IT Act, 1961, the Central Government notifies the bonds for an amount of rupees three thousand five hundred crores to be issued by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956 during the period from 26th Dec., 2006 to 31st March, 2007 as ‘long-term specified asset’ for the purpose of the said section subject to the following conditions, namely : (i) a person who has made an investment of an amount aggregating more than fifty lakh rupees in the bonds notified as ‘long-term specified asset by the Central Government for the purposes of s. 54EC of the IT Act, 1961 in the Official Gazette vide Notification No. SO. No. 963(E), dt. 26th June, 2006 or Notification No. SO. No. 564(E), dt. 29th June, 2006 shall not be allotted any bonds notified as ‘long-term specified asset’ by this notification. (ii) a person who is not covered by cl. (i), shall not be allotted the bonds notified as ‘long-term specified asset’ by this notification, for any amount which exceeds the amount of fifty lakh rupees as reduced by the aggregate of the investment, if any, made by him in the bonds notified as ‘longterm specified asset’ by the Central Government for the purposes of s. 54EC of the IT Act, 1961, in the Official Gazette vide Notification No. SO. No. 963(E), dt. 29th June, 2006 or Notification No. SO. No. 964(E), dt. 29th June, 2006.” From bare reading it is clear that notification is issued under the power conferred by sub-cl. (ii) of cl. (b) of Explanation to s. 54EC of the Act. The Central Government further notifies the bonds to be issued by the Rural Electrification Corporation Ltd. during the period from 26th Sept., 2006 to 21st March, 2007 for an amount of Rs. 3,500 crores. The said bond is considered as ‘long-term capital asset’ for the purpose of section. Notification imposed two conditions. “(1) No more bonds will be issued to any person, if he has already made an investment of an amount aggregating more than Rs. 50 lakhs in the bonds already notified in notification No. 963E dt. 29 June, 2006 or 964E dt. 29th June, 2006. (2) Persons not covered under the first condition, no person is allotted any bonds notified as ‘longterm capital asset’ which exceeds Rs. 50 lakhs as reduced by the aggregate investment, if any, made by him in the bonds notified as ‘long-term specified asset’.” Aggrieved by these conditions, these writ petitions challenging the said impugned notification as ultra vires s. 54EC of the Act, have been filed.

13. In the meanwhile, the s. 54EC was once again amended by the Finance Act of 2007 with retrospective effect from 1st April, 2006, which reads as follows : “Explanation : For the purposes of this section— (a) ‘cost’, 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’ for making any investment under this section during the period commencing from the 1st 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 April, 2006, but on or before the 31st March, 2007,— (i) by the National Highways Authority of India constituted under s. 3 of the National Highways Authority of India Act, 1988 (68 of 1988); or (ii) by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956 (I of 1956), and notified by the Central Government in the Official Gazette, for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit : Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of cl. (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause.” It is clear from the amendment that “long-term specified asset” means any bond redeemable after three years and issued on or after 1st April, 2006 but on or before 31st March, 2007. Investments have to be made during the period commencing from 1st April, 2006 and ending on 31st March, 2007. The bonds are to be issued by the National Highways Authority of India constituted under s. 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Ltd., a company formed and registered under the Companies Act, 1956. Further, it also enables the Central Government to notify in the Official Gazette for the purpose of this section with such conditions including the condition for providing a limit on the amount of investment by the assessee in such bonds. It means that the Central Government can notify the conditions as it thinks fit. Proviso has also been inserted after cl. (b) for the purpose of validating the bonds notified before 1st April, 2007 under the provisions of cl. (b) as they stood immediately before the amendment by the Finance Act.

The said amendment takes effect retrospectively from 1st April, 2006. By this amendment the impugned Notification dt. 22nd Dec., 2006 with conditions issued earlier, is deemed to be a bond notified under this amended provision. It is to be noted that another proviso was also inserted after sub-s. (1) of s. 54EC of the Act, which reads as follows : “Provided investment on or after 1st April, 2007 in the ‘long-term specified asset’ by the assessee during the end of the financial year does not exceed Rs. 50 lakhs.” By this amendment by Finance Act of 2007, the Central Government limited the investment made on or after 1st April, 2007 in the specified long-term asset by the assessee during the end of the financial year to Rs. 50 lakhs and the same has come into effect from 1st April, 2007. From both the amendments it is clear that the intention of the legislature is to limit the investment in the ‘long-term specified asset’ to Rs. 50 lakhs. The present writ petitions have been filed before the amendment of the above provisions. It challenges the Notification dt. 22nd Dec., 2006 on the ground that it is ultra vires of provision of s. 54EC of the Act. The power to limit on the amount of investment by an assessee in bonds is now incorporated in the section itself. By the proviso to Expln. (b), the bond notified before 1st April, 2007 with a condition is deemed to be a bond notified under the amended provision. In view of the subsequent amendment, the prayer in the writ petition becomes infructuous. In these circumstances, when the main prayer in these writ petitions fail the other arguments advanced with decisions relating to the violation of Arts. 14 and 265 of the Constitution of India need not be considered.

14. For the foregoing reasons, we are of the view that the challenge to the impugned Notification dt. 22nd Dec.,2006, has become infructuous. Accordingly, the writ petition are liable to be dismissed and the same are dismissed. No costs. We make it clear that we are not expressing any opinion on the other arguments advanced by the learned counsel appearing for the appellants. Consequently, connected miscellaneous petitions are also dismissed.

[Citation : 326 ITR 540]

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