Vildirect: IncomeTax-caselaws-2008-VIL-563-MAD-DT

2008-VIL-563-MAD-DT

Equivalent Citation: [2010] 326 ITR 540 (Mad)

MADRAS HIGH COURT

1524, 11506 of 2007.

Date: 24.09.2008

AREVA T AND D INDIA LTD.

ASSISTANT COMMISSIONER OF INCOME-TAX

BENCH

RAVIRAJA PANDIAN K., JANARTHANA RAJA P. P. S. JJ.

JUDGMENT

The judgment of the court was delivered by

P. P. S. Janarthana Raja J.- The writ petitions are filed by the petitioners seeking the relief of issuance of writ of declaration declaring that the conditions occurring in Notification No. 380 of 2006 F. No. 142/09/ 2006-TPL dated December 22, 2006, along with the words "subject to the following conditions, namely," issued by the Central Board of Direct Taxes are ultra vires section 54EC of the Income-tax Act, 1961, and arbitrary and violative of articles 14 and 265 of the Constitution of India and consequently unenforceable.

2. Since the issue involved in both the writ petitions is one and the same, they are taken up together and disposed of by a common judgment.

3. The brief facts are as follows :

W. P. No. 1524 of 2007 :

4. 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 switch gear (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 September 22, 2005 was Alstom Limited. The Areva group of com-panies acquired the T & D business of the Alstom group of companies world wide in January 2004. Areva T & D SA, France acquired in August 2005, the entire 66.35 per cent. share holding in the petitioner company which was earlier held by Alstom Holdings S. A. As per the 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 take over, since Areva desired to focus only on T & D business and since Alstom group was 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 Limited (AIPL). The shareholding of the petitioner company in Alstom Industrial Products Limited was to be ultimately acquired by the Alstom group and thus the controlling interest of the subsidiary company would get transferred to the Alstom group. Therefore, the board of directors of the petitioner company approved a scheme of arrangement under sections 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 January 1, 2006, and the scheme was also approved by the High Court of Calcutta and the order was received by the petitioner company on August 11, 2006. The effective date of transfer was August 14, 2006, when the petitioner company filed Form No. 21 with the Registrar of Companies, Kolkatta. 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 section 50B of the Income-tax Act. The relevant assessment year 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.

W. P. No. 11506 of 2007 :

5. 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 an industrial unit constructed on lease hold plot No. 6 situated in Block FC of sector 126A, within New Okhla Industrial Development Area (Noida) District Gautam Nagar, Uttar Pradesh, admeasuring 16571 sq. mts and a covered area of 2389.54 sq. mts. The said industrial lease hold plot was allotted in favour of the petitioner by lease deed dated March 21, 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 Company Limited by Transfer Memorandum No. 10271, dated November 17, 2006. The petitioner, by agreement dated December 21, 2006, has transferred the leasehold rights of the said property in favour of Bennett Coleman and Company 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 assessment year 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 of the benefit of exemption under section 54EC of the Act. Section 54EC deals with capital gains not 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 Limited on or after April 1, 2006. There is no limitation for the investment. However the Central Government later issued a Notification No. 380 of 2006 F. No. 142/2006-TPL, dated December 22, 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 section 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 Notification No. 380 of 2006 F. No. 142/09/2006-TPL, dated December 22, 2006, along with the words "subject to the following conditions, namely," issued by the second respondent herein are ultra vires section 54EC of the Income-tax Act, 1961, and arbitrary and violative of articles 14 and 265 of the Constitution of India and consequently unenforceable.

6. Both the petitioners have challenged the conditions incorporated in the above impugned notification and contended that it is ultra vires section 54EC of the Act. The said notification is contrary to the benefit conferred under section 54EC of the Act. If the assessee makes investment which arise out of the investment, i.e., long-term capital asset, the whole amount is exempted from taxation. By this notification, the assessees' exemption limit is restricted. Therefore, the learned counsel appearing for the petitioner contended that the conditions incorporated in the said notification are ultra vires section 54EC of the Act. The said notification is arbitrary and violative of article 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 section 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 section 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 a number of judgments of the Supreme Court reported in CIT v. British Paints India Ltd., [1991] 188 ITR 44 (SC) ; [1992] Suppl. 1 SCC 55, K. T. Moopil Nair v. State of Kerala, AIR 1961 SC 552, State of Andhra Pradesh v. Nalla Raja Reddy, AIR 1967 SC 1458, New Manek Chowk Spinning and Weaving Mills v. Ahmedabad Municipality, AIR 1967 SC 1801, State of Kerala v. Haji K. Kutty Naha, AIR 1969 SC 378, Khandige Sham Bhat v. Agrl. ITO [1963] 48 ITR (SC) 21 ; AIR 1963 SC 591, R. L. Marwaha v. Union of India [1987] 4 SCC 31, S. K. Dutt, ITO v. Lawrence Singh Ingty [1968] 68 ITR 272 (SC); AIR 1968 SC 658, CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) ; [1981] 2 SCC 460 and Deepak Sibal v. Punjab University [1989] 2 SCC 145 to support their claim.

7. Learned counsel appearing for the respondents filed counter and denied the allegations and vehemently contended that the notification issued under section 54EC of the Income-tax Act, 1961, is not ultra vires the said provisions of section 54EC. It was further contended that section 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 the 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 to Explanation (b) to section 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 provision of clause b as they stood immediately before the amendment of the Finance Act, 2007. It comes into effect retrospectively from April 1, 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.

8. Heard the learned counsel appearing on either side and perused the materials available on record.

9. Section 54EC of the Income-tax Act, 1961, is introduced by the Finance Act, 2001, with effect from April 1, 2001. As per the provision, if the amount of long-term capital gain arises from the transfer 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 day of April, 2000, by the National Bank for Agriculture and Rural Development established under section 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 section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) ;

(ii) on or after the 1st day of April, 2001, by the Rural Electrification

Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) ;

(iii) on or after the 1st day of April, 2002, by the National Housing

Bank established under sub-section (1) of section 3 of the National Housing Bank Act, 1987 (53 of 1987), or by the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989)."

10. 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 April 1, 2000, by the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981, or by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988, or on or after the 1st day of April, 2001, by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956, and on or after the 1st day of April, 2002, by the National Housing Bank established under sub-section (1) of section 3 of the National Housing Bank Act, 1987 (53 of 1987), or by the Small Indus-tries Development Bank of India established under sub-section (1) of section 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.

11. Subsequently, section 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 day of April, 2006,-

(i) By the National Highways Authority of India constituted under section 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

12. From this amendment it is clear that the tax benefit under section 54EC of the Act is not available on long-term capital gains which are invested on or after April 1, 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 April 1, 2006, in the bonds of Rural Electrification Corporation Limited and National Highways Authority of India and which are notified by the Central Government in the Official Gazette.

13. Both the petitioners wanted to invest in the said bonds. But at that time there was no availability of notified bonds in the market.

14. Therefore, it was not possible to make any investment by the petitioners. Representations were made by the assessees to the Central Board of Direct Taxes. Two more notifications in Nos. 963 and 964 dated June 29, 2006, were issued specifying the bond amount, which reads as follows ([2003]

284 ITR (St.) 11) :

"By Notification No. S.O. 963(E), dated June 29, 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 section 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 section 54EC.

S. O. 964(E). In exercise of the powers conferred by sub-clause (ii) of clause (b) of the Explanation to section 54EC of the Income-tax Act, 1961 (43 of 1961), the Central Government herby 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 Limited, 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."

15. The Central Board issued another circular in F. No. 142/09/2006-TPL, dated June 30, 2006, extending the time limit for making investments under section 54EC of the Act, after taking into consideration of the representation as well as the non-availability of the capital gain bonds. In paragraph 6 of the circular reads as follows ([2006] 284 ITR (St.) 11) :

"With a view to removing the hardship caused to taxpayers, the Central Board of Direct Taxes, in exercise of powers conferred by clause) of sub-section (2) of section 119 of the Income-tax Act, 1961, hereby orders that the limitation of six months for making the investment under section 54EC of capital gains arising from the transfer of a long-term capital asset, is extended-

(i) up to 30th September, 2006 in case of persons where the long-term capital asset was transferred between September 29, 2005 and 31st December, 2005 (both dates inclusive) ;

(ii) up to 31st December, 2006 in case of persons where the long-term capital asset was transferred between 1st January, 2006 and 30th June, 2006 (both dates inclusive)."

16. Subsequently, the Central Government also issued another Notification No. 380 of 2006 F. No. 142/09/2006-TPL dated December 22, 2006, which reads as follows ([2007] 288 ITR (St.) 6) :

"S. O. 2146(E). In exercise of the powers conferred by sub-clause

(ii) of clause (b) of the Explanation to section 54EC of the Income-tax Act, 1961, the Central Government notifies the bonds for an amount of rupees three thousand five hundred crores redeemable after three years to be issued by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956, during the period from December 26, 2006, to March 31, 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 lakhs rupees in the bonds notified as 'long-term specified asset' by the Central Government for the purposes of section 54EC of the Income-tax Act, 1961, in the Official Gazette, vide Notification No. S.O. 963(E), dated June 29, 2006, or Notification No. S. O. 964(E), dated June 29, 2006 shall not be allotted any bonds notified as 'long-term specified asset' by this notification.

(ii) a person who is not covered by clause (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 lakhs rupees as reduced by the aggregate of the investment, if any, made by him in the bonds notified as 'long-term specified asset' by the Central Government for the purposes of section 54EC of the Income-tax Act, 1961. In the Official Gazette, vide Notification No. S.O. 963(E), dated June 29, 2006, or Notification No. S.O. 964(E), dated June 29, 2006."

17. From a bare reading it is clear that notification is issued under the power conferred by sub-clause (ii) of clause (b) of Explanation to section 54EC of the Act. The Central Government further notifies the bonds to be issued by the Rural Electrification Corporation Limited during the period from 26th day of September, 2006, to 21st March, 2007, for an amount of Rs. 3,500 crores. The said bonds are considered as "long-term capital asset" for the purpose of section. The 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. 963(E), dated June 29, 2006, or 964(E), dated June 29, 2006.

(2) Persons not covered under the first condition, no person is allotted any bonds notified as 'long term capital asset' which exceeds 50 lakhs as reduced by the aggregate investment, if any, made by him in the bonds notified as 'long-term specified asset'. "

18. Aggrieved by these conditions, these writ petitions challenging the said impugned notification as ultra vires section 54EC of the Act have been filed.

19. In the meanwhile, section 54EC was once again amended by the Finance Act of 2007 with retrospective effect from April 1, 2006, which reads as follows :

"Explanation.-For the purposes of this section,-

(b) 'long-term specified asset' 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 (68 of 1988) ; or

(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 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 clause (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."

20. It is clear from the amendment that "long-term specified asset" means any bond redeemable after three years and issued on or after April 1, 2006, but on or before March 31, 2007. Investments have to be made during the period commencing from April 1, 2006, and ending on March 31, 2007. The bonds are to be issued by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988, or by the Rural Electrification Corporation Limited, 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. The proviso has also been inserted after clause (b) for the purpose of validating the bonds notified before April 1, 2007, under the provisions of clause (b) as they stood immediately before the amendment by the Finance Act. The said amendment takes effect retrospectively from April 1, 2006. By this amendment the impugned notification dated December 22, 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-section (1) of section 54EC of the Act, which reads as follows :

"Provided investment made on or after April 1, 2007, in the 'long-term specified asset' by the assessee during any of the financial year does not exceed Rs. 50 lakhs."

21. By this amendment by the Finance Act of 2007, the Central Government limited the investment made on or after April 1, 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 April 1, 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 dated December 22, 2006, on the ground that it is ultra vires the provision of section 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 Explanation (b), the bond notified before April 1, 2007, with 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 fails, the other arguments advanced with decisions relating to the violation of articles 14 and 265 of the Constitution of India need not be considered.

22. For the foregoing reasons, we are of the view that the challenge to the impugned notifications dated December 22, 2006, has become infructuous. Accordingly, the writ petitions 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 appellant. Consequently, the connected miscellaneous petitions are also dismissed.

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