INCOME TAX
Guidelines for companies and mutual funds in respect of approved investments for purposes of sections 54EA and 54EB
Circular 748
Dated 19/12/1996
clarification 1
1. Sections 54EA and 54EB of the Income-tax Act, 1961 have been introduced by the Finance (No. 2) Act, 1996 with effect from 1-10-1996 will consequently apply in relation to transfer of long-term capital assets on or after this date. Capital gains tax will be exempted in cases where net consideration (section 54EA) or the capital gains (section 54EB) is invested in certain approved instruments. The approved instruments under both the aforesaid sections have been notified separately. The Board have framed the following guidelines for approving investment instruments for the purposes of the above sections :—
1. (a) Applications to be sent by public companies and public financial institutions to the CBDT for notifying investment instruments.
(b) Mutual Funds referred to in section 10(23D) of the Income-tax Act including Unit Trust of India, need not make applications for this purpose.
2. Sixty per cent of Capital (hereinafter called investible capital) raised through bonds or debentures to be invested in infrastructure facilities as defined in sub-section (12) of section 80-IA of the Income-tax Act, 1961, or in companies generating power or generating and distributing power or in companies engaged in basic telephone services or in the exploration/extraction of oil and natural gas.
3. 25 per cent or more of the investible capital shall be invested in the infrastructure facility specified in sub-section (12) of section 80-IA, etc., as mentioned in para (2) above, before the end of one year from the date of approval by the Board.
4. The balance of investible capital shall be invested within a period of three years from the date of approval by the Board.
5. Every public company or public financial institution shall submit a certificate from an Accountant, as defined in the Explanation to sub-section (2) of section 288, specifying the amount invested in each year, from the date of approval by the Board.
6. The Board shall have the power to withdraw the approval granted in the following circumstances, namely :—
(a) if such public company or public financial institution fails to make investments as per conditions mentioned in sub-item (3) or (4) above; or
(b) if such public company or public financial institutions fails to file the certificate referred to in sub-item (5) above.
Circular : No. 748, dated 19-12-1996.
Clarification 2
With a view to channelising investment into priority sectors of the economy and to give impetus to the capital markets, sections 54EA and 54EB of the Income-tax Act, 1961, were introduced by the Finance (No. 2) Act, 1996. Under the provisions of these sections capital gains arising from the transfer of a long-term capital asset on or after 1st October, 1996, are exempted from capital gains tax if the amount of net consideration (section 54EA) or the amount of capital gain (section 54EB) is invested in certain specified assets.
The Central Board of Direct Taxes have notified the following instruments for the purposes of section 54EA and section 54EB :
A. For the purposes of section 54EA :
1. all bonds, redeemable after a period of three years, issued or to be issued by the Housing and Urban Development Corporation Limited, New Delhi;
2. all units, repurchasable after a period of three years, issued or to be issued by any mutual fund (including the Unit Trust of India) referred to in clause (23D) of section 10 of the Income-tax Act, 1961.
B. For the purposes of section 54EB :
1. deposits for a period of not less than seven years with the State Bank of India established under the State Bank of India Act, 1955 (23 of 1955), or any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), or any nationalised bank, that is to say, any corresponding new bank, constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or co-operative land development bank);
2. all bonds, redeemable after a period of seven years, issued or to be issued by the Housing and Urban Development Corporation Limited, New Delhi;
3. all units, repurchasable after a period of seven years, issued or to be issued by any mutual fund (including the Unit Trust of India) referred to in clause (23D) of section 10 of the Income-tax Act, 1961.
No restriction has been placed on the investment of capital raised by mutual funds, companies and financial institutions which raise capital through bonds or debentures have to invest in infrastructure facilities as defined in section 80-IA or in power or basic telephone services or in the exploration/extraction of oil and natural gas.
Press Note : Issued by the Ministry of Finance, Department of Revenue, New Delhi, dated 20-12-1996.
clarification 3
1. Circular No. 748, dated 19th December, 1996 (Clarification 1) laid down guidelines in respect of approved investments for purposes of section 54EA and section 54EB of the Income-tax Act. Subsequent to the issue of those guidelines, the Income-tax (Second Amendment) Ordinance, 1996 has been promulgated on 31-12-1996. By virtue of section 2 of the Ordinance, shares issued by a public company have been included in the investment instruments which would qualify for exemption from capital gains tax under section 54EA and section 54EB.
2. The guidelines laid down for bonds and debentures in Circular No. 748 will also apply to the shares issued by public companies with regard to the procedure for application to the Board as well as with regard to the manner in which the investible capital is to be utilized.
3. For the purposes of sections 54EA and 54EB shares of a public company shall mean primary issue of share capital and "public company" shall have the same meaning as defined in section 3 of the Companies Act, 1956.
Circular : No. 750, dated 13-1-1997.