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Reduced avenues for reinvestment under Sec. 54EC

Misleading statement in Notes on Clauses causes avoidable confusion

Section 54EC has been amended by substituting explanation (b) to sub-section (3) of Sec. 54EC, which had earlier listed six items of bonds permissible for reinvestment to avail capital gains relief. Now it is limited to two items and any new bonds that may be notified by the Central Government.

Since no date has been mentioned in the section it should be covered by Sec.1 of the Finance Bill that it will come into force on April 1, 2006. Available investments will be the same as per pre-amended law up to March 31, 2006. In fact, NABARD continues to accept deposits on the understanding that the investments till March 31 will merit the relief.

But some confusion is created by the Notes on Clauses which states, "The amendment will take effect retrospective from April 1, 2006".

Since the entire bill is to be operative on April1, 2006, the amendment cannot be retrospective. It can be understood as retrospective only if the amendment is to apply from assessment year 2006-07.

If this were the interpretation, even deposits made before February 28, 2006 will be disqualified for relief under Sec. 54EC.

The government undertakings accepting subscriptions for their bonds even after February 28, 2006 will also be making a mistake at the expense of the assessee.

The Memorandum explaining the Finance Bill does not improve matters, when it says, "this amendment will take effect from April 1, 2006". What is the correct position in law?

All the provisions in the Finance Bill are to be understood as prospective, except where they are made retrospectively. Since relief is extended to specified investments, specification of investment is procedural and not substantive, so that the list of investments specified by the amendment will apply only on or after April 1, 2006.

The general rule is that all laws relating to procedure are prima facie prospective in operation. Such doubt was resolved by a Bench of Five Judges in the Ahmedabad Manufacturing and Calico Printing Co. Ltd. v S.J. Mehta, ITO (1963) 48 ITR 154 (SC), where it was found that the amendment to Sec. 35 inserted with effect from April 1, 1956 would not apply to declaration of dividend made prior to April 1, 1956.

A similar view was taken by the Supreme Court in a bench of three judges in J. P. Jani, ITO v Induprasad Devshanker Bhatt (1969) 72 ITR 595 (SC) in a similar situation. In the case of a similar amendment to Sec. 34 (now 148), this decision was followed by another bench of the Supre me Court in National Agricultural Co-operative Market-ing Federation of India Ltd. v Union of India (2003) 260 ITR 548 (SC). This is the established law. No amendment can destroy an existing right or even place any restriction on it, unless it is expressly so enacted.

A mere procedural law should not be allowed to whittle down or modify a substantive right. Hence, there need be no apprehension on account of the misleading statement in Notes on Clauses.

The Memorandum should have clearly explained that all investments on or after April 1, 2006 alone can be covered by the new law.

If the amendment is understood as in Notes on Clauses, it will not only have a harsh impact on innocent investors who had acted according to prevailing law, but will also lead to the absurd result that only investments issued on or after April 1, 2006 will qualify for relief as stipulated clearly in the amended clause, so that no one will be able to get relief with reference to all investments made between April 1, 2005 and March 31, 2006.

I am certain that the confusion caused by the Notes on Clauses will be cleared by a clarification that the amendment refers to investments made on or after April 1, 2006 as incorporated in the body of the clause and not for assessment year 2006-07 so as to be retrospective in effect.

S. Rajaratnam

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