The Hindu Business Line : From the left pocket to the right

WHENEVER government companies or financial institutions fight tax cases, more often than not the issue is not only interesting but also sets important principles for other assessees to follow. The stakes are naturally high in such cases and sufficient legal points emerge from these battles. Recently, the Industrial Development Bank of India (IDBI) had to fight out its own case for getting exemption under Section 54E of the Income-Tax Act, 1961 when the section was in force.

This case is peculiar since IDBI availed itself of the exemption in accordance with the scheme which was floated by itself. This pointed issue came up before the Mumbai Bench of the Tribunal in IDBI vs DCIT (2004 91 ITD 34).

Facts, issues

The assessee, IDBI, framed a bond scheme and issued three-year IDBI capital bonds. The institution, while computing chargeable income under the `long-term capital gains', claimed a deduction under Section 54E(1) of the amount invested in purchasing the said bonds. The assessing officer (AO) opined that the plain and simple meaning of investment or deposit was withdrawal of fund from one person and transfer of the same to another person and that a person cannot invest or deposit money with himself.

The AO held that the assessee had merely transferred the amount from one of its own accounts to another, and such a book entry could not be treated as an investment even if a certificate/bond was issued in respect thereof. On appeal, the Commissioner (Appeals) upheld the impugned order. The matter reached the tribunal and the issue here in simple terms was: Could IDBI avail itself of a tax exemption in accordance with a scheme floated by itself?

Court decision

The Bombay tribunal held that IDBI was entitled to the exemption under Section 54E, though the scheme was floated by itself. An analysis of the section provides that where capital gain arises from the transfer of a long-term capital asset, and an assessee invests or deposits the whole or any part of the net consideration in any specified asset within six months after the date of such transfer, such assessee is entitled to exemption.

The Explanation below Section 54E(1) provides that investment can be made in any of the assets specified in clause (c) of such bonds issued by any public sector company, as the Central Government may by notification specify in that behalf. Through notification dated April 13, 1987, the Government specified the three-year IDBI capital bonds issued by the IDBI for the purpose of said clause (c). In pursuance of that notification, the assessee framed a bond scheme.

The tribunal reasoned that "the scheme was available to all taxpayers resident in India, other than minors and persons of unsound mind. The assessee was not precluded from opting the scheme. However, overtly, it seems absurd that the legislative intent in not providing for a distinct bar against an assessee investing in its own scheme, so as to entitle itself to claim exemption under Section 54E, would be to allow such a legal infeasibility.

At first sight, the request of the assessee under Section 54E and the intendment of the legislature in enacting that section appeared to be mutually contradictory. It was not so. The tribunal also disregarded the premise that a person cannot invest in himself on the reasoning that "it was not a case where there was no parting with of funds. The fund in which the investment had been made did not remain or continue with the assessee. "The assessee undeniably had no control over that fund. So, it was wrong to say that the assessee was bound to use that fund of its own in its own business, or for other developmental activities and that, therefore, the purpose of Section 54E was defeated. The assessee having no control over or access to the fund, it was not possible for the assessee to utilise it in its own business. That being so, even though the depositor investor/transferor and the transferee remained one and the same, the assessee itself, the fund was safely out of the reach of the assessee.

"That presented a simulated setting where in spite of the assessee transferring the amount to its own fund, it had no power over the said fund, thereby bringing its case at par with that of an assessee other than IDBI itself. Hence, the purpose of Section 54E was fully served, the assessee having complied with the terms of the bond scheme, and there being no prohibition in law against the assessee investing in the scheme, in the obtaining scenario."

The tribunal held that IDBI was entitled to the exemption under the law.

It may be noted that from April 1, 1992, Section 54E has no longer been in the statute. But there is a corresponding provision, Section 54EC, dealing with capital gains exemption through investment in specified bonds. The rationale of the aforesaid decision may still apply on similar facts and similar schemes floated by institutions. There is a saying that "one cannot make profit through oneself".

In the case discussed, it was a similar situation of trying to get exemption through one's own scheme. But then, since the funds earmarked for investment were distinct and separate, the Tribunal came to the conclusion that the assessee was an independent entity and the scheme floated by the assessee distinct and separate.

One only hopes that this decision is not agitated further since the logic and reasoning appears to be well founded. The Department should accept this decision so that finality is reached on this issue.

(The author is a Chennai-based chartered accountant.)

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