Section 54EE: A Cake That One Can’t Eat!
Sale/Transfer/Exchange of “Capital Asset” is a transaction that may bring high amount of tax liability on an individual. To reduce tax on this income one may claim the benefit given in following sections namely 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB and 54H. One such section is section 54EE. The basic feature of section 54EE is available to all assesses and all kind of long term assets.
Let’s understand the focus words in the provision of 54EE
1. Long-Term Capital Asset
2. Transfer
3. Investment of Amount of Capital Gain
4. Long-Term Specified Asset
5. Financial Year
6. Long-Term Specified Asset Is Transferred
ANALYSIS
As per section 54EE exemption is only available on Transfer i.e. sale of long term capital asset. To put more emphasis, this exemption cannot be availed in case of short term capital gain.
To claim the benefit of this section we just need to invest the amount of capital gain i.e. the whole of net consideration need not be invested. If a person invests the amount less than the amount of capital gain then he shall be eligible for proportionate exemption.
The assets in which the amount is to be invested are long term specified assets that would be notified by government. The use of these funds would be for start ups. Assessee needs to invest in the units of these assets that are issued before 1st day of April 2019.
There is a maximum limit of Rs. 50lakhs that can be claimed as exemption. This limit is per Financial Year. The benefit shall also be available in the subsequent financial year if the period of 6 months from the date of transfer spills over to the subsequent financial year.
There is a lock-in period of 3 years on the investments made in these long term specified assets. On any transfer of these assets made within 3 years of the date of acquisition, amount that was made exempt earlier i.e. exemption availed on transfer of Long term capital Asset would become chargeable in the year in which it was transferred under the head Income From Capital Gain.
Carefully note, in case the long term specified assets are kept as collateral or security for any loan it would be the deemed transfer of the asset on the date on which loan is taken.
The question that may arise is “WHAT ARE THE SECURITIES ISSUED BY GOVERNMENT IN THIS REGARD?”
As discussed above there are securities in which investment needs to be made. So, where these securities are notified? To everybody’s surprise, government had till date not notified any of the securities. The last date by which securities shall be issued is 31st March 2019 and till date no securities are issued. This had created a problems to those assesses who had entered into such transaction that attracted capital gain tax. They had the motive to get the taxation benefit by virtue of Section 54EE. But all that planning failed.
Also, one of the motives of this section was to promote Start Ups. Since nothing had been notified by government it is giving a presumption that Government is less interested on promoting start-ups.
As per the author, government should either withdraw this section or shall notify the securities under this section.
Therefore, it is said that section 54EE is A Cake That One Can’t Eat!
Section 54EE is reproduces hereunder for reference:-
“(1) Where the capital gain arises from the transfer of a long-term capital asset (herein in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, namely:—
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45:
Provided that the investment made on or after the 1st day of April, 2016, in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees:
Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from the transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.
(2) Where the long-term specified asset is transferred by the assessee at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is transferred.
Explanation 1.—In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have transferred such specified asset on the date on which such loan or advance is taken.
Explanation 2.—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 a unit or units, issued before the 1st day of April, 2019, of such fund as may be notified by the Central Government in this behalf.”
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