No Premature Redemption of Bonds to Ensure Financial Stability If Same Were Purchased to Claim Sec. 54EC Relief | HC

Case Details: Rakesh Kumar Saini vs. Power Finance Corporation Ltd. - [2024] 168 taxmann.com 704 (Delhi)

Judiciary and Counsel Details

• Sanjeev Narula, J.
• Kirti Uppal, Sr. Adv. & Shekhar Kumar, Adv. for the Petitioner. 
• Apoorv Kurup, CGSC, Gurjas Singh Narula, Ms Niomi Mittal, Ms Nidhi Mittal, Ms Gauri Goburdhan, Arnav Mittal, Ms Jaya Choudhary & Shuray Agarwal, Advs. for the Respondent.

Facts of the Case

The assessee, a practising Advocate, sold his residential property and invested the sale proceeds in bonds issued by the Power Finance Corporation to avail of capital gains tax exemption under section 54EC. A certificate was issued to him for the said bonds, which had a lock-in period of 5 years.

The assessee booked a residential flat in Noida and wanted to make payment for the final instalment of the flat in lieu of the residential property he sold in Delhi. Further, the assessee was informed that he would be eligible for a capital gains tax exemption had he used the proceeds from the Delhi property sale to purchase the property in Noida.

Accordingly, within a month of the bond certificates being issued, the assessee requested to cancel the bonds and refund the invested amount, intending to use those funds to pay the final instalment for the residential flat. The assessee contended that no loss was being caused to the respondent by cancelling the bonds since the money was being refunded at the initial stage. However, the respondent contended that there was no procedure in place to allow redemption of the investment before maturity of the bonds under the terms governing these bonds, and the bond could only be redeemed upon reaching maturity.

The aggrieved-assessee filed a writ petition before the Delhi High Court.

High Court Held

The High Court held that the PFC bonds, known as ‘54EC Capital Gain Tax Exemption Bonds – Series VIII’, is a type of investment instrument authorised by the Income-tax Act, 1961. These bonds allow individuals to save on long-term capital gains taxes incurred from selling property or assets.

By investing in these bonds, one can defer the payment of capital gains tax and enjoy the potential benefits of a reliable investment option. Such investment is held for 5 years, and the bonds so acquired cannot be transferred or converted into money or any loan, and neither can an advance be taken on security of such bond within 5 years from the date of acquisition. Any such action would result in the withdrawal of the capital gain exemption benefit.

With regard to the statutory scheme and the terms and conditions of the subject instrument, the assessee’s request for cancellation or redemption cannot be accepted. The intent, combined with the five-year lock-in period, imposes a clear embargo on premature redemption, as it ensures that the investments remain committed to the respondent’s financial stability and meet the object of the Issue. This lock-in period is not a mere formality but a substantive requirement, integral to the legislative intent behind section 54EC.

Moreover, the terms and conditions governing the bonds, stipulated by the respondent clearly restrict any withdrawal, redemption, or transfer of these bonds before the completion of the mandated 5-year period. This restriction applies regardless of whether the assessee claimed the capital gains exemption or not, and regardless of any willingness on the assessee’s part to forgo interest, as these bonds are essentially bound by legislative and contractual rigidity. Permitting any deviation from the stipulated lock-in period would compromise the object and purpose underlying these bonds, creating an avenue for circumventing statutory obligations under section 54EC.

Accordingly, the present writ petition was disposed of.

List of Cases Reviewed

• Major Amandeep Singh v. University of Delhi [Para 15] distinguished.