[Opinion] Section 54EC Exemption In Case Of Slump Sale

V K Subramani – [2025] 177 taxmann.com 614 (Article)

Overview of Chapter IV-E and Capital Gains Provisions

Chapter IV-E of the Income-tax Act, 1961, spanning from sections 45 to 55A, contains 31 provisions that play a crucial role in computing capital gains. Each section carries significant implications, and the interplay of these provisions often creates intricate scenarios for taxpayers and practitioners alike. For seasoned professionals, the permutations and combinations of these rules can be intellectually stimulating, as every real-life transaction may throw up unique challenges and interpretations. The complexity of this chapter lies not only in its technical depth but also in the practical issues it generates in day-to-day tax matters.

Practical Concerns of Taxpayers

From the perspective of an ordinary taxpayer, the law’s technicalities often give rise to simple but important questions. For instance, whether the sale of vacant land and purchase of another vacant land, or the sale of agricultural land followed by purchase of another agricultural land, could be treated as tax-neutral. The Income-tax Act, however, does not provide for such transactions to be exempt unless specific provisions like sections 54 to 54GB apply. While the rationale may appear inequitable to a common man—since no cash inflow is realized by merely replacing one asset with another—it highlights the need for clear communication and taxpayer education.

Depreciable vs. Non-Depreciable Assets

The Act provides different treatment for depreciable and non-depreciable assets. In the case of depreciable assets, if the entire block is sold and a new asset within the same block is purchased before the close of the financial year, the tax liability may be adjusted, safeguarding the taxpayer. On the contrary, for non-depreciable assets such as vacant land, agricultural land, or residential property, tax neutrality is limited to specific exemptions like sections 54, 54F, or 54EC. This differentiation underscores the principle that tax relief is deliberately restricted to certain scenarios and not universally available for all replacements of assets.

Focus on Slump Sale and Exemption under Section 54EC

Within this framework, two provisions often intersect in practical tax planning: section 50B and section 54EC. Section 50B governs slump sales, which involve the transfer of an undertaking or business division as a going concern, where net worth is deemed as the cost of acquisition. On the other hand, section 54EC provides relief from long-term capital gains tax if the taxpayer invests the gains in notified capital gains bonds, such as those issued by NHAI or REC, within six months of transfer. The interaction of these sections becomes significant in planning capital gains arising from slump sales, allowing taxpayers to mitigate liability by leveraging investment-linked exemptions.

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