Premature Withdrawal Of Investment From 'Capital Gain Tax Exemption Bonds' Defeats Legislative Intent Behind S. 54EC Of Income Tax Act: Delhi HC

A single bench of Justice Sanjeev Narula ruled that such an act would defeat the legislative intent behind Section 54EC of Income Tax Act, 1961.

The provision stipulates that long-term capital gain will not be charged on an assessee if he invests in certain specified bonds (which come with a lock-in period).

In the case at hand, the Petitioner, a practicing Advocate of the High Court, claimed that he was misled into investing in the bond issued by government owned Power Finance Corporation (PFC) following the sale of his residential property.

He claimed he sought withdrawal within a month of being issued the bond certificates and contended that no loss was being caused to the PFC since refund was being sought at initial stage, when even no interest on the bonds had been paid to him.

PFC on the other hand argued that there was no procedure in place to allow redemption of the investment before maturity of the bond, i.e. before 5 years.

At the outset, the High Court held that having regard to the statutory scheme and terms and conditions of the bond, Petitioner's request for cancellation or redemption cannot be accepted.

It observed that PFC offered a “long term specified bond”, authorized by the Income Tax Act, which can be redeemed only after 5 years from the date of the issuance due to the lock-in period under Section 54EC of the Act.

“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 date of acquisition. Any such action would result in withdrawal of the capital gain exemption benefit,” it said.

The Court reasoned that the funds raised through the 54EC bonds are in the nature of 'long term funds borrowing', intended to support PFC's financial objectives.

“This 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 Respondent's financial stability and to 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,” Court held.

It added, “This restriction applies regardless of whether the Petitioner has claimed the capital gains exemption or not, and regardless of any willingness on the Petitioner's part to forgo interest, as these bonds are essentially bound by legislative and contractual rigidity.”

Court said permitting any deviation from the stipulated lock-in period would compromise the object underlying the bonds, creating an avenue for circumventing statutory obligations under Section 54EC.

“The statutory framework does not just seek to incentivize tax savings but to ensure that these savings result in actual, long-term capital allocation. Allowing premature redemption through judicial intervention would not only be against the contractual terms, but also contravene the statutory intent of encouraging long-term investment,” it held and disposed the petition.

Appearance: Senior Advocate Kirti Uppal with Advocate Shekhar Kumar and Petitioner in person; CGSC Apoorv Kurup with Advocates Gurjas Singh Narula, Niomi Mittal, Nidhi Mittal, Gauri Goburdhan, Arnav Mittal, Jaya Choudhary and Shuray Agarwal for PFC

Case title: Rakesh Kumar Saini v. The Power Finance Corporation Ltd

Case no.: W.P.(C) 12196/2024

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