Circular No. 359 — Section 54E Exemption of Long-term Capital Gains When Consideration Is Invested in Specifi

What this is

Circular No. 359 was issued by the Central Board of Direct Taxes on 10 May 1983. Its subject is Section 54E Exemption of Long-term Capital Gains When Consideration Is Invested in Specified Assets.

This grants an exemption or a relief under a provision that allows one. Read the conditions attached: an exemption notification is construed strictly, and a condition missed is the exemption lost.

What it does

Allows earnest money or advance invested before the date of transfer to count for the section 54E exemption. Section 54E exempts long-term capital gains where the net consideration is invested in specified assets within six months after the date of transfer, and read technically that would deny the exemption for any part invested before the sale deed was executed. In consultation with the Ministry of Law, the Board takes the view that such a reading would go against the purpose and spirit of the section: earnest money or advance is part of the sale consideration and the section contemplates the net consideration being kept in specified assets for a minimum period. So if the assessee invests the earnest money or advance received in specified assets before the date of transfer, the amount so invested qualifies for exemption.

Why it was issued

A technical reading of the six-month window would have disallowed investment of advance money received before the transfer, and the Board considered the point with the Ministry of Law.

Who it reaches

Sellers of long-term capital assets who receive substantial advances
Assessees who invested advance money in specified assets before completing the sale
Assessing Officers computing exemption under section 54E

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.54E	no counterpart recorded

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTION 54E EXEMPTION OF LONG-TERM CAPITAL GAINS WHEN CONSIDERATION IS INVESTED IN SPECIFIED ASSETS

Assessee investing earnest money in specified assets before date of transfer - Whether amount so invested qualifies for exemption

1. Section 54E provides for exemption of long-term capital gains if the net consideration is invested by the assessee in specified assets within a period of six months after the date of such transfer. A technical interpretation of section 54E could mean that the exemption from tax on capital gains would not be available if part of the consideration is invested prior to the date of execution of the sale deed as the investment cannot be regarded as having been made within a period of six months after the date of transfer.

2. On consideration of the matter in consultation with the Ministry of Law, it is felt that the foregoing interpretation would go against the purpose and spirit of the section. As the section contemplates investment of the net consideration in specified assets for a minimum period and as earnest money or advance is a part of the sale consideration, the Board have decided that if the assessee invests the earnest money or the advance received in specified assets before the date of transfer of asset, the amount so invested will qualify for exemption under section 54E.

Circular : No. 359 [F. No. 207/8/82-IT(A-II)], dated 10-5-1983.

What to watch

What is protected is the investment of earnest money or advance actually received; money invested from other sources before the transfer is not what the circular addresses.
The amounts must go into specified assets and the holding requirement of the section still applies.
Section 54E has since been replaced by later exemption provisions with their own windows and conditions, so the reasoning has to be applied within the section in force for the year in issue.

Where you meet it

In a capital gains assessment where part of the investment was made out of advance money before the sale deed and has been refused for being outside the six-month window.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 791 — 442. Whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital as 2 June 2000
S.O. 632(E) — Equity shares to be issued within a period of one year from the date of publication of this notification in the Official 6 August 1999
Circular No. 560 — 441. Clarification regarding tax exemption under section 54E on sale of capital assets converted into stock-in-trade 18 May 1990
Notification No. 2469 — 3-year HUDCO Capital Gains Debentures " issued by the Housing & Urban Development Corporation Limited specified under se 15 July 1987
Notification No. 847 — 3--year Industrial Development Bank of India Capital Bonds issued by the Industrial Development Bank of India specified 13 April 1987
Notification No. 804E — Special series of units issued under the Capital Gains Unit Scheme specified under section 54E 27 October 1983

← Circular No. 360 · Circular No. 358 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.