IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 24.09.2008 CORAM THE HONOURABLE MR. JUSTICE K.RAVIRAJA PANDIAN AND THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA W.P. Nos.1524 & 11506 of 2007 and M.P.Nos.1 & 2 & 1 & 2 of 2007 W.P.No.1524 of 2007 M/s Areva T & D India Limited, 457, Anna Salai, Teynampet, Chennai-600 018, rep. by its Director, Treasury & Taxation L.V.Srinivasan ... Petitioner Vs. 1.The Assistant Commissioner of Income Tax, Company Circle-I(1), Chennai. 2.Union of India, rep. by its Secretary,, Ministry of Finance, Government of India, North Block, New Delhi. 3.The Rural Electrification Corporation Ltd., rep. by its General Manager-Finance, Core-4 Scope Complex, No.7, Lodhi road, New Delhi-110 003. (R3 impleaded as per order dt.21.3.07 by KRPJ in WPMP No.3/07 in WP.1524/07) 4.The Central Board of Direct Taxes, rep. by its member/Director, Ministry of Finance, North Block, New Delhi. (R4 impleaded as per order dt.11.7.07 by SMKJ in MP.No.4/07 in WP.1524/07) .. Respondents W.P.No.11506 of 2007 M/s Prasad Productions Pvt. Limited, rep. by its Director M.Paratpara Rao, registered Office 28, Arunachalam Road, Saligramam, Chennai-600 093. .. Petitioner https://hcservices.ecourts.gov.in/hcservices/ Vs. 1.The Union of India, rep. by Secretary to Government, Ministry of Finance, North Block, New Delhi. 2.The Central Board of Direct Taxes, Ministry of Finance,North Block, New Delhi. 3.The Deputy Commissioner of Income Tax, Media Circle,121, Nungambakkam High Road, Chennai-600 034. 4.The Rural Electrification Corporation Ltd., Core-3, Scope Complex, No.7, Lodhi road, New Delhi-110 003. ... Respondents Prayer: These Writ Petitions are filed under Article 226 of the Constitution of India seeking for the relief of issuance of writ of declaration declaring that the conditions occurring in the notification No.380/2006 F.No.142/09/2006-TPL dated 22.12.2006 along with the words "subject to the following conditions, namely," issued by the Central Board of Direct Taxes are ultra vires Section 54EC of the Income Tax Act, 1961 and arbitrary and violative of Articles 14 and 265 of the constitution of India and consequently unenforceable. For Petitioner :: Mr.Joseph Prabhakar in WP.1524/07 For petitioner in :: Mr.Shatiq Mohamed for WP.11506/2007 Mr.A.Sathyaseelan For 1st Respondent in :: Mrs.Pushya Sitaraman, WP.1524/07 & for R3 Senior Counsel for Income-tax in WP.11506/07 Department For respondents 2 & 4 :: Mr.P.Wilson, in WP.1524/07 & for R1 Assistant Solicitor General & R2 in WP.11506/07 For R3 in WP.1524/07 & :: Mr.A.Palaniappan for R4 in WP.11506/07 COMMON ORDER P.P.S.JANARTHANA RAJA, J. Writ petitions are filed by the petitioners seeking the relief of issuance of writ of Declaration declaring that the conditions occurring in the notification No.380/2006 F.No.142/09/2006-TPL dated https://hcservices.ecourts.gov.in/hcservices/ 22.12.2006 along with the words "subject to the following conditions, namely," issued by the Central Board of Direct Taxes are ultra vires Section 54EC of the Income Tax Act, 1961 and arbitrary and violative of Articles 14 and 265 of the constitution of India and consequently unenforceable. 2. Since the issue involved in both the writ petitions are one and the same, they are taken up together and disposed of by a common judgment. 3. The brief facts are as follows: W.P.No.1524 of 2007:- The petitioner is a company incorporated under the Companies Act, 1956, engaged in the business of Transmission and Distribution including manufacturing relays, circuit breakers, power transformers, distribution transformers and switch gear (Transmission & Distribution business (T & D business). Earlier the petitioner company was also engaged in non T & D business comprising manufacture of industrial motors, pumps, fans and energy meters for a number of years. The name of the petitioner company until 22.09.2005 was Alstom Limited. Areva Group of companies acquired the T & D business of Alstom group of companies world wide in January 2004. Areva T & D SA, France acquired in August 2005, the entire 66.35% shareholding in the petitioner company which was earlier held by Alstom Holdings S.A. As per SEBI regulations, Areva T & D SA, France acquired further 1,19,445 shares and thus Areva T & D SA now holds 2,65,83,845 shares of the petitioner company. The ultimate parent company of the petitioner company, namely Areva T & D SA is owned by the Government of France to the extent of 88% of the shareholding. After the take over, since Areva desired to focus only on T & D business and since Alstom Group desirous of retaining its interest in the Non–T & D business, it was decided to reorganize and reconstruct the petitioner company by transferring the non T & D business to its subsidiary company named Alstom Industrial Products Limited (AIPL). The shareholding of the petitioner company in Alstom Industrial Products Limited was to be ultimately acquired by Alstom Group and thus the controlling interest of the subsidiary company would get transferred to Alstom Group. Therefore, the Board of Directors of the petitioner company approved a scheme of arrangement under Sections 391 and 394 of the Companies Act for reconstruction of the petitioner company by transfer of its non T & D business as a going concern to its subsidiary for a consideration of Rs.41.3 crores. The said consideration for transfer was paid by issue of equity shares by the subsidiary to the petitioner company. The appointed date for this transfer was fixed as 1st January, 2006 and the scheme was also approved by the High Court of Calcutta and the order was received by the petitioner company on 11.08.2006. The effective date of transfer was 14.08.2006, when the petitioner company filed form 21 with Registrar of Companies, Kolkatta. The capital gains arising out https://hcservices.ecourts.gov.in/hcservices/ of the sale transaction worked out to Rs.11,96,95,469/- being the difference between the sale consideration received for the transaction and the net worth of the undertaking sold as prescribed under Section 50B of the Income Tax Act. The relevant assessment year is 2006-2007 and the capital gain worked out to Rs.10,18,67,615/- after setting off the long term capital loss of the earlier years amounting to Rs.1,78,27,854/-. W.P.No.11506 of 2007:- 4. The petitioner is engaged in the business of film production, distribution besides owing of studio and laboratory. The petitioner was a allottee/lessee and in possession of industrial Unit constructed on lease hold plot No.6 situated in Block FC of sector 126A, within New Okhla Industrial Development Area (Noida) District Gautam Nagar, Uttar Pradesh admeasuring 16571 sq.mts and a covered area of 2389.54 sq.mts. The said industrial lease hold plot was allotted in favour of the petitioner by lease deed dated 21.03.1988 and duly registered in the office of the Sub Registrar, Noida. The said Noida authority granted permission to the petitioner to transfer the lease hold rights of the said property in favour of M/s Bennett Coleman Company Limited by Transfer Memorandum No.10271 dated 17.11.2006. The petitioner, by agreement dated 21.12.2006, has transferred the lease hold rights of the said property in favour of Bennett Coleman and Company for a total sale consideration of Rs.42.13 crores. Out of this, Rs. 41.63 crores was towards sale of land and Rs.50 lakhs was towards sale of building. The capital gain arising out of the transaction worked out to Rs.40,00,14,349 being the difference between the considerations. So the taxable capital gains for the assessment year 2007-2008 worked out to Rs.39,50,14,349/-. Both the petitioners decided to invest the capital gains in the bonds for the purpose of availing benefit of exemption under Section 54EC of the Act. Section 54EC deals with capital gains not be to be charged on investment in certain bonds. The benefit of tax exemption is only with respect of long term capital gains invested in the bonds which are redeemable after three years and issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited on or after 01.04.2006. There is no limitation for the investment. However the Central Government later issued a notification No.380/2006 F.No.142/2006-TPL dated 22.12.2006 restricting the investment in bonds to a sum of Rs.50 lakhs per person. As per the above notification, a person, who are entitled to the benefit under Section 54EC of the Act, the value is restricted to a sum of Rs.50 lakhs. Aggrieved by the same, both the writ petitioners have filed the writ petitions seeking for issuance of writ of declaration, declaring that the conditions occurring in the notification No.380/2006 F.No.142/09/2006-TPL dated 22.12.2006 along with the words "subject to the following conditions, namely," issued by the second respondent herein are ultra vires Section 54EC of the Income Tax https://hcservices.ecourts.gov.in/hcservices/ Act, 1961 and arbitrary and violative of Articles 14 and 265 of the constitution of India and consequently unenforceable. 5.Both the petitioners have challenged the conditions incorporated in the above impugned notification and contended that it is ultra vires of Section 54EC of the Act. The said notification is contrary to the benefit conferred under Section 54EC of the Act. If the assessee makes investment which arise out of the investment i.e. long-term capital asset, the whole amount is exempted from taxation. By this notification, the assessees' exemption limit is restricted. Therefore the learned counsel appearing for the petitioner contended that the conditions incorporated in the said notification are ultra vires Section 54EC of the Act. The said notification is arbitrary and violative of Article 14 of the Constitution of India creating an invidious distinction between the assessees similarly situated and governed by the same assessment year, effecting the same type of transaction and being subjected to an identical gain. The denial of the benefit of the provisions of Section 54EC of the Act to the petitioners by the notification is plainly irrational and discriminatory. The petitioners further contended that the notification takes away the exemption which is conferred under Section 54EC of the Act. Therefore, the impugned notification issued by the Central Government is illegal and without any basis and justification. Hence, the same has to be quashed. Learned counsel for the petitioners relied on number of judgments of the Supreme Court reported in 1993 Supp. (1) Supreme Court Cases 55 (COMMISSIONER OF INCOME TAX, CALCUTTA VS M/S BRITISH PAINTS INDIA LIMITED); 1961 AIR Supreme Court 552 ( K.T.MOOPIL NAIR VS STATE OF KERALA); STATE OF ANDHRA PRADESH VS NALLARAJA REDDY (1967 AIR Supreme Court 1458); NEW MANEK CHOWK SPN. WVG. MILLS VS. AHAMADABAD MUNICIPALITY (1967 air Supreme Court 1801); STATE OF KERALA VS. HAJI K.KUTTY NAHA (1969 AIR Supreme Court 378); KHANDIGE SHAM BHAT VS ARI ITO (1963 AIR Supreme Court 591); R.L.MARWAHA VS. UNION OF INDIA (1987 (4) Supreme Court Cases 31); S.K. DUTTA ITO VS. LAWARENCE SINGH (1968 AIR Supreme Court 658); COMMISSIONER OF INCOME TAX VS. B.C.SRINIVASA SETTY (1981 (2) Supreme Court Cases 460) and DEEPAK SIBAK VS, PUNJAB UNIVERSITY (1989 (2) Supreme Court Cases 145) to support their claim. 6. Learned counsel appearing for the respondents filed counter and denied the allegations and vehemently contended that the notification issued under Section 54EC of the Income Tax Act, 1961 is not ultra vires the said provisions of Section 54 EC. It was further contended that Section 54EC envisages the investor to invest the capital gains on sale of long term capital assets in specified assets to be eligible to claim exemption. The Finance Act, 2006 restricted the scope and limited the meaning of 'long term specified asset' to bonds notified by the Government of India and issued by National Highways Authority of India and Rural Electrification Corporation with a view to channelise funds towards focused development of roads. He further contended that the limitation was https://hcservices.ecourts.gov.in/hcservices/ imposed with a view to ensure equitable distribution of benefit amongst the prospective investors and therefore, the restriction is reasonable and justifiable. Further there was also amendment to explanation (b) of the Section 54 EC. The proviso has also been inserted to validate the bond and notified before April, 2007 with the conditions specified in the notification, under the provision of clause b as they stood immediately before the amendment of Finance Act l 2007. It comes into effect retrospectively from 01.04.2006. Therefore, the learned counsel has vehemently submitted that the present writ petition is only to challenge the conditions enumerated in the notification which is now incorporated in the section itself by the retrospective amendment and therefore, the writ petitions become infructuous and are liable to be dismissed. 7. Heard the learned counsel appearing on either side and perused the materials available on record. 8. Section 54 EC of the Income Tax Act, 1961 is introduced by the Finance Act, 2001 with effect from 01.04.2001. As per the provision, if the amount of long term capital gain arises from the transfer is invested in the long-term specified asset, then the petitioner company need not pay capital gains tax. Explanation (b) defines "Long-term specified asset", which reads as follows: (i)On or after the 1st day of April, 2000, by the National Bank for Agriculture and Rural Development established under Section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981) or by the National Highways Authority of India constituted under Section 3 of the National Highways Authority of India Act, 1988 (68 of 1988); (ii)On or after the 1st day of April, 2001, by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956(1 of 1956); (iii) on or after the 1st day of April, 2002, by the National Housing Bank established under sub-section (1) of section 3 of the National Housing Bank Act, 1987 (53 of 1987) or by the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989)". From a reading of the above, it is clear that long-term specified asset means any bond redeemable after three years and issued on or after the 01.04.2000 by the National Bank for Agriculture and Rural Development established under Section 3 of the National Bank for Agriculture and Rural Development Act, 1981 or by the National Highways Authority of India constituted under Section 3 of the National Highways Authority of India Act, 1988 or on or after the 1st day of April, 2001, by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 and on or after the 1st day of April, 2002, by the National https://hcservices.ecourts.gov.in/hcservices/ Housing Bank established under sub-section (1) of section 3 of the National Housing Bank Act, 1987 (53 of 1987) or by the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act. There is no limitation imposed for the purpose of the investment. Any amount invested in the bonds issued by the above authorities is exempted from the purview of the capital gains. 9. Subsequently, the Section 54EC of the Act was amended by the Finance Act 2006, which reads as follows: "Explanation:- 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 any bond, redeemable after three years and issued on or after the 1st day of April, 2006.- (i) By the National Highways Authority of India constituted under Section 3 of the National Highways Authority of India Act, 1988(68 of 1988) and notified by the Central Government in the Official Gazette for the purposes of this section; or (ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956(I of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section." From this amendment it is clear that the tax benefit under Section 54EC of the Act is not available on long-term capital gains which are invested on or after April 1, 2006, in the bonds of National Bank for Agriculture & Rural Development, National Housing Bank and Small Industries Development Bank of India. Because of the amendment, the tax benefit under the said Section is available thereafter only on those long-term capital gains which are invested on or after April 1, 2006, in the bonds of Rural Electrification Corporation Limited and National Highways Authority of India and which are notified by the Central Government in the Official Gazette. 10. Both the petitioners wanted to invest in the said bonds. But at that time there was no availability of notified bonds in the market. Therefore, it was not possible to make any investment by the petitioners. Representations were made by the assessees to the Central Board of Direct Taxes. Two more notifications in Nos.963 and 964 dated 29.06.2006 were issued specifying the bond amount, which reads as follows: "By notification No.S.O.963(E), dated June 29,2006, the Central Government has notified the bonds for an amount of rupees one thousand five hundred crores (redeemable after three years) to be issued by the National Highways Authority of India constituted under Section3 of the https://hcservices.ecourts.gov.in/hcservices/ National Highways Authority of India Act, 1988 (68 of 1988) during the financial year 2006-07 as "long-term specified asset" for the purpose of Section 54EC. S.O.964(E). In exercise of the powers conferred by sub- clause (ii) of clause (b) of the Explanation to section 54EC of the Income-tax Act, 1961 (43 of 1961), the Central Government herby notifies the bonds for an amount of rupees four thousand five hundred crores (redeemable after three years) to be issued by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), during the financial year 2006-07 as ‘long- term specified asset’ for the purpose of the said section. " 11.The Central Board issued another circular in F.No.142/09/2006-TPL, dated 30.06.2006 extending the time limit for making investments under Section 54EC of the Act, after taking into consideration of the representation as well as the non-availability of the capital gain bonds. In Paragraph 6 of the Circular reads as follows: "With a view to removing the hardship caused to tax payers, the Central Board of Direct Taxes, in exercise of powers conferred by clause © of sub-section (2) of section 119 of the Income-Tax Act, 1961, hereby orders that the limitation of six months for making the investment under Section 54EC of capital gains arising from the transfer of a long-term capital asset, is extended- (i) upto 30th September, 2006 in case of persons where the long-term capital asset was transferred between 29th September, 2005 and 31st December, 2005 (both dates inclusive); (ii) upto 31st December, 2006 in case of persons where the long-term capital asset was transferred between 1st January, 2006 and 30th June, 2006 (both dates inclusive). " 12. Subsequently, the Central Government also issued another notification No.380 of 2006 F.No.142/09/2006-TPL dated 22.12.2006, which reads as follows: " S.O.2146(E) (1) In exercise of the powers conferred by sub-clause (II) of clause (b) of the explanation to section 54EC of the Income-Tax Act, 1961, the Central Government notifies the bonds for an amount of Rupees three thousand five hundred crores to be issued by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 during the period from 26.12.2006 to 31.03.2007 as "long-term specified asset" for the purpose of the said section subject to the following conditions, namely:- https://hcservices.ecourts.gov.in/hcservices/ (i) a person who has made an investment of an amount aggregating more than fifty lakhs rupees in the bonds notified as 'long-term specified asset by the Central Government for the purposes of section 54EC of the Income-Tax Act, 1961 in the Official Gazette vide notification number S.O.963(E) dated 26.06.2006 or notification number S.O.564(E) dated 29.06.2006 shall not be allotted any bonds notified as 'long- term specified asset' by this notification. (ii) a person who is not covered by clause (i), shall not be allotted the bonds notified as 'long- term specified asset' by this notification, for any amount which exceeds the amount of fifty lakhs rupees as reduced by the aggregate of the investment, if any, made by him in the bonds notified as 'long-term specified asset' by the Central Government for the purposes of section 54EC of the Income-tax Act 1961.In the Official Gazette vide notification number S.O.963(E), dated 29.06.2006 or notification number S.O.964(E) dated 29.06.2006." From bare reading it is clear that notification is issued under the power conferred by sub clause II of clause (b) of Explanation to Section 54EC of the Act. The Central Government further notifies the bonds to be issued by the Rural Electrification Corporation Limited during the period from 26th day of September, 2006 to 21st March,2 007 for an amount of Rs.3500 crores. The said bonds is considered as 'long term capital asset' for the purpose of section. Notification imposed two conditions. "(1) No more bonds will be issued to any person, if he has already made an investment of an amount aggregating more than Rs.50 lakhs in the bonds already notified in notification No.963-E dated 29.06.2006 or 964-E dated 29.06.2006. (2) Persons not covered under the first condition, no person is alloted any bonds notified as 'long term capital asset' which exceeds 50 lakhs as reduced by the aggregate investment, if any, made by him in the bonds notified as 'long term specified asset'. " Aggrieved by these conditions, these writ petitions challenging the said impugned notification as ultra vires of Section 54EC of the Act, have been filed. 13. In the meanwhile, the section 54 EC was once again amended by the Finance Act of 2007 with retrospective effect from 01.04.2006, which reads as follows: "Explanation: 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 https://hcservices.ecourts.gov.in/hcservices/ capital gains received or accruing as a result of the transfer of the original asset; (b)"long-term specified asset' for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,- (i) by the National Highways Authority of India constituted under Section 3 of the National Highways Authority of India Act, 1988(68 of 1988); or (ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956(I of 1956), and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of Clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause. ." It is clear from the amendment that "long term specified asset" means any bond redeemable after three years and issued on or after 01.04.2006 but on or before 31.03.2007. Investments have to be made during the period commencing from 01.04.2006 and ending on 31.03.2007. The bonds are to be issued by the National Highways Authority of India constituted under Section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956. Further it also enables the Central Government to notify in the Official Gazette for the purpose of this Section with such conditions including the condition for providing a limit on the amount of investment by the assessee in such bonds. It means that the Central Government can notify the conditions as it thinks fit. Proviso has also been inserted after clause (b) for the purpose of validating the bonds notified before 1st April, 2007 under the provisions of clause (b) as they stood immediately before the amendment by the Finance Act. The said