Section 54GB exemption denied as company incorporation date strictly determines eligibility, not business commencement date.

ORDER

Madhusudan Sawdia, Accountant Member. – This appeal is filed by Shri Kamal Chand Jain (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) (“Ld. CIT(A)”) dated 15.10.2025 for the A.Y. 2017-18.

2. The assessee has raised the following grounds of appeal:

3. The brief facts of the case are that the assessee is an individual who filed his return of income for Assessment Year 2017-18 on 03.08.2018. The case of the assessee was selected for limited scrutiny and accordingly notice under section 143(2) of the Income-tax Act, 1961 (“the Act”) dated 09.08.2018 was issued by the Learned Assessing Officer (“Ld. AO”). During the assessment proceedings, the Ld. AO observed that the assessee had claimed deduction/exemption of Rs. 2,60,99,699/- under section 54GB of the Act. The Ld. AO called upon the assessee to substantiate the claim made under section 54GB of the Act. After considering the submissions of the assessee, the Ld. AO was not satisfied with the explanation furnished and consequently denied the claim of exemption under section 54GB of the Act amounting to Rs. 2,60,99,699/-. Accordingly, the assessment was completed by the Ld. AO under section 143(3) of the Act on 30.11.2019 denying the claim of exemption of the assessee under section 54GB of the Act amounting to Rs. 2,60,99,699/.

4. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), however, confirmed the action of the Ld. AO and dismissed the appeal of the assessee.

5. Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before this Tribunal. At the outset, the Learned Authorized Representative (“Ld. AR”) submitted that the only issue involved out of the grounds of the appeal of the assessee is the denial of exemption of Rs. 2,60,99,699/- under section 54GB of the Act. The Ld. AR further submitted that during the year under consideration the assessee earned longterm capital gain of Rs. 2,60,99,699/- from the transfer of a residential property. It was submitted that the assessee invested the entire amount of capital gain in the equity shares of M/s. Spads Polyplast Products Private Limited (“M/s. Spads Polyplast”) and accordingly claimed exemption under section 54GB of the Act. The Ld. AR submitted that M/s. Spads Polyplast was incorporated under the Company Act on 27.03.2008. However, the company had not commenced any business activity nor had it purchased any plant and machinery till Financial Year 2016-17. It was contended that the effective business operations of the company commenced only on 01.03.2017 and the plant and machinery for manufacturing activities were also acquired during the relevant financial year. The Ld. AR invited our attention to the provisions of section 54GB of the Act and submitted that the assessee had fulfilled all the substantive conditions prescribed therein. Referring to section 54GB(6) of the Act, it was submitted that the only dispute in the present case is regarding the date of incorporation of the eligible company. The Ld. AR argued that although the company was incorporated under the Companies Act on 27.03.2008, no business activity was carried on by the company till 01.03.2017. Inviting our attention to the MSME certificate placed at page no. 96 of the paper book, it was submitted that the date of commencement of business mentioned therein is 01.03.2017 and therefore the effective date of incorporation should be treated as 01.03.2017. The Ld. AR further referred to the Memorandum explaining the provisions of the Finance Act, 2012 introducing section 54GB of the Act, placed at page no. 113 of the paper book. It was submitted that the object of the legislature was to encourage investment in new start-up manufacturing enterprises and MSMEs. According to the Ld. AR, the assessee had invested in a manufacturing concern which commenced its business operations only on 01.03.2017 and therefore the investment should be regarded as satisfying the spirit and object of section 54GB of the Act. It was further argued that instead of incorporating a fresh company, the assessee had utilized an existing company which had remained dormant and had not commenced business activities. Once the company was revived and registered under the MSME provisions with effect from 01.03.2017, the investment made by the assessee should be treated as investment in an eligible company for the purpose of section 54GB of the Act. In support of the aforesaid contention, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT 196 ITR 188 (SC), wherein it was held that incentive provisions should be construed liberally to advance the object of the legislation. Accordingly, the Ld. AR prayed that the exemption claimed under section 54GB of the Act be allowed.

6. Per contra, the Learned Departmental Representative (“Ld. DR”) strongly relied upon the orders of the lower authorities. The Ld. DR submitted that section 54GB(6) of the Act specifically defines the term “eligible company” and the statute clearly refers to the date of incorporation of the company in India. There is no dispute regarding the fact that M/s. Spads Polyplast was incorporated under the Companies Act on 27.03.2008. The Ld. DR further submitted that the assessee’s contention that the date of commencement of business or the date of MSME registration should be treated as the date of incorporation has no support from the provisions of the Act. It was argued that the expression used in section 54GB(6) of the Act is “company incorporated in India” and therefore only the date of incorporation under the Companies Act can be considered. The Ld. DR also submitted that beneficial provisions can certainly be construed liberally; however, an express statutory condition prescribed by the legislature also cannot be ignored. Accordingly, the Ld. DR prayed that the orders of the lower authorities be upheld.

7. We have heard the rival submissions and perused the material available on record including the case laws relied upon. The solitary issue arising for our consideration is whether the assessee is entitled to exemption under section 54GB of the Act in respect of investment made in the equity shares of M/s. Spads Polyplast. The facts are not in dispute. During the year under consideration, the assessee earned longterm capital gain of Rs. 2,60,99,699/- from the transfer of a residential property. The assessee invested the said amount in the equity shares of M/s. Spads Polyplast and claimed exemption under section 54GB of the Act. The claim was denied by the Ld. AO on the ground that the investee company was incorporated on 27.03.2008 and, therefore, did not satisfy the conditions prescribed under section 54GB(6) of the Act. The action of the Ld. AO was upheld by the Ld. CIT(A). Before us, the contention of the assessee is that although the company was incorporated under the Companies Act on 27.03.2008, it had not commenced any business activity till 01.03.2017. It was further submitted that the company obtained registration under the MSME provisions and effectively commenced its manufacturing operations only on 01.03.2017. Therefore, according to the assessee, the date of commencement of business or the date of MSME registration should be treated as the effective date of incorporation for the purpose of section 54GB of the Act.

8. We are unable to accept the aforesaid contention of the assessee. For deciding the issue, it is necessary to refer to section 54GB(6) of the Act, wherein the term “eligible company” has been specifically defined, which is to the following effect:

“54GB(1)…………………

(6) For the purposes of this section,—

9. On perusal of the above, it is evident that the provision of section 54GB(6) of the Act clearly provides that an eligible company means a company incorporated in India during the period beginning from the first day of April of the previous year in which the capital gain arises and ending on the due date of furnishing the return of income under section 139(1) of the Act. Thus, the statute specifically refers to the date of incorporation of the company in India. The provision does not make any reference to the date of commencement of business, date of commencement of manufacturing activity, date of acquisition of plant and machinery, date of registration under MSME provisions, or any other operational date. Therefore, the legislative intent is clear and unambiguous that the relevant date for determining eligibility is the date on which the company is incorporated under the Companies Act. In the present case, there is no dispute that M/s. Spads Polyplast was incorporated under the Companies Act on 27.03.2008. The assessee has also not disputed this fact. The only argument advanced is that since the company remained dormant and commenced business activities only from 01.03.2017, the said date should be considered as the effective date of incorporation. However, such an interpretation cannot be accepted because it would amount to rewriting the statutory provision. The date of incorporation of a company is a legal concept governed by the provisions of the Companies Act. Once a certificate of incorporation is issued by the competent authority, the company comes into existence as a legal entity from that date. The commencement of business or registration under any other statute cannot alter or substitute the date of incorporation prescribed under the Companies Act.

10. We have also examined the MSME certificate placed at page no. 96 of the paper book. The said certificate merely indicates the date of commencement of business activities for the purpose of MSME registration. Such a certificate cannot override or modify the date of incorporation of the company under the Companies Act. Therefore, the date mentioned in the MSME certificate cannot be treated as the date of incorporation for the purpose of section 54GB(6) of the Act.

11. The assessee has further relied upon the Memorandum explaining the provisions of the Finance Act, 2012 introducing section 54GB of the Act and submitted that the object of the provision was to encourage investment in new start-up manufacturing companies. It was argued that the assessee’s investment is in consonance with the legislative objective and, therefore, a liberal interpretation should be adopted. We have carefully considered the submission. There can be no quarrel with the proposition that section 54GB of the Act was introduced with the object of encouraging investment in eligible companies and promoting entrepreneurship and manufacturing activities. However, it is equally well settled that while interpreting a beneficial provision, the Court or Tribunal cannot ignore the express language employed by the legislature. The object of the provision may assist in resolving ambiguity, but it cannot be used to substitute or modify clear statutory conditions.

12. The assessee has relied upon the decision of the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. (supra), for taking a liberal approach in the case of the assessee. There is no dispute regarding the proposition laid down by the Hon’ble Supreme Court. However, the said principle cannot be stretched to such an extent that an express statutory condition enacted by the legislature is ignored or rewritten. Liberal interpretation can be adopted only where two views are reasonably possible. It cannot be invoked to alter the plain meaning of the words used by Parliament. We also find support for the above view from the decision of the Hon’ble Supreme Court in the case of Commissioner of Customs (Import) v. Dilip Kumar & Company  (SC), wherein the Constitution Bench held that exemption provisions are required to be construed strictly and that the burden lies upon the assessee to establish that he squarely falls within the scope of the exemption provision. The Hon’ble Supreme Court further held that where the language of the exemption provision is clear, the same has to be interpreted strictly and no benefit can be extended beyond what is expressly provided by the legislature. In the present case, the assessee seeks to substitute the statutory expression “company incorporated in India” occurring in section 54GB(6) of the Act with the date of commencement of business or the date of MSME registration. Such an interpretation is contrary to the plain language employed by the legislature. The expression used in the statute is “company incorporated in India” and not “commencement of business”, “commencement of manufacturing activity” or “registration under MSME”. Therefore, the date relevant for determining eligibility is only the date of incorporation under the Companies Act. Admittedly, M/s. Spads Polyplast was incorporated on 27.03.2008, much prior to the period contemplated under section 54GB(6) of the Act. Consequently, the company does not satisfy the statutory definition of an “eligible company”. Once the investee company fails to satisfy the primary condition prescribed under section 54GB(6) of the Act, the investment made by the assessee in its equity shares cannot qualify for exemption under section 54GB of the Act. Therefore, considering the plain language of section 54GB(6) of the Act, the decision of the Hon’ble Supreme Court in Dilip Kumar and Company (supra) requiring strict interpretation of exemption provisions, and the fact that M/s. Spads Polyplast was incorporated on 27.03.2008, we find no infirmity in the orders of the lower authorities in denying the exemption claimed under section 54GB of the Act amounting to Rs. 2,60,99,699/-. Accordingly, the order of the Ld. CIT(A) is upheld and the ground raised by the assessee is dismissed.

13. In the result, the appeal of the assessee is dismissed.