Case Law Details
Exemption U/s. 54EC available on STCG calculated u/s. 50 on sale of depreciable assets held for more than 36 months
Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E can not be denied by referring to the fiction created u/s.50. Section54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified asset, the assessee shall not be charged to capital gains therefore, the exemption under Section 54E of the income tax Act can not be denied to the assessee on account of the fiction created in Section 50.
It is true that Section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In the other words, where the long term capital assets has availed of depreciation, then the capital gain has to be competed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gains has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act. To put it simply the benefit of Section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either u/s. 48 and 49 or u/s. 50. The contention of the revenue that by amendment to Section 50 the long term capital assets has been converted into a short-term capital assets is also without any merits. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as a short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that Section 50 converts a long term capital assets into a short-term capital asset.
HIGH COURT OF GUJARAT
Deputy Commissioner of Income-tax
Versus
Himalaya Machinery (P.) Ltd.
Tax Appeal No. 271 of 2012
November 27, 2012
ORDER
Akil Kureshi, J.
Revenue is in appeal against the order of Income Tax Appellate Tribunal (‘ITAT’ for short) dated 29.11.201. The following question is presented for our consideration:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of Rs.40,99,947/- u/s. 50 of the Act on account of assessee’s claim for exemption u/s. 54EC on gain arising from the sale of depreciable assets being short term capital gain without appreciating that exemption u/s. 54EC was not allowable in the case of assets covered by the provisions of Section 50 of the Act, since these assets are in the nature of short term capital gain in view of C.B.D.T. Circular No. 469 dated 23.9.1986 ?”
The question arises in following factual background:
2. For the Assessment Year 2003-04, the assessee had filed a return of income in which the assessee had claimed short term capital gain of Rs.40,99,947/- arising from the sale of assets included in the block of assets. With respect to such gain, assessee had claimed the exemption u/s. 54EC of the Act, for having made investment in the specified bond.
3. The Assessing Officer previously accepted the assessment u/s. 143(1) of the Act. However, subsequently on the basis that such exemption was not available to the assessee and therefore income chargeable to tax has escaped assessment, issued notice u/s. 148 of the Act of reopening of the assessment. In the assessment framed by the Assessing Officer pursuant to such notice, he disallowed the claim of exemption of the assessee.
4. Assessee carried the matter in Appeal. CIT(Appeals) allowed the appeal holding that deeming fiction created u/s. 50 of the Act with respect to depreciable assets would be confined for the purpose of mode of computation of capital gains contained in Section 48 and 49 of the Act and would not cover the exemption u/s. 54EC of the Act. Finding that assets transferred were held for more than 36 months and that otherwise requirements of Section 54EC were fulfilled, CIT(A) deleted the addition, relying on the decision of Bombay High Court in case of CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210/[2005] 144 Taxman 855.
5. Revenue carried the appeal before the Tribunal. Tribunal relying on assessee’s own case in the earlier year, confirmed the decision of CIT(Appeals). Tribunal had in such decision relied on judgment of Bombay High Court in case of ACE Builders (P.) Ltd. (Supra). Therefore, Revenue has preferred this appeal.
6. Ld. Counsel for the Revenue vehemently contended that by virtue of Section 50 of the Act, sale of the assets by the assessee would be treated as short-term capital gain. Since the exemption u/s. 54EC of the Act is available only in respect of long-term capital gain, tribunal erred in allowing the benefit to the assessee. Ld. Counsel further submitted that language of Section 50 is unambiguous and any depreciable assets was if sold after 36 months would give rise to the short-term capital gains. In that view of the matter, according to the ld. Counsel, exemption of Section 54EC would not be available.
7. To appreciate the contention we may recapitulate the facts, before adverting to the statutory provisions. The assets in question are certain depreciable assets which formed part of the block assets of the assessee. The assessee had held such assets for a period of more than 36 months. During the year under consideration, assessee had sold such assets and made capital gains. Assessee had invested such amount in the specified bond as provided under section 54EC of the Act. In this factual background, the question that arises is whether the assessee’s claim for exemption was valid ? We may peruse the relevant statutory provisions at this stage.
8. Part E of the Chapter IV of the Act pertains to Capital gains. Section 45 is a charging Section under which any profits or gains arising from the transfer of a capital asset effected in the previous year, would be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of the previous year in which the transfer took place.
9. Section 48 provides mode of computation. Essentially it is provided that income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of any improvement thereto.
10. Section 49 of the Act provides for cost with reference to certain modes of acquisition. Sub-section (1) of Section 49 provides for deeming cost of acquisition of capital assets in cases such as (i)on any distribution of assets on the total or partial partition of a Hindu undivided family; (ii) under a gift or will; (iii) by succession, inheritance or devolution etc. In such cases, it is provided that cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
11. Section 50 of the Act makes Special provision for computation of capital gains in case of depreciable assets and reads as under:
Notwithstanding anything contained in clause (42A) of Section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income tax Act, 1922 (11 of 1922) the provisions of sections 48 and 49 shall be subject to the following modifications :-
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amount, namely –
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the Written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
Such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;
(2) where any block of assets ceases to exist as such, for the reason that all the assets in the block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.]
Upon perusal of Section 50 of the Act, it can be seen that in case of capital assets forming the part of block of assets in respect of which depreciation was allowed, provision of Section 48 and 49 shall apply subject to such modifications as are provided in clause (1) and (2) of Section 50 of the Act.
12. It would thus emerge that in case not falling under section 50 of the Act for computation of capital gains in case of transfer of the asset, mode of computation and the cost of acquisition of asset would be worked out by applying the provisions as contained in Section 48 and Section 49 respectively. However, in case of transfer of capital asset, forming part of block of assets in respect of which depreciation has been allowed, mode of computation and cost of acquisition shall be as per modifications provided in Section 50 of the Act. Thus, Special provision made for computation of capital assets in respect of which depreciation has been allowed, is confined for the purpose of Section 50 in relation to Section 48 and Section 49 only.
13. With this background, we may take notice of Section 54EC of the Act. Section 54EC pertains to Capital gain not to be charged on investment in certain bonds, relevant portion of which are as under:-
54EC. (1) Whether the capital gain arises from the transfer of a long-term capital asset (the capital asset to transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this Section, that is to say –
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under Section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, though much of a capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long term specified asset bears to the whole of the capital gain, shall not be charged under section 45 :
Section 54EC thus provides for exemption from payment of capital gain subject to condition made therein be satisfied. Ld. Counsel for the Revenue would refer to the beginning words of sub-section (1) of Section 54EC which refer to capital gain arising from the transfer of a long-term capital asset and would contend that by virtue of Section 50 of the Act, such exemption would not be available in the cases of transfer of assets on which depreciation has been allowed.
14. We are afraid that such an interpretation would not be warranted. It is true that under section 54EC of the Act, exemption would be made available in case of transfer of long term capital assets. However, once such condition is fulfilled, by virtue of the fact that asset was such on which the depreciation was allowed and therefore, computation would be done as provided u/s. 50 of the Act by applying modifications in Section 48 and Section 49 would not change the nature of capital asset or availability of exemption specified under Section 54EC of the Act.
15. We may notice that Gauhati High Court in case of CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 131 Taxman 699 had taken a similar view. In such decision, Court was concerned with the sale of an asset covered under section 50 of the Act and exemption from payment of capital gain of Section 54E of the Act. High Court ruled in favour of Assessee, making following observations :
“The essential requirements or ingredients to attract the provisions of Section 54E are (I) the capital gains has arisen from the transfer of a long term capital asset and not from any short term capital asset, (ii) the assessee has, within period of six months after the date of transfer invested or deposited any part or whole of the net consideration in any specified asset, if these essential conditions are complied by the assessee then he would be entitled for the exemption as specified under Section 54E of the Act, 1961. the assessee has to satisfy that the transfer in question of the asset is that of a long term capital asset. Secondly, that the amount received by him towards the transfer of long term capital asset has been invested or deposited in any specified asset which are mentioned in Section 54E partially or fully within a period of six months from the date of transfer. If these two conditions are satisfied by the assessee he shall be entitled for the benefit as provided under Section 54E of the Act. Section 54E is an independent provision, which is not controlled by Section 50 of the Act.
Section 50 is a special provision where the mode of computation of capital gains is substituted if the assessee has claimed the depreciation on capital assets. Section 50 nowhere says that depreciated asset shall be treated as short-term asset, whereas Section 54E has an application where long term capital asset is transferred and the amount received is invested or deposited in the specified assets as required under Section 54E. For application of section 54E the necessary pre-requisite condition and enquiry would be, whether the assessee has transferred long-term capital asset and whether the consideration so received is invested or deposited within the time limit in specified asset. Capital gain may have been received by the assessee on depreciable assets, if the conditions necessary under Section 54E are complied with by the assessee, he will be entitled to the benefit envisaged in Section 54E of the Income Tax Act.
16. We may notice that Section 54E of the Act also made similar provision of exemption of capital gain on transfer of capital assets along the line of Section 54EC of the Act with which we are concerned.
17. The decision of Gauhati High Court in case of Commissioner of Income Tax (Supra) was taken note of and followed by the Bombay High Court in case of ACE Builders (P.) Ltd. (Supra) in the context of assets which was covered under Section 50 of the Act. The claim of assessee was exempted u/s 54E of the Act was upheld the Bombay High Court are as under :
25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in Section 50 to suggest that the fiction created in Section 50 is not only restricted to Section 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of Section 50 is restricted only to the mode of computation of capital gains contained in section 48 and 49. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the apex court in the case of State Bank of India v. D. Hanumantha Rao reported in [1998] 6 SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to July 19, 1969. The respondent therein who had joined the bank of July 1, 1972, claimed extension of service because he was deemed to be appointed in the bank with effect from October 26, 1965, for the purpose of seniority, pay and pension on account of his past service in the Army as Short Service Commissioned Officer. In that context, the apex court has held that the legal friction created for the limited purpose of seniority, pay and pension can not be extended for other purposes. Applying the ratio of said judgment, we are of the opinion that this fiction created under Section 50 is confined to the computation of capital gains only and can not be extended beyond that, thirdly Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E can not be denied by referring to the fiction created u/s.50. Section54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified asset, the assessee shall not be charged to capital gains therefore, the exemption under Section 54E of the income tax Act can not be denied to the assessee on account of the fiction created in Section 50.
26. It is true that Section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In the other words, where the long term capital assets has availed of depreciation, then the capital gain has to be competed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gains has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act. To put it simply the benefit of Section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either u/s. 48 and 49 or u/s. 50. The contention of the revenue that by amendment to Section 50 the long term capital assets has been converted into a short-term capital assets is also without any merits. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as a short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that Section 50 converts a long term capital assets into a short-term capital asset.
18. Our view is thus supported by two decisions of different High Courts. Independently also, we are inclined to believe that assessee’s claim for exemption of Section 54EC was valid and therefore, rightly upheld by the Tribunal. Hence, this Tax Appeal is dismissed.
