Section 50AA: Judicial Interpretations vs Legislative Clarity in Income Tax Bill 2025

Section 50AA of the Income Tax Act, 1961, carve out narrow deeming provisions that classify transfer of  Market linked debentures & Unlisted Debentures as short‑term capital gains (“STCG”), irrespective of actual holding period. (Similar to Section 50 – Computation of capital gains on transfer of depreciable assets)

Yet, the underlying assets may still qualify as long‑term for exemption purposes under Section 54F.

Through this article, I had tried to provide a analysis of legislative intent, leading judicial interpretations and how the New Income Tax Bill, 2025 effects this whole scenario

Before Jumping into, following are the sections/provisions involved;

Relevant extract of Section 50 and 50AA under the current Act – Almost Similar wordings

A critical issue has been whether such fiction also affects the classification of the asset itself, particularly in the context of claiming exemptions under Section 54EC or 54F, which depends upon the transfer of a long-term capital asset.

This issue was specifically addressed in the landmark judgment of the Bombay High Court in CIT v. ACE Builders Pvt. Ltd. [2005] 144 Taxman 855 (Bombay), wherein the assessee claimed exemption u/s 54E ( This was discontinued and a new section 54EC was introduced, which has similar wordings as 54E) and it was held that:

“There is nothing in the section to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 and cannot be extended beyond that.

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.

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 cannot be denied by referring to the fiction created under section 50.

Accordingly, it was held that an assessee is entitled to claim exemption under Section 54E (now 54EC) even when the gains are deemed to be short-term under Section 50, provided the asset was held for the prescribed duration required to qualify as a long-term capital asset.

The above judgement was affirmed by Hon’ble SC in case of CIT, Panji vs. V.S. Dempo Company Ltd. [2016] 74 taxmann.com 15 (SC)/[2016] 242 Taxman 434 (SC)/[2016] 387 ITR 354 (SC)/[2016] 290 CTR 401 (SC)[05-09-2016]

This position has been reaffirmed by various tribunals, most notably in the recent decision of the Mumbai ITAT in SKF India Ltd. v. DCIT (ITA No. 1221/Mum/2022, order dated 10 April 2023). The Tribunal reiterated that the deeming fiction under Section 50 cannot extend beyond the computation mechanism and does not override the basic definition of a long-term capital asset under Section 2(29A) of the Act.

50AA: Still an ambiguity?

It is a newly introduced section and yet to be tested judicially, however the structure and language of Section 50AA is identical to those of Section 50 (as already highlighted above). Consequently, the judicial reasoning applied to Section 50 could arguably extend to Section 50AA as well.

Further, as per the Finance Bill, 2023 Memorandum , Legislative intent is to tax gains on transfer of market linked debentures and unlisted debentures [added by Finance Bill (No.2) 2024] at a rate par with normal tax rates and not any special rate. Therefore, the provisions of this section only applies for the purpose of tax rate and does not intend to override the original characterization of such capital asset.

However, one may argue and point out that since it is specifically stated under the provisions that “capital gains arising shall be deemed to be the arising from the transfer of short-term capital assets; the asset shall be considered as STCA and benefits of 54EC/F shall not be given.

New Income Tax Bill, 2025 – The Saviour

The New Income Tax Bill, 2025 was introduced on 13 February 2025, with the objective of replacing the existing Income-tax Act, 1961. The primary intent of the proposed legislation is to simplify the statutory language, eliminate redundancies, and improve administrative clarity.

To achieve this, the New Income Tax Bill, 2025 adopts revised drafting language and simplified terminology at several places to enhance understandability for the general public. However, such rewording had inadvertently lead to interpretational deviations or ambiguities at certain instances when compared to the current provision.

Once such example is Section 50AA, or should say Section 76 of the New Income Tax Bill, 2025:

Comparison table to showcase the language difference:

Unlike the current provision which uses a deeming fiction to classify gains as short-term, the New Income Tax Bill, 2025 explicitly states that such gains shall be treated as short-term capital gains, without referencing the concept of a short-term capital asset. This subtle but significant change in language may have important interpretational consequences.

Under the New Income Tax Bill, 2025:

Section 2(102) defines short-term capital gain as “capital gains arising from the transfer of a short-term capital asset.”

Section 2(101) defines short-term capital asset as a capital asset held by the assessee for not more than 24 months immediately preceding the date of transfer.

Section 2(67) defines long-term capital asset as a capital asset which is not a short-term capital asset.

On a joint reading of these provisions, the following position emerges:

1.Where a Specified Mutual Fund or Unlisted Bond/Debenture is held for more than 24 months, it does not fall within the definition of a short-term capital asset under Section 2(101)

2. Consequently, such an asset qualifies as a long-term capital asset under Section 2(67).

3. While Section 76 (corresponding to existing Section 50AA) deems the gains from such transfer to be short-term for taxation purposes, it does not alter the nature of the asset.

4. Therefore, for the purpose of claiming exemption under Section 86 (corresponding to current Section 54F), the asset may still be regarded as a long-term capital asset, thereby allowing the exemption to be claimed.

Conclusion:

While the New Income Tax Bill, 2025 is yet to be enacted and remains subject to legislative changes, the current language—if retained—appears to broaden the scope for claiming exemption under Section 54F (corresponding to Section 86 of the New Income Tax Bill, 2025). The final position will, however, depend on how the legislation ultimately takes shape.

All Views are personal.