Case Law Details

Case Name : DCIT Vs Bharat Enterprise (ITAT Mumbai)
Appeal Number : ITA No. 1764/Mum/2010
Date of Judgement/Order : 30/06/2011
Related Assessment Year :
Courts : All ITAT (5515) ITAT Mumbai (1716)

CA Sandeep Kanoi

On appeal before the Ld. CIT(A), it was stated that during the year, the assessee firm has sold the premises for the consideration of Rs 7,55,00,000/- and the working of the capital gains arising there from is given in the computation of total income filed along with the return of income. The capital gain arising there from is Rs 5,77,35,538/- Rs 5,71,50,000/- have been invested in Nabard Capital Gains Bonds to claim the exemption u/s 54.

The balance capital gain of Rs 535,538/- has been set off against the carried forward long term capital gain/loss of Rs 5,80,238/- The assessee firm has claimed depreciation on the said premises from year to year and hence as per section 50, the gain arising there from is deemed to be the short term capital gain. Section 50 of the IT Act, 1961 carves out an exception in respect of depreciable assets and provides that where depreciation has been claimed and allowed on the asset, then the computation of capital gain on transfer of such asset u/s 48 and 49 shall be as modified u/s 50. The effect of section 50(2) is that where the consideration received on transfer of depreciable asset exceeds the written down value of the asset, then the excess is taxable as a deemed short term capital gain. It is to be noted that the fiction created u/s 50 is confined to the computation of capital gains only and cannot be extended beyond that. The benefit of section 54E will be available to the assessee firm irrespective of the fact that the computation of capital gains is done either u/s48 and 49 or u/s 50. There is nothing in section 50 to suggest that the fiction created in section 50 is not only applicable to section 48 and 49 but also applies to other provisions. On the contrary, this section makes it explicitly clear that the deeming provision created in sub section (1) and (2). Is restricted only to the mode of computation of gains contained in section 48 and 49. The legal fiction is to deem the capital gains as short term capital gain and not to deem the asset as short term capital asset. Section 50 does not convert a long term capital asset into a short term capital asset. Though section 50 has been enacted with the object of denying multiple benefits to own depreciable assets, yet the restrictions is limited to the computation of capital gains and not to exemption provisions Thus the exemption u/s 54E cannot be denied to the assessee firm on account of the fiction created in section 50. It was further submitted that the assessee firm has relied upon before the AO on the following decisions exactly on the same point and identical issue which is in appeal:

  1. C.I.T. vs Ace Builders P. Ltd (2006) 281 ITR 210(Bom)
  2. CIT Vs Assam Petroleum Industries P. Ltd. (2003) 262 ITR 587(Gau)
  3. Dr. (Mrs) Sudha S Trivedi vs ITO (2009) 31 SOT 38(Mum) Order dated 20.2.2009.

The Ld. CIT(A) held as follows:

“I have carefully considered the assessee’s submissions and the relevant orders. Since the assessee has claimed depreciation on the said premises from year to year, the provisions of section 50 are squarely applicable and the gain shall be treated as a deemed short term capital gain. In the three case laws cited by the assessee which includes the decision of the jurisdictional Bombay High Court (Ace Builders) and jurisdictional ITAT,Mumbai (Sudha 5 Trivedi) (supra) it has been held that the assessee is entitled to exemption u/.s 54E in respect of capital gain arising on the transfer of a long term capital asset on which depreciation was allowed. ITAT, Mumbai has held in Sudha S Trivedi’s case that ,”Section 54EC is on independent provision not controlled by section 50 If the capital asset is held for more than 36 months the benefit of section 54EC cannot be snatched away because section 50 is restricted only to the mode of computation of capital gain contained in section 48 and 49 and this fiction cannot be extended beyond that for denying the benefit otherwise available to the assessee u/s 54EC of the Act, if the other requisite conditions of the section are satisfied. Our view is also fortified by CIT vs Assam Petroleum Industries (P) Ltd (2003) 262 ITR 587 (Gau). We, therefore, overturn the impugned order and direct that the exemption under this section be allowed to the assessee because of her having made investment in eligible bonds out of the sale proceeds from the transfer of long term capital asset.

There is no dispute in the fact that the flat transferred was purchased in the year 1979 and has been held for more than 36 months. There is also no dispute that the assessee firm has invested or deposited in whole or part of the net consideration in the specified assets within the stipulated time.

Thus, respectfully following the decisions of the jurisdictional High Court and the jurisdictional ITAT, the Assessing Officer is directed to allow exemption u/s 54E on account of investment in eligible bonds out of the sale proceeds from the transfer of the long term capital asset.”

Aggrieved the Revenue is on appeal. In this case the flat which has been held for more than three years. We find that this issue has been covered by the Jurisdictional High Court in the case of CIT Vs. A.S Builders 281 ITR 210. The Jurisdictional High Court has held that in the case of depreciable assets the deemed fiction credit under sub­section 1 & 2 of Sec.50 is restricted only to the mode of computation of capital gains contained under Sec.48 & 49 and does not apply to any other provision. The fiction created by the legislature is to be confined to the purpose for which it is created. Further, Sec.54E does not make any distinction between depreciable asset and non-depreciable asset. Exemption available under Sec.54E cannot be denied by referring to the fiction created under Sec.50. Benefit of Sec.54E is available to the assessee irrespective of the fact that the computation of capital gains is done either under sec.48 & 49 or u/s.50. The legal fiction created by the statute under Sec.50 is only to deal capital gain as short term capital gain and not to deem the asset as short term capital asset. Therefore, it cannot be said that Sec. 50 converts long term capital asset into a short term capital asset. Accordingly it was held by Hon’ble High Court that the Tribunal was justified in allowing exemption u/s.54E in respect of capital gains arising on transfer of capital asset on which depreciation has been allowed.
It can be seen that the ratio of the above Jurisdictional High court squarely covers the issue on appeal in this case. The Ld. CIT(A) has rightly held that, following the decision of the Jurisdictional High Court referred to above, that the assessee is entitled to relief u/s.54E in respect of capital gains computed u/s.50 in respect of transfer of depreciable asset. Therefore, the appeal by the Revenue regarding ground of exemption u/s.54 EC in respect of gains arising u/s.50 from transfer of depreciable asset is dismissed.
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Category : Income Tax (28372)
Type : Judiciary (12684)
Tags : ITAT Judgments (5694) section 54EC (87)

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