Facts of the case:
1. assessee is an individual engaged in the business of photography
2. assessee also earned long term capital gain, which was claimed exempt under section 54EC
3. The assessee made investment of Rs.25,50,000, in capital gain bonds of National Highway Authority of India and claimed exemption under section 54EC of the Act against the aforesaid capital gain earned.
4. The Assessing Officer denied the benefit of exemption under section 54EC on the ground that the shop was a depreciable asset and the resultant gain was a short term capital gain whereas the exemption under section 54EC was available only on long term capital gain (LTCG).
5. the learned CIT(A) allowed the claim of the assessee
Contentions of Appellant:
the building having been held for a period in excess of three years, it would by definition qualify to be a long-term capital asset (LTCA) u/s.2(29A), and the capital gain arising on its transfer eligible for exemption u/s. 54EC.
Contention by Revenue:
the Assessing Officer was justified in rejecting the claim of the assessee in-as-much as the capital gain on the sale of shop, a depreciable asset, is deemed as a short-term capital gain (STCG) u/s.50, while exemption u/s. 54EC is allowed only on LTCG, i.e., which is, by definition, not STCG.
Ruling of Honorable ITAT/Court:
1. The capital asset sold by the assessee during the year is a shop, comprising of land (or rights therein) as well as building or the super-structure thereon, which are separate and distinct assets under the Act
2. by virtue of the deeming provision of section 50, cost of a long-term capital asset (LTCA), i.e., as per section 2(29A), where depreciable, forming part of a block assets on which depreciation stands claimed, the capital gain on its transfer would have to be computed in terms thereof, i.e. by treating the WDV of the relevant block of assets (or, as the case may be, the relevant asset) as its cost of acquisition.
3. The second deeming per the provision of section 50 is qua the nature of such capital gains, i.e., as capital gains arising from the transfer of a STCA. Section 54EC is available on capital gain arising on the transfer of a LTCA, i.e., which is not a STCA by definition. The same shall, therefore, not apply to capital gains computed u/s.50.
4. by definition a capital expenditure, depreciation, which is amortization of the cost over a definite period is allowed as expenditure where the asset is employed for the purposes of business or profession, toward recouping its’ cost, so as to make available the necessary funds with the business for the replacement of the asset at the end of its’ useful life, enabling the business to in the process, maintain the capital of the firm.
5. Income, by definition, is accretion to capital, so that only the excess, i.e., over cost, including the cost of depletion of capital, would be income, both in economic and accounting theory. The charge of depreciation, thus, has a sound basis thereto, well accepted in taxing statutes.
6. WDV of the relevant (block of) asset, representing its un-depreciated or the unutilized life/value, is taken as its cost of acquisition for the purpose of computation of capital gains in as- much as it is only this, depreciated asset, that stands transferred, fetching a value corresponding with its’ balance life.
7. This would, in our view, also explain or bring forth the prescription of a separate computation mechanism for capital gain on transfer of capital assets that are depreciable (per s. 50), and also not extending thereto the indexation benefit, to adjust for the inflation factor, per s. 48, for such assets even where held for long-term.
8. deduction u/s.54EC to be available on the capital gains computed u/s.50 of the Act.
9. Revenue’s appeal stands dismissed.
Key Take Away
Correctness of law laid down by Bombay High Court in Ace Builder 281 ITR 210 that deduction u/s 54EC is available to short-term capital gains computed u/s 50 doubted by Tribunal.