High Court of Gauhati
Commissioner of Income Tax
Assam Petroleum Industries (P.) Ltd.
P.P. Naolekar, Cj.
and Amitava Roy, J.
IT Appeal No. 30 of 2001
June 24, 2003
P.P. Naolekar, CJ. – The appeal has been admitted on the following question of law :
“Whether on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the CIT(A) in allowing exemption under section 54E of the Income-tax Act, 1961 on gains arising out of transfer of depreciated assets, when unabsorbed depreciation of earlier years was claimed and allowed to be set off ?”
2. To answer the question, the brief facts necessary are – M/s. Assam Petroleum Industry is a company. The assessee derives income from house property as well as from his business dealing. The assessment year in question is 1991-92. During the previous years the assessee has received compensation from the Deputy Commissioner, Kamrup for acquisition of its land and building. The assessee had invested the entire receipt of compensation by purchasing IDBI Bonds and claimed exemption of the capital gain under section 54E of the Income-tax Act, 1961. The claim made by the assessee in regard to land was allowed by the Assessing Officer whereas the claim in regard to building the Assessing Officer was of the view that the depreciation of the said building having been claimed and allowed under the Income-tax Act, capital gain arising out of transfer of the said building is to be construed as short-term capital gain under section 50 of the Act and not a long-term capital gain as claimed by the assessee and thus the assessee is not entitled to claim benefit under section 54E of the Income-tax Act, 1961. It has come on record that the depreciation on the building has been allowed to the assessee in the year 1987-88 and thereafter no depreciation has been claimed nor allowed by the assessee. However, the unabsorbed depreciation was carried over from the preceding assessment years and was allowed set off against house property income in the assessment year 1989-90. The Assessing Officer, therefore, concluded that the assessee claimed the depreciation on the building and the department allowed the same in the relevant year and therefore the building in question was a depreciated asset and thus capital gain arising out of transfer of the said property was short-term capital gains within the meaning of section 50 of the Act. Consequently, the Assessing Officer rejected the claim of the assessee under section 54E of the Act.
3. Aggrieved by the order of assessment the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Guwahati. The Appellate Commissioner has held that the capital gain claimed by the assessee on transfer of its building was a long-term capital gain and, therefore, the addition made by the Assessing Officer was not sustainable in law. The Commissioner of Income-tax (Appeals) held that the Assessing Officer is not correct in invoking section 50 of the Act for arriving at the conclusion that the assessee has transferred the short-term capital assets. The Assessing Officer was directed to allow the benefits of section 54E of the Act to the assessee.
4. The Revenue was aggrieved by the order passed by the Commissioner of Income-tax (Appeals) and preferred an appeal before the Income-tax Appellate Tribunal, Guwahati Bench, Guwahati. The Tribunal upheld the findings and the view taken by the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue. That is how the Revenue has preferred this appeal in this Court.
5. The question falls for determination is whether the assessee who has claimed and allowed depreciation on capital assets is entitled for benefits under the provisions of section 54E and claim deduction while calculating his income or by virtue of section 50 of the Income-tax Act, 1961. The capital gains shall be considered to have arrived out of short-term capital asset and the assessee is not entitled to claim benefit.
6. The contention of Mr. K.P. Sarma, the counsel for the Revenue is that once depreciation is allowed on the capital asset, the capital asset goes out of purview of section 54E and the capital gain shall be chargeable to income-tax and the assessee is not entitled to claim any exemption on capital gain and consequently from his income under that provision.
7. Section 2(42A) defines ‘short-term capital asset’ which means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Thus the assets, which have been already held for more than 36 months before it is transferred, would not be short-term capital assets. Section 2(29A) defines ‘long-term capital asset’ means a capital asset, which is not short-term capital asset. Therefore, the asset, which has been held for more than 36 months before the transfer, would be long-term capital asset. Section 29B provides for ‘long- term capital gain’, which means capital gain arising from the transfer of a long-term capital asset.
8. All capital gains on the transfer of the capital asset whether short-term capital asset or long-term capital asset except otherwise provided in mentioned sections in section 45 of the Income-tax Act are chargeable to income-tax. How, the capital gains shall be computed is laid under sections 48 and 49 of the Income-tax Act, 1961. The capital gain arising from the transfer of short-term assets under section 48 (as it stands at the relevant time) are wholly assessable to be as ordinary income after deduction as provided under section 48(1)(e) whereas the capital gain arising from the transfer of long-term capital assets are partially assessable as provided under section 48(b), which reads :
“(b) where the capital gain arises from the transfer of a long-term capital asset (hereinafter in this section referred to, respectively, as long- term capital gain and long-term capital asset) by making the further deductions specified in sub-section (2).”
9. Thus by virtue of this section, long-term capital assets would be entitled for further deduction as provided in sub-section (2) of section 48. Section 49 is a provision where under the general principle is laid down for computing capital gains and certain exceptions are en grafted in the section. Thus, sections 48 and 49 provide for the principles on which the capital gains shall be computed and the benefit which can be given for transfer of a long-term capital assets while calculating the capital gain by virtue of sub-section (2) of section 48 wherein the assessee transferring long-term capital assets can claim further deduction as specified under sub-section (2).
Section 50 of the 1961 Act reads :
“Special provision for computation of capital gains in case of depreciable assets.—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 amounts, 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 that 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.”
10. By virtue of this section, notwithstanding anything contained in clause (42A) of section 2, where the short-term capital asset has been defined, if the depreciation is allowed, the procedure for computing the capital gain as provided under sections 48 and 49 would be modified and shall be substituted as mentioned in section 50. Section 50 only provides that if the depreciation has been allowed under the Act on the capital asset then the assessee’s computation of capital gain would not be under sections 48 and 49 of the Income-tax Act and it would be with modification as provided under section 50. Section 54E is the section which has nothing to do with sections 48 and 49 or with section 50 of the Income-tax Act, 1961 wherein mode of computation of capital gain is provided. Section 54E is a provision whereby the assessee is entitled to claim exemption or deduction from his income if the condition laid down therein is fulfilled. The relevant provision of section 54E reads as under :
“54E. Capital gain on transfer of capital assets not to be charged in certain cases.—(1) Where the capital gain arises from the transfer of a long-term capital assets, the capital asset so transferred being hereinafter in this section referred to as the original asset and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any specified asset such specified asset being hereafter in this section referred to as the new asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—”
11. 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 a 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 assets 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.
12. 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 assets, 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 inquiry 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 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.
13. Thus, the question is answered in favor of the assessee and it is held that the assessee is entitled for exemption or/ deduction as provided under section 54E of the Income-tax Act on capital gains.